Bitcoin (BTC)? Not a security. Ether (ETH)? It’s not one either, at least in the eyes of the U.S. Security and Exchange Commission’s cryptocurrency point person. However, most ICOs function as securities and will be regulated as such, William Hinman, director of the SEC’s division of corporation finance, said at the Yahoo Finance All Markets Summit in San Francisco on Thursday.
“We should…focus not on the digital asset itself, but on the circumstances surrounding the digital asset and the manner in which it was sold,” Hinman said in his . “In cases where the digital asset represents a set of rights that gives the holder a financial interest in an enterprise…calling the transaction an initial coin offering, or ICO, or a sale of a ‘token,’ will not take it out of the purview of the U.S. securities laws.”
That’s because when a token or ICO is used to raise money for a network or entity, “the economic substance is the same as a conventional security offering,” Hinman said.
Hinman reiterated previous comments by regulators that the function of tokens could shift over time to the utility role their backers often make the case for.
The exceptions? When “the digital asset is sold only to be used to purchase a good or service available through the network on which it was created,” Hinman said. By that logic, bitcoin and ether aren’t securities because they represent decentralized networks, according to Hinman’s comments.
“The network on which bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception,” he said. “Applying…federal securities laws to the offer and resale of bitcoin would seem to add little value.”
Coming into Focus
Although he gave the usual disclaimer that his remarks may not reflect SEC policy as a whole, Hinman’s comments are similar to those of SEC Chair Jay Clayton, suggesting the regulatory landscape is coming into focus. Speaking earlier this month to CNBC, Clayton said the commission has no plans to broaden its definition of securities to include cryptocurrencies, but that public initial coin offerings would fall under its purview, much as initial public offerings do.
“If you want to do any IPO with a token, come see us,” Clayton said on .
In his speech Hinman pointed to longstanding methods to identify whether an asset is a security, making reference to the landmark SEC v. Howey Supreme Court case, which set the precedent that context defines a security, and the Gary Plastic Packaging Corp. v. Merrill Lynch case, which ruled financial instruments can be part of a broader investment contract deemed a security — a fact that could affect even assets like bitcoin if they are “packaged and sold as an investment strategy,” Hinman said.
But Hinman also reiterated previous comments by regulators that the function of tokens could shift over time to the utility role their backers often make the case for, presuming “the network on which the token or coin is to function is sufficiently decentralized,” he said.
“Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers,” Hinman said.
Opening the Door?
The news helped spike the value of both ether and bitcoin, which like most cryptocurrencies had plunged this week. As of 4 p.m. EST Thursday, ether was up more than 10 percent on the day, while bitcoin was up more than 5 percent.
While Hinman said the SEC was prepared to provide guidance to companies seeking clarity on the topic, at least one observer questioned what a “sufficiently decentralized” network means in the eyes of regulators. In his remarks, for example, Hinman acknowledged that ether was initially used for fundraising but because of the network’s decentralized structure should no longer be considered a security.
“‘Sufficiently decentralized’ means people will start gaming ‘decentralization,’ ” CoinShares Chief Strategy Officer Meltem Demirors said in . “This basically opens the door for any ICO to claim they are not a security.”