Ether Is Not A Security

Yesterday, a top official from the SEC said what many of us in crypto land had been wanting to hear from the SEC for the last year:

According to Bloomberg:

“Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,” William Hinman, who heads the Securities and Exchange Commission’s division of corporation finance, said in remarks prepared for a Yahoo Finance conference in San Francisco. “And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.”

For me, this is not about Ether, but about the fact that a token can be used to raise capital (the “fundraising that accompanied the creation of Ether”) and at some point no longer resemble a security in the eyes of the SEC.

I particularly like this language that Hinman used in his remarks:

But this also points the way to when a digital asset transaction may no longer represent a security offering. If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.

And this part:

Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.

That last point is super important because as my colleague Nick tweeted out last night, we don’t want Bitcoin and Ether to have the advantage of being the only tokens that are not deemed to be securities. We want a hyper-competitive market where the best protocols win on the merits, not because some regulator likes them better.

But all in all, it was a good speech and a good day for crypto. It is clear that the SEC is trying to define some clear lines in the sand under which the decentralized world we all want to see happen can happen. And they are also trying to make sure that bad actors can’t skirt securities laws by simply claiming they are doing a token offering.


Comments (Archived):

  1. jason wright

    “….based on my understanding of the present state of Ether…”that’s a major assumptive conditional clause. does he, or in fact anyone outside of the inner circle of Ethereum, truly understand the present state? To know that there would need to be a forensic audit of the the top of my head i can think of one question that needs an answer. how many Ether does the Foundation still hold?and another. at what point is a network deemed to be sufficiently decentralised? what’s the metric? clear as mud.just don’t offer a token to US citizens. they’re only 4% of the planet’s population.

    1. kidmercury

      I had the same thought, especially regarding at what point a cryptocurrency becomes “sufficiently dectentralized” to not be a security. If security is a transient state, can a cryptocurrency go back and forth? Could ether be a security again?I wonder how long nation states will try to regulate this stuff before it becomes accepted they are not in a position to do so effectively.

      1. jason wright

        two entwined issues.1. decentralisation of the architecture of the network. 2. dilution of the concentration of the token.a threshold test? anonymity makes that difficult. who is operating the nodes on the network?who is in control of the private keys?only if we can answer these basic questions can we know if a network is or is not decentralised. new legislation is required to compel networks to extend KYC to KYN (know your node) to answer 1.not sure about how to legislate 2., which defaults to all ICOs being security offerings. therefore ether is a security (if defined as sponsor-controlled. we can’t just assume that after a period of time it will somehow naturally no longer be sponsor-controlled).bitcoin is not a security.

        1. Lawrence Brass

          The mission of the SEC and equivalent regulators in every country is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”.I think that the classification of the instrument is irrelevant to the mission goals. The problem is who will regulate. Its either the SEC or the state gambling board. It is either investing or gambling.Truth is that today crypto investors are on their own.Crypto regulation is in some way being coded into the systems, the regulators should be part of that process.

    2. Sebastian Wain

      > at what point is a network deemed to be sufficiently decentralised? what’s the metric?It is common to use the Gini index. There is even a “prehistoric” 2014 article about Ethereum decentralization by Vitalik after the ether sale: Ether Sale: A Statistical Overview. The last academic paper on this topic is Decentralization in Bitcoin and Ethereum Networks.I think the main issue here is that the protocol governs Ethereum while in many tokens you can identify a few actors who can modify the whole system. This is obviously relative but even if Vitalik wants an Ethereum protocol change that is not sound it will not be accepted by the general community.

      1. jason wright you see the distribution (concentration/ dilution) of the token as a relevant issue?

    3. Richard

      What AVC leaves out is that, this is an antiregulatory MAGA appointee, with little focus on consumer protection. He is a Silicon Valley insider who worked on Silicon Valley IPOs during the first implosion. He did have several winners, notably Google and Facebook.

      1. jason wright

        ah, the wide angle lens. nice framing.

      2. JLM

        .If you are speaking of Jay Clayton, I think you are, perhaps, giving him a bum rap. First, he was a Cromwell-Sullivan lawyer who handled all kinds of securities transactions with a particular depth in SV related deals.He was never an investor in those deals, but was their lawyer.He knows the space well, but the first thing he did after being appointed by Pres Trump was to form a cyber unit focused on combating ICO fraud.The “” story is great literature.The guy’s focus is on providing open opportunity to investors – knocking the walls down so all investors can get a look at the big, sweet deals.It is a misstatement of his intentions to suggest he would be easier on ICOs. In fact, I think he will be incredibly harder as the formation of the new cyber unit professes.…Here is a statement he made some time ago.JLMwww.themusingsofthebigredca…

        1. LE

          Jay Clayton does have a good resume.…This is why ‘forks’ here at AVC are so valuable to me. Today I learned what a Thouron scholar was as well as ‘order of the coif’.… I have to say that the Coif is actually less impressive than it sounds. Which is impressive in itself. Noting that most people will probably be impressed and not think anything further of this type of thing. I love this type of manipulation. How you can attach a word in front of something get a great deal of bang for the buck. (To be clear it is impressive..) The Thouron thing is something that anyone can do and it will be impressive. Create an award and award it to the best and brightest.My research shows Clayton bought a place on Hudson St. in NYC (won’t give the address) for $3.2m over 12 years ago for 2.43% less than asking price. All public data.I think a man like this deserves credit for ‘opening the kimono’ and going into government service.

          1. JLM

            .Thouron – Brit paratrooper.Death from the skies.JLMwww.themusingsofthebigredca…

        2. Richard

          William Hinmann

  2. awaldstein

    I stopped my day yesterday to ingest this.Not often that anything from our government is expressed with thought, nuance and pointing in a direction that I can embrace.This was an exception and yesterday, had a cascade of positive trends in my world.I slept well.

  3. William Mougayar

    But that didn’t totally jive with what SEC Chairman Clayton said last week on CNBC, mainly that they view all ICOs as securities and that was their turf to regulate them.…The SEC needs to bring real clarity to this. They can’t just make speeches here and there and say things that are contradictory or inconclusive. Fact is, and I’m repeating this in all my talks: classifying tokens is a slippery slope for regulating them. Classifying them helps to understand them, and no more. This is a new asset class that exhibits multiple overlapping characteristics, and you can’t just simply say it’s a utility or security. And we can’t (and shouldn’t) apply existing regulations, because they existed for 70 years.It’s time to update this regulation, because the blockchain technology cuts through it like a knife.The stone age didn’t end for a lack of stones.

    1. awaldstein

      “classifying tokens is a slippery slope for regulating them. Classifying them helps to understand them, and no more. This is a new asset class that exhibits multiple overlapping characteristics, and you can’t just simply say it’s a utility or security.”Example pls of laws that are enforceable that do not classify the act or asset.While I don’t disagree with you in abstract, regulations existing or new do this by their very nature.No?

      1. William Mougayar

        I am writing a longer post to explain more on this, but in a nutshell, the properties of these tokens are the novelty. They have multiple characteristic as I mentioned. Securities laws were written 70 years ago, and never changed. Maybe it’s time for an update, or maybe the SEC isn’t the only regulator to govern their future, as some of this is beyond their scope.

        1. awaldstein

          I understand your point and you are right.My point is not that there doesn’t need an update.But that indeed they need to be classified as if not they can’t be enforced.That is the very nature of legislation.You are taking the opposite stance it seems so curious how this works then.

          1. William Mougayar

            They need to be more specific pertaining to the conditions for a certain classification if that’s what they want to do. As it is, being high level leaves a lot to interpretation and deviations.As you well know, the regulators job is mostly to enforce and interpret current laws. Legislators can create new ones.

          2. awaldstein

            Well said.I think they will be rewritten.I also think they will not be any more specific and as always, the dockets of the courts will be full.Just as no one knows (including you) where all the great changes in crypto are going to in specifics, it is–in my opinion–unrealistic to think that legislators can define that future in detail.Have you looked at the IQ, or focus, or moral character of elected representative lately?Ain’t gonna happen.

          3. Pointsandfigures

            I don’t think they will be rewritten, but there might be a new body of regulation written to specifically identify crypto tokens. Unfortunately, though I believe strongly in a Democratic Republic I don’t think our elected legislature is up to speed on this issue and could only uncover problems and risks without doing anything productive or proactive to prevent fraud.

          4. awaldstein

            I strongly believe in the inevitability of change.Politics and outcome this Fall aside, the diversity, intelligence, inspiring energy of these self-made net natives challenging the incumbents is terrific. They know as much as we do btw.It will take some time but we live through the cesspool of today.The hateful, morally bereft, astoundingly idiotic cadre of criminals will fade away.Forever an optimist!

        2. Pointsandfigures

          A government agency does not give up turf easily. SEC will be the regulator along with the CFTC and non-govt ones like FINRA

          1. William Mougayar

            It might confusing before it gets better.They all need to come together and clarify these turf boundaries and conditions.

    2. Richard

      Gimme a break. Have you watched Coinbase fight tooth and nail to keep large insider trading of bitcoin out of the public domain. The securities acts of 1934 and its amendments were written to protect main st investors. It is the the “truth in securities” law, the Securities Act of 1933 has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities.

      1. JLM

        .I agree more with you than you do with yourself. Nice volley at the net.JLMwww.themusingsofthebigredca…

    3. JLM

      .Securities laws have not existed for 70 years untouched. They are pretty damn dynamic.The Chairman’s speech and the one that Fred reports on are pretty clear – ICOs are securities and we have an agreed upon methodology in which to issue and regulate securities.BTW, one of the first things Clayton did upon appointment was to form a cyber security unit focused on crypto fraud. I consider that a damn good development as it takes the industry on point and gives the industry a place to go to define “best practices.”Crypto is going to be regulated. The IRS has stated how it is going to be taxed. The SEC is adding to the regulatory umbrella (burden), but that ship has sailed.The SEC has staked out its turf.JLMwww.themusingsofthebigredca…

      1. sigmaalgebra

        It’s good to learn some good stuff; now I am.Maybe 99% of the content on the Web is junk. For the narrow interests of any one person, maybe 99.9%. But the rest can be terrific, personal life and civilization changing stuff.

  4. Cowboy Fred shills for crypto

    It is as if cowboy capitalist Fred found the Western frontier of the USA had closed so he, his brethren, and minions, have collectively deluded themselves into believing that the Pacific Ocean is solid land. Umm. Yeah. That’s a greaaaat plan!Wake up folks! Crypto is a bubble that will burst within a decade, probably within five years. “Fiat currency” is not fake money. It is real money because guys with lots and lots of guns (the government) says it is. Try printing your own money and then using that to pay your taxes. Then report back to explain to us all how well that worked for you.The way to get a good government is not to indulge in obvious financial fantasies. Listening to Fred prattle on about crypto nonsense is like listening to a lunatic say, “Let’s see now. Because the ocean is solid land I think we can walk to Shanghai from San Francisco…”All people must observe Noahidism or Judaism. People must not engage in Paganism, which this blog tends to champion. Much like communism, Western-style liberalism is headed for the dustbin of history.Fred is like President Donald Trump. Both are obsessed with maintaining the popularity. LPs who are considering entrusting their money to Fred would very likely earn higher returns by simply investing in index funds instead of believing the beguiling jibberish in this post.See Warren Buffet’s remarks over the years about guys like Fred who are members of the “2 and 20 club””2 + 20, and Other Hedge Fund Math”…

    1. awaldstein

      This comment adds nothing to the conversation.Wanna spout your own crap, get your own blog and let others converse.

      1. Pointsandfigures

        Yup. Venture funds are not like hedge funds.

      2. fredwilson

        it doesn’t bother me. i like the criticism.

    2. Mario Cantin

      Sorry, but from here, you sound like a troll with an axe to grind. Based on your name alone, I would be skeptical of your intentions; and your comment would be deleted If I were the moderator. Come back when you have a constructive attitude and thoughts.

      1. jason wright

        the grinding stage was earlier.

    3. SubstrateUndertow

      “Fiat currency” is not fake money. It is real money because guys with lots and lots of guns (the government) says it is.Isn’t solving that arcane, oligarch, centralized, static organizing dynamic the driving-force that keeps people like Fred excited about leveraging a revolutionary new blockchain-organizing-dynamic in order to tame/utilize the organic interdependencies inherent in a complex new network-effect economy/everything ?

  5. Pointsandfigures

    Yup, a good ruling and interpretation. It should allow room for non-governmental agencies like FASB and AICPA to issue rulings on how to account for them, and audit them.I think people need to remember where the SEC real fear lies; fraud at the retail level with US investors. Specifically, US. If another country’s investor wants to throw money to the wind, they cannot be responsible. The SEC is very careful about that and it always has been. This is not a recent development.

  6. Frank W. Miller

    I luv the irony in the title of your piece here. I absolutely agree there is no security in Ether. 😉

  7. creative group

    CONTRIBUTORS:A more complete explanation of the statement verses what many wanted to hear:. “The digital asset itself is simply code,” William Hinman, director of the SEC’s corporate finance unit, explained . “But the way it is sold—as part of an investment; to non-users; by promoters to develop the enterprise—can be, and, in that context, most often is, a security—because it evidences an investment contract.”Thanks to Adam Lashinsky of Fortune Data Sheet. @adamlashinskyCaptain Obvious!#UNEQUIVOCALLYUNAPOLOGETICALLYINDEPENDENT

  8. Amar

    So what does that mean for me? I am not fully grokking the implications:1. Does this impact how i purchase tokens today? Yes or No2. Does this make one marketplace less riskier than another (for e..g is Coinbase getting a stamp of approval from the Feds that Joe’s crab shack in Canada is not getting? Yes or No3. Has this in any measurable way changed the risk I assume when I purchase tokens?After multiple announcements and interviews with SEC top officials, it is not yet clear to me what new policy or policy change was announced and how it impacts me as an investor?

    1. JLM

      .No. No. No.JLMwww.themusingsofthebigredca…

    2. Girish Mehta

      It is useful and interesting to hear what a senior official in a regulatory agency says. Beyond that…I was a little surprised by the attention/reaction to it yesterday. It was a speech, not the notice of the process for new legislation.When somebody says “based on my understanding of the present state of…”, I am generally not inclined to spend too much figuring out the implications of what they say after that. It is likely too early for that.Do not think decentralization is a legally meaningful term at this point in time. I may be wrong about that (and about everything crypto), but the speech seemed to skim over that point.

  9. JLM

    .This speech is neither a policy statement nor a proposed rule IAW the Federal rulemaking process. It is a speech, but much of what it says is in perfect compliance with the current regulatory environment for securities.Some background?If you take a company public, you hire an investment banker and notify the SEC of your intentions.Your investment banker conducts “due diligence”, gets 5 years of audited financials, and puts together a deal book (red herring in its initial form).The deal gets run by the SEC who makes a critique of the red herring and the appropriate forms of the SEC (SEC Form S1).When approved, your investment banker takes you on a road show and you “talk your book.” You will have a presentation coach who will run you through the presentation.The investment bank will form a syndicate and will run the books to sell the IPO.The investment bank will set the price on a Thursday at 2:00 PM. They will either raise it (haha) or lower it (most likely) and remind you they can buy the “greenshoe” – 15% over allotment which they make a boat load of money on.[This greenshoe is one of the dirty little secrets of Wall Street. If they price deal low or competitively and it jumps – who really wins big? The IB with the greenshoe because they have a huge profit in stock that they can find the buyers for easily.]You will need market makers (secondary brokerages who make a market in your stock) and a transfer agent (runs the “book entry” securities ownership books for every share of stock).Thereafter, you will be required to file quarterly Form 10Qs and an annual Form 10K forever. There will be a number of other forms and you will have to report publicly on any event which rises to a level of “materiality” (Form 8K).Pretty standard stuff.What this speech says (to me):1. The issuance of ICOs (tokens) is a securities transaction regulated by the SEC 33/34 acts. Which means all the issuance baloney above will apply.2. After the initial public offering, transactions between individuals are not securities transactions. Just like selling shares through a transfer agent. No new sod being broken here.This is no different than if I owned 100 shares of MSFT and sold it through my broker. That is not a “securities” transaction. It is handled at the transfer agent level and is a cash for stock transaction. Call this a “stock sale” as opposed to a “securities transaction.”The nature of the sale is indirectly highly regulated as the brokerage and the transfer agent are regulated entities.3. The test for treating this as a typical “stock sale” is that the owners are not regulated — why the speech specifically reserves judgement on closely held transactions — and it is cash for a token (stock). The speech champions the merits of being widely disseminated and decentralized.What is lost in this discussion is the degree of regulation on the part of the iinitial transaction which IS a securities transaction – the initial issue. In addition, the regulatory burden embraced by an issuer.The head of the SEC gave a similar speech in which it was clear that the SEC is the appropriate entity to regulate crypto. That, taken with the speech noted, means: crypto is regulated by the SEC, crypto issuance is a securities transaction even if we decide that subsequent “stock sale” transactions are not “securities transactions.”When you look at this way, there is really not much new here.Last point: when there is a real rule, it will happen in this order:1. Enabling legislation;2. Advanced notice of a new rule by the appropriate rulemaking entity (SEC);3. Call for input in drafting the proposed rule (lobbyists, y’all);4. Publication of the proposed rule in the Federal Register with a designated comment period;5. Public comment. Every public comment is typically answered and there can be thousands;6. Revision of the rule (more lobbyists, y’all);7. Final rule published in the Federal Register and the Code of Federal Regulations;8. An effective date.I belabor this point because crypto is a long, long, long way from the finish line, but the pathway laid out is absolutely the SEC norm. Nothing new here.JLMwww.themusingsofthebigredca…

    1. Girish Mehta

      Much ado about little (not nothing).

      1. JLM

        .I agree more with you than you do with yourself. A total recitation of what the SEC rules currently say. Nothing more.JLMwww.themusingsofthebigredca…

  10. Virginia Persons

    A lot of discussion about what may or may not be a security, but let’s not forget that Bitcoin, Ether, and others have been defined as commodities by the CFTC which brings its own set of regulatory requirements and issues.

  11. cavepainting

    | “where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts “Isn’t Vitalik at the heart of Ethereum’s efforts? Aren’t the core Ethereum developers actively involved with developing Casper (POS) and driving adoption?How can a purchaser not expect the Ethereum core team to not carry out managerial responsibilities?