
Ether Tokens Are Likely Securities (2016) - hudon
http://decentralizedlegal.com/ether-is-a-security/
======
ThrustVectoring
So, follow-up question: are Team Fortress 2 hats securities? It arguably meets
all four points: Valve gets money for releasing hats into the TF2 ecosystem,
TF2 is a common enterprise, hat speculators expect to make a profit through
simple capital appreciation, and the hat owners rely on the effort of Valve to
develop TF2 for their profits.

~~~
decentralizedL
In game digital assets is an interesting hypothetical. Whether or not it
satisfies all the prongs of an investment contract analysis is less important
than the overall size of the market. I think if blockchain tokens were doing
daily vols similar to Team Fortress 2 hats, that the SEC would have never felt
the need to comment. But that's just conjecture not anything you could hang
your Team Fortress 2 hat on :)

~~~
lathiat
MMORPGCoin coming to an ICO near you

~~~
tyywebb
Someone needs to make an ICO for WoW gold.

~~~
steanne
[https://neverdie.com/index.html](https://neverdie.com/index.html)

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redm
The IRS still defines cryptocurrency as a "product", not a security. [1] It is
to be treated as such in your taxes. I think that's the best indicator of the
state of affairs. They provided detailed guidelines and answer many common
questions 2014. [2] That may change but I'm pretty comfortable with not
treating it as a security for the moment.

Also, since were treating it as a product, I view contributing to Ether based
ICO's as not a sale of my "product" since the product is still the same, just
tied to a smart contract. I see it the same as buying a physical product and
then exchanging it for another physical product at the same store. I don't
incur taxes when I exchange.

[1] [https://www.irs.gov/uac/newsroom/irs-virtual-currency-
guidan...](https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidance)

[2] [https://www.irs.gov/pub/irs-
drop/n-14-21.pdf](https://www.irs.gov/pub/irs-drop/n-14-21.pdf)

~~~
mtgx
I think if you're offering your cryptocurrency/token in a crowdsale/ICO, then
it should be seen as a security, because you're essentially offering people
the opportunity to "invest" in your company's potential future.

~~~
smokeyj
I mean, maybe if the currency is pre-mined and you're buying a token from a
seller. But what about Satoshi? Did Satoshi issue a security by releasing the
blockchain? I mean, all he did was write a program and released it in the
wild. That fact that other people decided to give value to his tokens doesn't
mean he sold securities to the general public.

I think we need to reconsider from the ground up how securities should be
regulated. There's been some promising rhetoric with the Jobs act but it seems
like mostly talk with the SEC dragging their feet.

I remember explaining Reg-D to a progressive friend of mine. His initial
reaction was that I'm making the law up, and there's no way the government
actively prevents non rich people from early stage investing. We took a bet
and I won. When I told him reg-d is backed by progressives then _all of a
sudden_ he saw the value in it. Funny how that works.

~~~
s73ver
The only way you could think that is if you also believe that patents on
existing processes, but then add "On a computer" are new and novel things.

Just because something is using a blockchain does not mean it's new, or that
what is happening doesn't fall under existing securities law.

~~~
smokeyj
You can't patent software so thanks for making my point. You can't patent math
either. Crypto is math based money so now the SEC is basically trying to
regulate math. Any reasoning person will see the futility in that.

Paradigm shifts require new rules. You can't regulate a car the same way you
regulate a horse. But when we allow buggy whip manufacturers to influence
regulators for the interest of their personal bottom line, then the public
looses while the intrenched interests win.

[https://en.wikipedia.org/wiki/Red_flag_traffic_laws](https://en.wikipedia.org/wiki/Red_flag_traffic_laws)

~~~
s73ver
Wrong on all counts. Software was patentable in the US. And there was a long,
long time where there were a lot of patents whose only "innovation" was doing
something on a computer.

"Crypto is math based money so now the SEC is basically trying to regulate
math. Any reasoning person will see the futility in that."

Any reasoning person will know that what you said is not accurate in the
least.

"Paradigm shifts require new rules"

This is NOT a paradigm shift. Literally you are arguing to go back to the days
when software was patentable, and that "on a computer" should be all that's
required to get a patent.

"You can't regulate a car the same way you regulate a horse."

No, but I can regulate what they are trying to do, which is provide
transportation, the same. Likewise, these coins are not doing anything new.
They are doing the exact same thing, just in a new package.

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austenallred
What else could they be other than securities? That's the purpose they serve.

From Investopedia: "A security is a fungible, negotiable financial instrument
that holds some type of monetary value. It represents an ownership position in
a publicly-traded corporation (via stock), a creditor relationship with a
governmental body or a corporation (represented by owning that entity's bond),
or rights to ownership as represented by an option."

That was the design of tokens from the beginning, and they were created for
the purpose of being securities.

It should be no surprise that they're regulated as such.

~~~
hectorr1
Was Ether a security during the crowd sale? Yes.

Would it be a security in a future where the world runs on Ethereum and it is
used to secure the decentralized network? No.

Is it a security today? That's complicated.

There is a lot of legal discussion in the token space about when the
transition from security to commodity happens. Unfortunately the SEC provided
no guidance on how it thinks about this question, but lots of people are
working hard to figure it out.

------
btown
Can we make a cryptocurrency that automatically only has value iff it is not
declared a security by the SEC?

Whenever it is not declared a security, there is an expectation of profits,
which would now qualify it as a security under the Howey Test. But if it is
then declared a security, then there is no expectation of profits, which would
subsequently disqualify it as a security under the Howey Test.

I really REALLY want to see this happen.

~~~
ubernostrum
It likely wouldn't cause anything interesting to happen because real-world law
doesn't work like "smart" contracts or computer code. You probably want to
read this classic article for a good explanation:

[http://ansuz.sooke.bc.ca/entry/23](http://ansuz.sooke.bc.ca/entry/23)

------
decentralised
I struggle with point number 4, "Did token holders rely on the efforts of
others for their (expected) profits?".

It is the effort of (early) investors that make/made Ether out of their own
work (mining) that creates the token supply and because Ether is needed in
order to interact with Ethereum DApps, it's the demand for the token that
makes it gain market value in exchanges. This seems to suggest that there is
an effort on the part of the investor.

Many ICOs will simply state they are out of limits for US investors and again
we see that regulators like democracy and capitalism but don't really want it
to be accessible to _everyone_.

~~~
hudon
That's what I thought. If I buy an Apple stock, I can't meaningfully
contribute to the success of Apple (outside of investing more money). But if I
was an early investor of ETH, I could build an Ethereum smart contract that is
useful and thus provides value and thus makes the price of ETH go up as more
people buy it to use my smart contract.

Would it be correct to say then that as long as there is at least 1 useful
smart contract that the Ethereum Foundation does not solely control, ETH would
fail prong 4?

~~~
stult
The issue isn't whether you can hypothetically contribute to the potential
security's value but rather is whether the success of the venture depends
primarily on the efforts of others. There's a lot of grey area between being a
regular Joe small shareholder in a massive publicly traded corporation (no
participation) and being the sole owner and manager of a closely held
corporation (clear participation). Its worth noting that commodity market
fluctuations don't count as the efforts of others (e.g. Noa v. Key Futures
where silver certificates weren't considered a security even when sold by an
investment firm which marketing the certificates as investments).

There's a trend in the modern interpretation of Howey toward something called
the "risk capital test," which states that a scheme which raises capital to
finance a venture should be considered a security. I'm not sure Ether meets
that test and it's a minority rule anyway but modern Howey jurisprudence is
quite flexible because scam artists tend to be extremely inventive in getting
around the Securities Act.

Ultimately the decisive factor in court is likely to be the unfortunately
vague but essential standard "Do the investors in the scheme require the
protection of the Securities Act of 1933?" The lack of a comparable regulatory
system to protect the public against Ether scams counts against exclusion from
the Securities Act. Otherwise, I personally think the case for Howey is weak
here, but that's because the case law hasn't caught up to the tech yet. So we
can't predict how a federal court might decide because they very well may
revise the existing standards.

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will_brown
Since the SEC investigative report concluded the DAO tokens were securities,
one of the biggest questions is: are there any factual distinctions between
the sale of DAO tokens and the sale of Ether.

I really can't understand why the SEC spent its time on the DAO seeing as the
token purchasers essentially agreed by majority vote to null and void their
purchase, meanwhile the Ether sale did in fact become binding.

------
vasilipupkin
Very interesting, but SEC could have gone after Ethereum but explicitly did
not and went after the DAO which was issued on top of Ethereum. My
interpretation is that SEC doesn't think Ether is a security

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empath75
Its amazing the logical hoops people will jump through to defend their rights
to invest in pyramid scams.

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shellbound1
The SEC notice also mentions buyers violating some Section 5. Does that mean
that buyers are also at risk here for simply purchasing some tokens that were
later found to be unregistered securities? That seems rather chilling.

~~~
decentralizedL
I think the key language to focus on in the SEC notice is those “participants”
who have a necessary role in the transaction of an unregistered offer and sale
of securities are liable for violating Section 5 (page 16). Taken to the
extreme, one could argue that even buyers of unregistered securities have a
necessary role in the transaction but this is not the kind of activity
relevant for Section 5 violations. Section 5 activity is more concerned with
things like underwriting, offering, issuing, promoting, and soliciting the
offer and sale of unregistered securities that lack a valid registration
exemption.

~~~
shellbound1
Thank you for the response. Could you see this affecting sellers in secondary
markets? Most that purchased DAO tokens likely went on to sell them in
secondary markets. Would their role as a seller be applied to Section 5?

I think these are also important questions to consider. The valuation of a
token is affected if you can't later sell it without commiting securities
fraud. I really hope this is not the case.

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novalis78
What about cryptocurrencies then that could as well be seen as crypto assets.
Instead of launching a token on Ethereum they could launch a copy of Ethereum.
Investors can buy "in" or use it to trade/pay. Premining is common and used to
pay for building out the infrastructure of such a system. How can one gov
entity power grab and be in charge of an entire global emerging technology.
Something does not seem right in this picture.

------
Jabanga
Ether tokens have a clear use-value. They don't provide holders with any
passive income from profits earned by a common enterprise. I am not a lawyer,
but in my opinion, the idea that they're securities is ridiculous.

This is a good analysis of how US securities laws relate to tokens:

[https://www.coinbase.com/legal/securities-law-
framework.pdf](https://www.coinbase.com/legal/securities-law-framework.pdf)

~~~
hudon
Something can be useful and a security, according to the SEC. They published
an Investor Bulletin yesterday saying as much:

"A virtual currency is a digital representation of value that can be digitally
traded and functions as a medium of exchange, unit of account, or store of
value. Virtual tokens or coins may represent other rights as well.
Accordingly, in certain cases, the tokens or coins will be securities and may
not be lawfully sold without registration with the SEC or pursuant to an
exemption from registration."

From: [https://www.investor.gov/additional-resources/news-
alerts/al...](https://www.investor.gov/additional-resources/news-
alerts/alerts-bulletins/investor-bulletin-initial-coin-
offerings#.WXk2AVP3tsM.twitter)

~~~
Jabanga
Ether does not represent any "other rights" that would put it within the
definition of a security.

------
ojr
Is selling new Kanye West sneakers, yeezy's, a security? The resale price is
usually 5x the retail price. I know there are some edge cases but how you
market it can be the difference between illegal and legal. I think a problem
with the DAO token, there was voting rights. A simple token coming off as a
commodity should be safe

~~~
yellowstuff
Neither of your points (price going up and voting rights) are what determines
if something is a security. The article does a good job of running through
what the law says makes something a security.

~~~
ojr
"proportional dispensation of voting rights are important indicators of common
enterprise" same author

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newsum
[http://www.investopedia.com/terms/s/security.asp](http://www.investopedia.com/terms/s/security.asp)

"It represents an ownership position in a publicly-traded corporation (via
stock), a creditor relationship with a governmental body or a corporation
(represented by owning that entity's bond), or rights to ownership as
represented by an option."

Stop it!

~~~
decentralizedL
Can't stop won't stop :)

[https://www.sec.gov/about/laws/sa33.pdf](https://www.sec.gov/about/laws/sa33.pdf)

"The term ‘‘security’’ means any note, stock, treasury stock, security future,
security-based swap, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement, collateral-trust
certificate, preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for a
security, fractional undivided interest in oil, gas, or other mineral rights,
any put, call, straddle, option, or privilege on any security, certificate of
deposit, or group or index of securities (including any interest therein or
based on the value thereof), or any put, call, straddle, option, or privilege
entered into on a national securities exchange relating to foreign currency,
or, in general, any interest or instrument commonly known as a ‘‘security’’,
or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to subscribe
to or purchase, any of the foregoing."

~~~
newsum
quick thought experiment:

If I presell tickets to my music festival to a reseller who in turn profits in
selling it to festival goers, you're basically saying my tickets were
securities and need to be registered with the SEC. you see how crazy that
sounds. :)

DAO tokens were obvious everything else is just a funny money commodity. Yes,
some kid made a way to print your own money in under 30 secs. enjoy it!

~~~
yebyen
I'm so torn. On one hand, I want you to be right, but on the other hand I
would love to see the likes of Ticketmaster and StubHub going down in flames
at the hands of the SEC.

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rdlecler1
By this criteria, wouldn't this make art of an artist (fractional ownership)
sold by an art dealer a security and therefore subject to SEC registration?
Basically tokens are a security because the SEC says so. I haven't seen a good
explanation otherwise.

~~~
hudon
IANAL but I'd assume it is hard to argue that there is a common expectation of
profit when purchasing art, even though this is why _some_ people buy art.
Furthermore, the profits you would make upon reselling the piece of art are
not coming solely from the artist's efforts. The artist got paid for their
efforts and your profits are coming from your ability to market the piece and
negotiate a better deal. In other words, you have some control over how much
profits you gain and the artist is out of the picture (ie. they are no longer
spending effort to help you make profit).

But a securities law expert would have a better explanation

