
Digital Asset Transactions: Remarks at the Yahoo Finance All Markets Summit - viach
https://www.sec.gov/news/speech/speech-hinman-061418
======
seibelj
Relevant quote:

> And 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. And, as with Bitcoin, applying the
> disclosure regime of the federal securities laws to current transactions in
> Ether would seem to add little value. 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. And of
> course there will continue to be systems that rely on central actors whose
> efforts are a key to the success of the enterprise. In those cases,
> application of the securities laws protects the investors who purchase the
> tokens or coins.

~~~
jjxw
It's an interesting distinction which begs the question of how securities
enforcement will work on currencies which start off looking like securities
and "evolve" out of that designation like Bitcoin and Ether did. As implied by
the statement, the "fundraising that accompanied the creation of Ether" would
probably qualify as a securities offering since it absolutely relied on
central actors to maintain initial development until it had grown sufficiently
to become more of a decentralized platform. At what point are token purchases
no longer protected by securities law?

The SEC (or SEC leadership) has shown a willingness to take a fairly nuanced
view on how cryptocurrencies are classified. Will be interesting to see how
this thinking evolves as nuance comes with complexity.

~~~
fredgrott
be careful of relying on that quote..Ethereum applied and got registered to
fund raise under current laws...see the blog announcemnet of said crowdsale:
[https://blog.ethereum.org/2014/07/22/launching-the-ether-
sal...](https://blog.ethereum.org/2014/07/22/launching-the-ether-sale/)

~~~
deltateam
Applied is a mischaracterization of what Ethereum did.

Ethereum got a legal opinion from a law firm in the United States, and
simultaneously convinced the regulators in the Canton of Zug, Switzerland to
create a completely new term for them. State regulations in the Swiss
Confederacy extend to the sovereign protection of the Switzerland brand and
all of its economic treaties.

Ethereum nor the Ethereum foundation applied for US securities anything. Not a
Reg D offering, not Reg S, not anything.

The parent question remains valid: if one did register as a security, how does
the asset transition to not being a security.

Sounds like we need a new Reg for transitional securities. As it stands, the
SEC is still applying its broad discretion to not levy criminal and civil
sanctions to unregistered transitional securities.

------
ve55
Keep in mind the definition we can use legally for a security is "a contract,
transaction or scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts of the
promoter or a third party."
([https://en.wikipedia.org/wiki/Howey_test](https://en.wikipedia.org/wiki/Howey_test))

What's interesting about this ruling with respect to Ethereum is that one of
the main reasons Ethereum has done so well is because of the development team.
If they were terrible, Ethereum investors could have lost all of their money,
but instead the developers have done a wonderful job and that has resulted in
substantial profits for those holding ether.

The investors do not get dividends or equity, but they absolutely have
invested in a common enterprise (Ethereum, the Ethereum network, and the
Ethereum codebase) with an expectation of profit (obviously) based on the
efforts of a third party (the developers - who control the entire codebase and
have moved Ethereum forward every step of the way).

Although this ruling is obviously good news for Ethereum, it seems to set a
bit of a double standard with respect to what we've seen about Ethereum
tokens, where the situation is very similar to this, but yet they're instead
ruled as being securities due to the above reasons. It is interesting that one
of the key points here is their notice of 'decentralization' \- how much
decentralization is required for something to not be a security? It's a very
difficult question, because development is generally always centralized in any
project, there's few other ways to get things done efficiently.

The price of Ethereum is up almost 10% in the last 24 hours, partially related
to this news as we see a spike in price coinciding with this announcement
across the market ([https://coinmarketcap.com/](https://coinmarketcap.com/)).

~~~
CryptoPunk
>>What's interesting about this ruling with respect to Ethereum is that one of
the main reasons Ethereum has done so well is because of the development team.
If they were terrible, Ethereum investors could have lost all of their money,
but instead the developers have done a wonderful job and that has resulted in
substantial profits for those holding ether.

It is certainly one of the main reasons, but it's not clear it's the majority
of the reason. The community around Ethereum was very large from the very
start.

Much of the value generated has been as a result of independent teams creating
DApps and various utilities (e.g. blockchain explorers like Ethercan, browser
extensions like MetaMask, web-based wallets/DApp-browsers like
myetherwallet.com), and unpaid volunteers contributing to its EIP process.

The token sale smart contract template that set off the token sale boom was
created by one of the early independent projects, I believe Digix.

------
phnofive
Key points regarding Ether:

>And 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.

>I would like to emphasize that the analysis of whether something is a
security is not static and does not strictly inhere to the instrument.[10]
Even digital assets with utility that function solely as a means of exchange
in a decentralized network could be packaged and sold as an investment
strategy that can be a security. If a promoter were to place Bitcoin [or
Ether] in a fund or trust and sell interests, it would create a new security.

Recommend changing the title to Bitcoin/Ether, but even that is a serious
simplification; more like: "Sales of Ether/Bitcoin are not inherently
securities transactions"

~~~
21
> Recommend changing the title to Bitcoin/Ether

The SEC commented before that Bitcoin is not a security, so the Bitcoin
related part is not news.

------
SirensOfTitan
The interesting takeaway here is the idea that decentralization is the key
factor in determining whether a token is a security.

~~~
omarchowdhury
There are other key factors, specifically the manner of sale and whether the
purchasers are led to an expectation of profits.

------
briatx
It seems to me that eth would trigger many of his factors (listed below) for
determining whether or not it is a security. How many people are buying eth
for "gas" vs holding it for a return?

> What are some of the factors to consider in assessing whether a digital
> asset is offered as an investment contract and is thus a security?
> Primarily, consider whether a third party – be it a person, entity or
> coordinated group of actors – drives the expectation of a return. That
> question will always depend on the particular facts and circumstances, and
> this list is illustrative, not exhaustive:

> Is there a person or group that has sponsored or promoted the creation and
> sale of the digital asset, the efforts of whom play a significant role in
> the development and maintenance of the asset and its potential increase in
> value?

> Has this person or group retained a stake or other interest in the digital
> asset such that it would be motivated to expend efforts to cause an increase
> in value in the digital asset? Would purchasers reasonably believe such
> efforts will be undertaken and may result in a return on their investment in
> the digital asset?

> Has the promoter raised an amount of funds in excess of what may be needed
> to establish a functional network, and, if so, has it indicated how those
> funds may be used to support the value of the tokens or to increase the
> value of the enterprise? Does the promoter continue to expend funds from
> proceeds or operations to enhance the functionality and/or value of the
> system within which the tokens operate?

> Are purchasers “investing,” that is seeking a return? In that regard, is the
> instrument marketed and sold to the general public instead of to potential
> users of the network for a price that reasonably correlates with the market
> value of the good or service in the network?

> Does application of the Securities Act protections make sense? Is there a
> person or entity others are relying on that plays a key role in the profit-
> making of the enterprise such that disclosure of their activities and plans
> would be important to investors? Do informational asymmetries exist between
> the promoters and potential purchasers/investors in the digital asset?

> Do persons or entities other than the promoter exercise governance rights or
> meaningful influence?

------
russdpale
I don't see how the SEC could rule eth is a security and maintain its
integrity, which is critical when dealing with this new technology if it
wishes to retain some form of control into the future.

The primary use of ether in its purest abstraction (ie _not_ packaged in an
index fund), is in the form of gas to power the individual steps of the
computer. It is no more a security than the gasoline in your car.

However, based on the statements, there are going to be a lot of coins that
are a security and a lot of coins are going to blur the line to the point of
near invisibility. It is arguable that Eth is already doing this.

It's clear the SEC is far behind, and needs a new framework by which to judge
these coins, instead of hammering them into existing frameworks designed
explicitly for older financial vehicles.

~~~
will_brown
>The primary use of ether in its purest abstraction (ie not packaged in an
index fund), is in the form of gas to power the individual steps of the
computer. It is no more a security than the gasoline in your car.

I’m sure if you compared the number of people who bought ETH to actually use
as gas to facilitate a transaction vs simply investing for profit compared to
the number of people who bought gas to fuel their cars vs resell for
profit...you might not get so wrapped up in you analogy

~~~
21
The relevant part is not if you can make a profit, but if there is a
"promoter" which says that. He gave an example how buying a house is not a
security even if you expect prices to go up, but buying the same house through
another legal entity with management can be a security.

------
dclowd9901
There's something I can't reconcile in my head about crypto: What is the
vested interest in a country like the US allowing crypto to become the de
facto world currency, thus stripping the power of the Reserve away from the US
(and indeed any other country with an interest in managing its own currency)?
Doesn't it behoove countries with this interest to work to the bitter end to
prevent crypto from becoming de facto?

And if I'm right, and crypto _can't_ become de facto, what is it aside from a
security, since it would have no "home"?

~~~
CompelTechnic
A decent fraction of the people in charge of making these decisions understand
that new, risky forms of enterprise can lead to benefits for a lot of people.

Despite being a regulatory body, the SEC has a very free-market culture.

~~~
dclowd9901
I think you're right insofar as wanting to get out of the way of companies,
but I think when it comes to something as fundamental as _the currency which
operates at a national level_, it would decidedly be more cautious, especially
in giving away the power to inflate or offer 0% interest overnight loans.

------
lossolo
So basically Ethereum is not security but any crypto tokens created on top of
Ethereum to make _public offering_ are still securities.

~~~
decentralised
Not _any_. The SEC has previously acknowledged the different types of tokens
(utility, security, commodity, collectible, etc).

------
wmf
This will probably become the new new wannabe loophole. "Our SAFT is a
security but when the token launches it won't be."

~~~
CryptoPunk
That's not a loophole. It has a significant effect on the flexibility and
participation set of initial fundraising. I would argue it reinforces the
traditional VC paradigm that limits accessibility to the wealthy.

------
shkkmo
FTFA:

> And 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.

Wouldn't the hard forks seem to go against this?

------
SlowRobotAhead
Of course it's not a security. It's a commodity... right?

------
Talyen42
It's all in the marketing.

Scammy ICO promises? It's a security.

The number of promises the Ethereum foundation and developers have made with
regard to expected ROI? Pretty much zero in centralized fashion. Not a
security.

If I sell potatoes on the street promising MOON RETURNS 50% a month, i'm
selling securities.

~~~
tyrust
> It's all in the marketing.

But it's not:

> simply labeling a digital asset a “utility token” does not turn the asset
> into something that is not a security.

Your point only works in one direction: of course if something is marketed
promising returns then it is a security. The lack of such marketing does not
imply anything in either direction.

That said, I do believe that Ether is a utility token.

------
thisisit
Can we please change the title to "SEC Director of Corporation Finance thinks
Ethereum is not a security" or something along those lines? Because it is not
SEC's view that Ethereum is not a security but someone working there.

~~~
phnofive
Unless the SEC disavows this statement, wouldn't a director's view be seen as
the SEC's view?

~~~
ucaetano
No, the SEC would have to explicitly issue a ruling.

This would be equivalent to equating the opinion of a single Supreme Court
Justice to a ruling of the Supreme Court on a subject.

~~~
will_brown
That’s not exactly how it works.

Check out United States v. Baker for _reliance on authority of a Government
Official_.

A good practical example is where Obama said his Justice Dept would not
enforce Federal Laws on Marijuana in States where actors are complying with
those State Laws. If the Federal Government preceded to crack down, U.S. v.
Baker would provide a solid defense of good faith reliance on authority of a
Givernment Official where the act is otherwise in clear violation of federal
law.

