Under the Investment Company Act of 1940, Section 2(a)(36), a security is defined as “any note, stock, treasury stock, security future, bond, debenture, evidence, certificate of interest or participation in any profit-sharing agreement…” amongst many other financial vehicles. That begs the question, where do cryptocurrency and ICOs lie within the purview of that definition?
Just this morning, William Hinman, Director of Corporate Finance at the U.S. Security and Exchange Commission said that Bitcoin and Ether are not securities, according to multiple news outlets. Speaking at the Yahoo Finance All Market Summit in San Francisco, Hinman addressed a highly-contentious issue that shook up the crypto market after a fake-news scare from the Wall Street Journal in early May.
“When I look at bitcoin today, I don’t see a central third party whose efforts are key factors to determining the success of that enterprise. The network on which bitcoin functions is operational and appears to have been decentralized for some time…”
The key distinction between classifying a digital token as a security, lies within the utility, and the token’s role as a means of exchanging goods and services through a network. Under the eyes of the SEC, ICOs operate very much under the legal boundaries of securities. Bitcoin and Ethereum, however, can operate very much like a sovereign currency moving forward.
Hinman’s statements echo those of Jay Clayton, Chairman of the SEC. Earlier last week, Clayton touched upon the “incredible promise” of distributed ledger technologies driving out market inefficiences in a CNBC interview. He went as far as saying that cryptocurrencies could very well be eventual “replacements for sovereign currencies.”
“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” — William Hinman
Hinman expressed considerable interest in the potentialfor distributed ledger technology to share information, transfer value, and record transactions. He referenced the considerable value “in creating applications that can be accessed and executed electronically with a public, immutable record without the need for a trusted third party.”
We are witnessing the emergence of a new asset class, as Hinman remarked that subjecting Bitcoin and Ethereum to “federal securities laws [of] currenct transactions” would add little value. The far-reaching effects of how Bitcoin and Ether will affect economic activity from a transfer-of-goods-and-services perspective remains to be seen.
A transcript of Hinman’s statements can be found on the official SEC website here.