— loomdart (@loomdart) March 12, 2019
While Clayton did not reference Ethereum or any other cryptocurrency by name, he confirmed that he agrees with Hinman’s (the SEC’s Director of Corporation Finance) analysis of whether crypto assets fall under the securities classification.
In the letter, Clayton specifically said: “The analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument. A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition.”
The Howey framework
Mr Clayton then went on to agree with Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract, stating: “Purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.”
In June last year, Mr Hinman also said that once “a network becomes truly decentralised, the ability to identify an issuer or promoter to make the requisite disclosure becomes less meaningful”, which would imply that subsequent offers and sales of tokens in such a network are no longer subject to securities laws.
What it may mean to ‘not’ be a security
If Ethereum can crack the formula to not be labelled a security, it would open the door for the SEC to shift responsibility to their sister regulator the CFTC (Commodities and Futures Trading Commission).
This agency has already shown a willingness to approve and open up the institutional market to a number of regulated products in the form of Bitcoin futures at the CME, CBOE, and the soon to launch ICE exchange.
On the other hand, the SEC as an agency has continued to reject and deny any ETF applications on the grounds of custody, manipulation, and lack of proper pricing data. If it continues to reject proposals, then we may see a shift in the approach of regulated exchanges to target new crypto futures products (like an Ethereum-based futures product) instead of the elusive Bitcoin ETF.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.