Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), has clarified that, in his view, ETH is an unregistered security—as are most other tokens in the digital currency industry.
On March 9, U.S. Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam expressed a different perspective. In his view, ETH is a commodity and thus falls under the regulatory purview of the CFTC. Noting that ETH had been listed on CFTC exchanges for quite some time, he said, “we would not have allowed the Ether futures product to be listed on a CFTC exchange if we did not feel strongly that it was a commodity asset.”
.@CFTC Chair Rostin Behnam Says Stablecoins Are Commodities At Senate Agriculture Hearing https://t.co/g4jnFsSFkc @SenGillibrand pic.twitter.com/0Zg9ULZvVs
— blockchain tipsheet (@blockchaintpsht) March 8, 2023
To complicate matters further, New York Attorney General Letitia James weighed in late last week with a lawsuit against KuCoin, accusing it of selling unregistered securities, specifically ETH.
So, who’s right? Is ETH a security? According to the Howey Test, it absolutely is.
ETH is a security according to the Howey Test
First, let’s begin with a simple explainer of what The Howey Test is and why it matters. This will be crucial to understanding why ETH is a security.
According to Investopedia, “The Howey Test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an “investment contract,” and therefore would be considered a security and subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. Under the Howey Test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
In essence, the Howey Test is used to determine what is and isn’t a security in the United States. It’s a well-known term within the digital currency industry as it has been brought up in relation to high-profile cases like SEC vs. Ripple.
Let’s break down the Howey Test further. In order to qualify as an investment contract, there has to be:
- Investment of money.
- In a common enterprise.
- With a reasonable expectation of profits.
- With those profits being derived from the effort of others.
Astute observers will immediately see that, in all likelihood, the Ethereum ICO from 2014 meets all four criteria. During the sale, more than 7 million ETH tokens were sold in the first 12 hours alone, with coins sent to a wallet controlled by ETHSuisse, a company based in Switzerland.
So, under the guise of a ‘decentralized’ ICO, we have:
1. The investment of money. Everyone who sent BTC to the Ethereum ICO wallet address will attest to that.
2. In a common enterprise, in this case, EthSuisse. This was a company based in Zug, Switzerland. This firm has since been dissolved, and the Ethereum Foundation has taken control.
3. With a reasonable expectation of profits. Why else does anyone buy into ICOs? The hype around Ethereum was insane including by its main pitchman Vitalik Buterin.
4. With the profits being derived from the efforts of those who had developed the Ethereum blockchain and would develop it in the future.
I’m not a securities expert, but I possess basic powers of logical deduction, and based on those four simple criteria that make up the Howey Test, ETH is a cut-and-dry security. That the common enterprise that accepted the cash has since been dissolved does not change anything. All four criteria of the Howey Test have been met.
What defines a commodity? According to Black’s Law Dictionary, commodities are “goods that can be freely sold to the public. It can be agriculture, fuel, or metals.” It’s much more difficult to see how the argument that ETH tokens fit this definition would hold up in court.
Most ICO tokens are worthless and will go away
According to the legal opinion of both the Chairman of the SEC and the New York Attorney General, and according to the logic above, Ethereum, and most other tokens sold via ICO, are unregistered securities.
That means the people involved in the entities that sold them are legally liable for doing so, and most tokens will share the fate of KIN after the SEC wins its lawsuit against Kik Interactive. Not only do we have qualified opinions and logic to go on, but legal precedent favors the notion that ETH and most other ICO tokens are securities, too.
All of this should cause readers to radically reassess what the future of the industry might look like. Whereas Satoshi’s original Bitcoin is in the clear, according to Gensler and others, almost everything else can and will be targeted.
The next few years are going to change everything. Smart developers should switch to a ‘set in stone‘ protocol that scales infinitely and utilizes tokens not issued in any ICO or offering—the original Bitcoin, BSV.
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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