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Ethereum (ETH) Is Not a Security, SEC Chairman Hints on Official Response to Congressman

Securities and Exchange Commission Chairman Jay Clayton confirmed an existing analysis stating that Ethereum and other tokens of similar characteristics did not fall within the securities category under SEC standards.

Comm. Jay Clayton

Mr. Clayton issued that statement in an official response to US House Rep. Ted Budd, who requested a formal pronouncement from the commission asking to clarify certain positions regarding cryptocurrencies. One clarification he asked for was to corroborate whether the opinions expressed by William Hinman, SEC Director of the Division of Corporate Finance, were representational or personal in nature.

As previously reported by Ethereum World News, Mr. Hinman was invited to the All Markets Summit organized by Yahoo Finance on Thursday, 14 June 2018 as a member of the SEC, and during that event explained that because of its characteristics, ETH (the native cryptocurrency of the Ethereum network) was not considered a security:

“When we think about how ether today is operating, at least, we see a highly decentralized” network, not the type of centralized actor that characterizes securities offerings. In its current state, we don’t see value regulating it.”

However, despite the positive effect this opinion had on the markets, the non-formal nature of this event raised doubts in the community. This motivated Mr. Ted Budd and a group of congressmen to ask the SEC for greater clarity regarding cryptocurrencies, ICOs and the like:

Ethereum and Other Projects Don’t Pass The “Howey Test” 

Mr. Clayton’s official communication on behalf of the SEC points out that while each cryptocurrency, token or ICO must be evaluated individually, the general criteria allow the civil society to have an approximate understanding of whether a token is a security by applying the Howey Test.

“We also apply tests developed through case law, including the well-established “investment contract”* test articulated by the Supreme Court in SEC v. Howey and its progeny, including United Housing Found, Inc. v. Forman. As those cases explain, the “touchstone” of an investment contract “is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The determination of whether a digital asset is an “investment contract” depends on the application of Howey and its progeny to the particular facts and circumstances of the digital asset transaction.”

Broadly, according to the Howey Test, a transaction is an investment contract if:

  1. It is an investment of money
  2. There is an expectation of profits from the investment
  3. The investment of money is in a common enterprise
  4. Profit comes from the efforts of a promoter or third party

Good News For The Ecosystem

For further clarity, Mr. Clayton specifically referred to the words of William Hinman, Director of the SEC’s Division of Corporate Finance. In the letter, Comm. Clayton confirmed that Ether (and tokens of similar characteristics) were not considered Securities:

 “Your letter also asks whether I agree with certain statements concerning digital tokens in Director Hinman’s June 2018 speech. I agree that 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. I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, 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.”

Mr. Clayton’s statements are of special importance for traders of ETH and other similar tokens since they open the doors to American exchanges to operate freely without the uncertainty of being accused in the future of illegal operations with undeclared securities.

The post Ethereum (ETH) Is Not a Security, SEC Chairman Hints on Official Response to Congressman appeared first on Ethereum World News.

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3 More Reasons Why Ripple (XRP) Is NOT A Security

Following the statement by the Director of The SEC’s Division of Corporate Finance, William Hinman, clarifying that Ethereum (ETH) is not a security, a lot of Ripple (XRP) HODLer and fans have taken to social media to express their opinions as to why XRP is also not a security. Ethereum World News had also explored the case of XRP not being a security only a few days ago.

In the article by Ethereum World News, the points that were put forth were that the Ethereum announcement set precedence for XRP not being a security based on the fact that both projects are decentralized. In the case of Ripple, the release of Rippled v1.0.0 and its recent amendments usher in a new era of decentralization for the ledger. For every two non-Ripple validators of the network that are added, Ripple will remove one of its own.

Another argument put forth was that Brad Garlinghouse had stated that XRP is completely separate from the Ripple company.

Furthering on this topic of discussion, are the following 3 reasons also justifying that XRP is not a security.

Firstly, and as stated by the Chief Cryptographer at Ripple, David Schwartz, XRP was given to the Ripple company. Mr. Schwartz made this comments back in April via twitter in response to an article that claimed both XRP and ETH were non-compliant securities.

Further investigating the background of both XRP and Ripple, we find that XRP was first created in 2004. The current version of XRP as we know it, was only available in 2012. Ripple Labs was created in the same year of 2012 by Chris Larsen who initially called it OpenCoin. Chris was also the creator of XRP. 100 Billion XRP were then issued to run on the protocol created by web Developer, Ryan Fugger, that we now know as the Ripple Network. Therefore, Schwartz is right to say that XRP was given to Ripple.

This then means that XRP is entirely separate from the Ripple company as mentioned by Brad Garlinghouse. XRP is used as a utility coin to facilitate liquidity in the Ripple network.

Secondly, several experts on the laws and regulations governing securities according to the SEC, have claimed that the existing framework cannot offer guidelines to regulate XRP. The regulators will have to include new provisions to govern XRP in its regulatory documentation. The Feds themselves, back in 2014, had clearly stated that they do not have the framework to regulate crypto.

Former Federal Reserve Chairwoman, Janet Yellen, was quoted as saying the following back in 2014:

The Fed doesn’t really play any regulatory role with respect to Bitcoin, other than assuring that banking organizations that we do supervise are attentive, that they are appropriately managing any interactions they have with participants in that market, and appropriately monitoring anti-money laundering, bank secrecy act responsibilities that they have.

Thirdly, a previous ruling by FinCEN in 2015, had given Ripple the go ahead to continue with XRP sales. FinCEN is the Financial Crimes and Enforcement Network that is part of the US Department of Treasury. This means it is a federal entity. FinCEN gave Ripple the green light to continue its activities as per the report available on its website.

The report states that in the agreement signed by both FinCEN and Ripple, Ripple acknowledged that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they are not profiting by creating products that allow would–be criminals to avoid detection. Both parties hoped that the agreement would set an industry standard in the space of digital currencies.

This means if the SEC states that XRP is a security, the agreement by FinCEN comes under scrutiny. FinCEN would have to answer as to why it gave Ripple the green-light to go ahead with the sale without consulting the SEC. The only explanation is that FinCEN did not consider XRP as being a security.

In conclusion, the debate as to whether XRP is a security or not, continues to broaden the crypto-community with information regarding regulatory grey areas that need further interpretation by the SEC. Once the regulators make a decision on a way forward with respect to XRP, the Crypto-community can relax a bit as was the case when Ethereum was let off the hook by Director Hinman.


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50% of Top 10 Crypto’s Can Be Classified as Securities, says Crypto Hedge Fund Exec

Multicoin Capital is a crypto hedge fund and its Managing Partner, Kyle Samani, has used the recent statements by the SEC Director of Corporate Finance, William Hinman, to further analyze the top 10 cryptocurrencies as to whether they make the cut of Hinman’s definition of a security.

In a 17 part tweet, Kyle Samani came to the conclusion that the following cryptocurrencies are securities:

  • Ripple (XRP)
  • Stellar (XLM)
  • Tron (TRX)
  • Cardano (ADA)

Samani highlighted the following from the statement issued by Director Hinman to prove his argument:

If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.

Samani zeroed in on the last statement of:

where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts.

With the above statement, Kyle Samani came to the conclusion that the coins of XRP, XLM, IOTA, TRX and ADA qualify as being securities. All these projects have the founding companies holding a vast majority of the tokens.

In the case of Ripple, the organization is known to be HODLing some XRP in escrow, giving some of it away as well as selling some XRP in the markets when needed. Samani stated that the Stellar Foundation owns over 90% of the coins making it a security. The same applies to IOTA and TRX. The only reason ADA made the list as a security is because the platform is not truly decentralized yet and that nobody knows how many ADA the Cardano Foundation owns.

With respect to Bitcoin, Bitcoin Cash, Litecoin, Ethereum Classic and EOS, Samani used the above argument to quickly declare them as NOT being securities. In the five coins, no single founding entity owns a vast majority of the coins. Plus the mining/block production characteristics of the 5 platforms, furthers decentralization on the individual networks.

He also gave some advice to the EOS community when he said:

EOS – only 1 implementation. B1 owns 10% of tokens. B1 clearly did not launch the chain. If I were B1, I’d encourage the community to build another EOS implementation. This, combined with the fact that BPs clearly are independent businesses, could make EOS a utility quickly

Samani would end his twitter thread with the following comments:

The next few months certainly will be exciting!

This indicates that the five coins of XRP, XLM, MIOTA, TRX and ADA might find themselves being classified as securities by the SEC and constrained by regulation. Such an event is sure to cause some shock-waves in the crypto-verse.

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Here Is Why Ripple (XRP) Is Also Not a Security

The Crypto-verse is elated after the Director of The SEC’s Division of Corporate Finance, William Hinman, said that Ethereum (ETH) is not a security based on how it is structured in a decentralized manner. Mr. Hinman said that:

When we think about how Ether today is operating, at least, we see a highly decentralized network, not the type of centralized actor that characterizes securities offerings. In its current state, we don’t see value regulating it.

ETH joins Bitcoin (BTC) as the only two coins the SEC has openly excluded from being classified as securities. This then brings us back to the other discussion as to whether Ripple (XRP) fits the bill of being classified as a security.

There is also a pending Lawsuit against Ripple that was filed by a disgruntled trader. The plaintiff in the lawsuit, purchased 650 XRP on January 5th and later sold the entire amount on January 18th sustaining a 30% loss due to XRP dipping in value during the same period. The plaintiff claims that he did not expect to lose money due to the promotional practices of Ripple’s parent company.

In response to the above lawsuit claim, Brad Garlinghouse responded via an interview with CNBC that:

Whether or not XRP is a security shall not be dictated by one lawsuit. The SEC is the governor of that. I think it is very clear that XRP is not a security. It exists independently of Ripple the company. If Ripple, the company shut down tomorrow, XRP will continue to exist.

Ripple’s Chief Market Strategist, Cory Johnson, also echoed Garlinghouse’s view when he explained to CNBC that:

We absolutely are not a security. We don’t meet the standards for what a security is based on the history of court law. We’re 100 percent clear, it’s not a security. We don’t meet the standards.

In conclusion, the declaration by the SEC that Ethereum is not a security, makes the case that Ripple (XRP) is also not a security. Brad Garlinghouse and Cory Johnson have clarified this on numerous occasions. This means that the pending lawsuit against the parent company, Ripple, stands on a shaky foundation moving forward.

Disclaimer: This article is not meant to give financial advice. It is an opinion piece. The opinion herein should be taken as is. Please carry out your own research before investing in any of the numerous cryptocurrencies available.