Ethereum and Bitcoin aren’t considered securities

Recently the Director of Corporate Finance at the Securities Exchange Commission (SEC) announced that both Bitcoin and Ethereum are not considered securities.

...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.

Let’s discuss the differences between what asset is considered a security versus a utility and how that ultimately shapes its near future in the United States.

Security vs. Utility

Securities are designed to be assets that are issued to investors in pursuit of future profits. They are able to pay dividends, share profits, or even pay interest to help generate profit for the security owner. However, being a security means you’re under the jurisdiction of the SEC and must comply to their rules.

An investment is a security if it passes the 4 requirements of the Howey Test.

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. Any profit comes from the efforts of a promoter or third party

According to the SEC, Ethereum fails the Howey test due to point number 3. The SEC stated that “When the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede.”

On the other hand, being a utility token means that you’re purchasing the token as a service instead of an investment. These tokens have an actual use case instead of being bought for the sole purpose of an investment. Through utility token ICOs, companies can raise capital in exchange for users to access to future services on the application. Utility tokens can be compared to in game currency - something you purchase with real money, but you’re buying to use. By having a finite supply, many utility tokens are still bought as investments due to the nature of supply and demand, yet avoid the regulations of the SEC.

So what does this all mean for Ethereum and Bitcoin? By not being labeled a security, they aren’t as threatened with regulatory control and people would not need to worry in investing in these cryptocurrencies.

Cheers,
The Blockchain Musketeers

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