Out of all the new cryptocurrencies, ethereum is one that stands out as being a competitor to bitcoin. In fact, it’s now valued as being the second most popular digital currency, which has given bitcoin investors pause over the last year. But in spite of its success, there has been concern over the fact that United States commodities regulators have been unsure of whether to classify ethereum as a security or not. However, recently the SEC determined that transactions involving ether were not subject to federal securities rules.
This ruling was a relief to investors, given that there are many companies that use ethereum to issue their own crypto tokens. Combined, these have raised billions of dollars in profits in the last year, but are as yet unregulated. The United States SEC deciding to classify ethereum as a security would have been a huge problem for anyone who has used it to issue their own tokens and not complied with various Securities and Exchange Commission guidelines.
While some argue that ethereum meets the Howey Test, a legal precedent which determines whether or not an asset can be considered a security, ethereum’s developers and many others do not. According to the Howey Test, an asset is a security if it has specific features, such as whether it represents an investment in a common enterprise or the profits depend on the actions of a third party. If an asset can prove that can be used on its own, it does not qualify to be a security. The fact that the ethereum network wasn’t yet active during its ICO means the tokens couldn’t be used for anything else — which would be an argument in favor of it being a security.
On the other hand, there are several reasons why other industry experts argue that ethereum doesn’t meet the requirements for being a security. The first being that ethereum’s blockchain requires miners validate transactions, create new blocks and then unlock ETH tokens. The other argument is that the Ethereum Foundation has stated that they have no control over the supply or issuing of ETH and it only has about 1 percent of ETH, which is lower than that held by many users in the network.
It remains to be seen how ethereum and other cryptocurrencies are ultimately regulated in the years to come. Blockchain technology and the digital currencies built on top of it continue to be developed at a faster pace than the SEC and other regulatory agencies may have anticipated, and that may impact any future decisions. But in the meantime, this decision from the SEC has settled a few questions, even as advances in this technology may raise more in the future.