SEC director says Ethereum does not fall under securities regulation

The price of the cryptocurrency surged after the US watchdog weighed in on the debate.

A US Securities and Exchange Commission (SEC) official has said that Ethereum (ETH) does not fall under securities law.

On Thursday, William Hinman, SEC Director of Corporation Finance, said in prepared remarks that "the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions."

As the news broke, the price of ETH jumped to $525.74 at market close. The price has now stabilized and is back down to $492.79.

The line drawn between securities and cryptocurrencies has rocked the market. Since 2017, when the US decreed that some Ethereum trading may be bound by securities law, there has been a level of uncertainty as to how cryptocurrency exchanges should be structured and what guarantees investors in Initial Coin Offerings (ICOs) held in law, if any.

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If ICOs can be considered as bound by securities law, the Wild West of cryptocurrency investment would suddenly be restricted by registration, the requirement to form management structures similar to traditional companies, and SEC scrutiny -- and this would potentially expand to envelop cryptocurrency as a whole.

Some feared that SEC's stringent rules could potentially cause a slowdown in the market or scupper future investment.

However, Hinman has suggested that when a digital asset is being sold not to invest in a project, such as through an ICO, but to purchase goods or services through the network in which the asset was created, securities law may not apply.

"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," the executive said.

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When it comes to Bitcoin, Hinman believes there is "little value" in attempting to regulate the cryptocurrency as a security today, as the blockchain which underpins the virtual asset is operational and has been "decentralized for some time, perhaps from inception."

Putting aside how Ethereum was created, through a successful crowdfunding campaign, Hinman views this cryptocurrency in the same fashion.

"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," Hinman said. "And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value."

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Decentralization and a lack of reliance on an entrepreneurial project or enterprise appear to be key factors in deciding whether or not a cryptocurrency should be considered a security, and therefore bound by SEC regulations.

"Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required," the executive added. "There will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins."

Earlier this week, Coinbase announced plans to support Ethereum Classic (ETC) on the firm's cryptocurrency trading platform.

Coinbase said support for the cryptocurrency will be added, "in the coming months."

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