Ethereum: Is It A Digital Currency Or A Security?

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This question has been bounced around as of late among US securities regulators in order to define its status and thus regulate it under current securities guidelines or create new policies and guidelines from which regulatory agencies can monitor it from.

What is known right now is that ethereum (ether) holds the number 2 position, right behind bitcoin, as the most valuable cryptocurrency in the world. That status might be in jeopardy, however, if regulators in the US finally decide that the digital asset is a security and not a digital currency.

Ethereum’s Rise In Value

Over the past year, ethereum has given bitcoin a run for its digital money. Ether tokens currently in circulation are estimated, at the time of this writing, to be valued at roughly $72 billion. Since the beginning of last year, the digital currency has risen from a mere $50 per token to almost $700

Impact Of Possible SEC Decision

The Wall Street Journal has recently reported that people in the know have said that US financial regulators like the Securities and Exchange Commission (SEC) are seriously looking at ether and examining whether it falls into the same definition as a stock or a bond. If so, it would most certainly have to be monitored and regulated under the exact conditions in which U.S. publicly-traded stocks are.
https://www.technologyreview.com/the-download/611066/the-us-is-approaching-a-defining-moment-for-cryptocurrency-innovation/

If the SEC does decide to classify ether as a security, all the tokens issued in 2014 during its Initial Coin Offering would be subject to the same disclosure, registration, and accreditation that stocks must follow when they are initially offered to investors.

Of course, as with most cryptocurrencies at that time, ethereum along with its ether tokens did not comply with any of those rules.

In addition to ethereum’s plight, many other cryptocurrencies that were issued through ethereum’s blockchain platform in the past will also have to face the same penalties as ethereum if the SEC ultimately deems ether tokens a security and not a cryptocurrency.

The Big Question

The main question that the SEC is looking at is whether or not ethereum developers are currently in a position to influence the value of ether tokens in the same way a company can influence the value of its stock.

There are many experts within the digital currency world who claim that ethereum developers created a unique computer network that does not allow them to influence the value of ether in any way, yet prominent financial figures like Gary Gensler, former chairman of the Commodity & Futures Trading Commission (CFTC) believe that ethereum developers are definitely in a position to do so.

Howey Test

Gensler says that ethereum meets the criteria given by the Howey Test, which defines specific guidelines in regards to whether an asset/financial instrument falls into the realm of a security or not.

According to the Howey Test, any asset or instrument that meets the following criteria should be considered a security:

1 – The instrument represents an investment in a common enterprise.

2 – Profits depend on third-party actions.

According to Gensler, ethereum most definitely falls into the second case as the Ethereum Foundation which ethereum/ether tokens rest upon represent a common enterprise.

However, Gensler’s critics claim that if an instrument can be classified as “useful” in-and-of-itself, then it should not be considered a security. In retaliation to that argument, Gensler and others who feel that ethereum should be labeled a security and regulated as such, state that ethereum’s network was not functioning during the time of its ICO and so ether tokens could not have been used for anything “useful” at that time.

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