Background of SEC enquiry
Ethereum is subject to a looming enquiry by the US Securities and Exchange Commission (SEC) as well as the Commodity Futures Exchange Commission (CFEC) for its token presale in 2014. During the presale of ETH tokens in 2014 a total of 31,000 BTC were raised by the Ethereum Foundation to fund the development of Ethereum.
Regulators are concerned that the presale itself could be classed as securities sale, due to the fact that investors likely bought tokens in the hopes that their value would increase in the future. If so the Ethereum Foundation should have registered ETH as a security before the token sale was carried out.
Howey Test to decide if its security
Under the Howey Test, a transaction is considered an investment contract/ security if:
1. There is an investment of money (Arugeable)
There is room for argument here as a total of 31,000 BTC were raised by the Ethereum Foundation in 2014 to fund the development of Ethereum. Thus if you view bitcoin as a legitimate form of money in 2014 then its considered a security. However, at current stage in view that investor can directly use fiat for investment in ethereum its an outright investment of money.
2.There is an expectation of profits from the investment (YES)
From the start there has been an expectation on return from investment, else no one would have invested. On hindsight in 2014, if investors have known about the current price of ethereum who would not have invested in their project.
3. The investment of money is in a common enterprise (YES)
Although ethereum is set up as a non-profit foundation but the truth to it is that many companies going on ICO has followed this type of listing method to sits entity as a non-profit organization. Substance over form: It’s a common enterprise, the Supreme Court in recent rulings has actually created a test that looks at an investment’s substance, rather than its form, as the determining factor for whether it is a security.
4. Any profit comes from the efforts of a promoter or third party (Arguable)
There is room for argument here. As the whole ethereum protocol is decentralized and involved a lot of communities from miners, ethereum foundation, investors, Ethereum enterprise alliance etc. The arguement here is that people may be buying ether as utility to deploy smart contracts or for payment. There may not be profit intent. But the former may be minimal as majority of ether holders are holding ether for investment profits or as proceeds from ICOs.
I dont think there would be definitive decisions or outcomes anytime soon as the stakes are too high for this. Notwithstanding, my view is that ethereum is not a security during 2014 sales, but definitely meets the criteria of being a security at current stages.
Repercussions of classifying ethereum as security
1. It will trigger an investigation of all previous and future ICOs which have collected ethereum on whether these tokens should also be considered as securities.
2. There may be massive fine slammings across the whole crypto industry
3. Last but not least this would trigger another stretch of bear market.
My viewpoint is that the classification verdict may not happen soon. But the big commotion about ethereum classification as Securities would imply tighter regulations governing future ICO launches and cryptomarket is coming our way. ICO launches would need comply with more stringent regulations and crypto investors would need to brace for more volatility and made early preparation to restructure their portfolio accordingly.