Did the SEC Just Give the Nod to Bitcoin and Ethereum?

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When Howey Met Gary (Plastic)

Yahoo Finance held its “All Markets Summit: Crypto” today in San Francisco at the Nasdaq Entrepreneurial Center. The event brought together influential entrepreneurs, corporate leaders, policy makers, and legal experts to examine the global investment appetite for Bitcoin and other cryptocurrencies, as well as try to answer some of the biggest questions surrounding these assets. Most notable, was a speech given by William Hinman, Director of the SEC’s Corporate Finance Division. His speech was titled, “Digital Asset Transactions: When Howey Met Gary (Plastic)”.  There’s a link below to the full text of his speech, which isn’t very long but makes for an interesting read.

Click here for a full text reading of the original Bitcoin Whitepaper

In his speech, Director Hinman discussed whether a digital asset offered as a security can, over time, become something other than a security. The “Howey” and “Gary” that Director Hinman referred to in his speech are two important securities law cases, SEC v. Howey and Gary Plastic Packaging Corp. v. Merrill Lynch, that are relevant to this question. More importantly though, he offered possible insight into how the SEC views Bitcoin, Ethereum and other cryptocurrencies. The crux of the matter seems to come down to the purpose of the initial offering and decentralization of authority (or lack thereof).

And so, when I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprise. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value.  And 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. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.
–William Hinman, Director of the SEC’s Corporate Finance Division

So basically what Mr. Hinman is saying is (1) no, Bitcoin is not now, nor ever was, a security subject to SEC regulation; and (2) Ethereum might have started as a “security”, but no longer should be regarded as a security because it has become decentralized. He gave a couple of lists of questions to use in determining whether a digital asset is a security subject to SEC regulation. The two most important, in my humble opinion, are the following:

1. Is there a person or group that has sponsored or promoted the creation and sale of the digital asset, the efforts of whom play a significant role in the development and maintenance of the asset and its potential increase in value?
2. Are purchasers “investing,” that is seeking a return? In that regard, is the instrument marketed and sold to the general public instead of to potential users of the network for a price that reasonably correlates with the market value of the good or service in the network?

But here’s the real takeaway

A researcher in the cryptosphere, Bix Weir (RoadToRoota.com), takes William Hinman’s speech as a signal to developers in the cryptosphere that the SEC is not interested in killing this technology. But developers need to talk to the SEC about what they are developing. I would have to agree with that interpretation. If it is correct, it’s a positive sign for the future of cryptos. Regardless, it has been interpreted that way in the Ethereum market today.

But a word of caution. There is another important point worth noting in the endnotes you will find in the text version of Mr. Hinman’s speech on the SEC website (linked below). Mr. Hinman’s comments at the Yahoo event today are not official SEC policy. The first endnote, which is hyperlinked, after “Thank you, Andy. I am pleased to be here today” says:

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s [William Hinman’s] views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff.

Nonetheless, Mr. Hinman could not have made these comments without getting an OK from his superiors at the SEC and will further bolster the legitimacy of cryptocurrency and blockchain technology.

Related:

• Bitcoin Whitepaper – A Full Text Reading, May 7, 2018
• Three People Bitcoin Newbies Should Follow, November 27, 2018
• A Fundamental Truth About Money, March 29, 2017

Resource Links:

• Digital Asset Transactions: When Howey Met Gary (Plastic), U.S. Securities and Exchange Commission [Press release], June 14, 2018
• Yahoo Finance All Markets Summit: Crypto, Yahoo Finance, June 14, 2018
• ALERT!! SEC Greenlights Ethereum!! (Bix Weir), Road to Roota [YouTube Video], June 14, 2018
• Bitcoin.org
• Ethereum Project
• Securities and Exchange Headquarters Building image credit: U.S. Government Works