Is ETH a Security?

Since the Ethereum network has come to prominence along with Bitcoin and other crypto currencies over the last 3–5 years (3 trillion dollar market cap at all time high), the question of its legal status has been heavily debated. Lawmakers in general have made conflicting comments about this subject and today I’d like to try and bring a lot of the facts into one place. The main argument that will effect the future of ETH and other crypto currencies is, “Is Ether a commodity or a security?”

What is a commodity?

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. A commodity thus usually refers to a raw material used to manufacture finished goods.

Bitcoin itself has been classified as a commodity similar to Gold since it is primarily a store of value, used as something to be traded and the only way to create it is by mining. In the past this has also been true for Ether (ETH), but two major events, one recent, and the other not so recent, bring Bitcoin and ETH into starker contrast. More on that later…

What is a security?

A security is a financial instrument that holds some type of monetary value and can be sold or traded in a financial market. The most common types of securities are stocks, bonds, ETFs (exchange-traded funds), options, and mutual funds.

I think the key word in the above definition is financial INSTRUMENT.

The Howey Test is a president set by the supreme court which determines whether a transaction qualifies as an “investment contract (instrument).” The Howey test states that if a transaction is found to be an investment contract, it’s considered a security.

According to the U.S. Securities and Exchange Commission (SEC), an “‘ investment contract’ exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. The so-called ‘Howey Test’ applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities.

So what about ETH?

ETH’s status is certainly debatable. The current president, set by the previous SEC chair Jay Clayton, is that ETH is a commodity. But recently two main differences have been pointed out between ETH and BTC. First, the Ethereum foundation did, in the early days, conduct an ICO (initial coin offering) to help raise funds for the foundation to develop the Ethereum network. In the minds of most lawmakers, an ICO is clearly a financial contract where ETH was used as a financial instrument. The second is a more recent change. Ethereum is no longer “mined,” but staking is now the mechanism that more Ethereum is created. Staking is seen as more akin to a dividend mechanism rather than a mining procedure.

So now what?

Until a case is brought to the supreme court or a congressional law is passed, we will not have a clear definition for ETH and other crypto currencies. As far as I can tell, the worst that can happen, is that the American government could shut down any centralized exchange that attempts to sell securities without being registered as such. The Ethereum network is far too decentralized to be completely controlled by any one government, but participation and innovation could be stifled by bans or unclear regulation.

Unfortunately, this is the natural progressing of new tech and changing times. Most in the space knew this argument was inevitable and that only with clear regulation will the crypto space be able to grow past infancy. Until then crytpo will continue to feel like the wild west. Significant institutional capital investment will continue to wait on the sidelines as they are bound by red tape, and only those brave individuals and companies willing to tread in this murky water will benefit or get rekt by exploring uncharted territory.

For more ETH content follow me on Twitter @AllThingsETH or on my YouTube Channel!

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