Key Insights:
- What is Ether?
- Why should Ether be classified as a security?
- Implications of classifying Ether as a security
In 2018, Bill Hinman, the Director of Corporate Finance at the U.S Securities and Exchange Commission (SEC) declared that Ether is not a security. But, time and time again the controversy between cryptocurrencies, and regulators have resurfaced the argument whether Ether could be a security.
While identifying the factors to classify financial securities, there are clear indications that Ether can not be categorized as a security. several events have occurred in the crypto ecosystem since 2018— necessitating a change in narrative. The reality now is what if Ether is classified as a security.
What is Ether?
Ether (ETH) is the cryptocurrency/digital token of the Ethereum network. While Ethereum is the network that is deployed on blockchain technology, Ether is Ethereum’s token that can be used for exchange and transactions. The Ethereum Virtual Machine (EVM) uses Ether as a payment method to reward network participants.
The reward is due to the expenses they incurred for securing the blockchain and validating transactions on the Ethereum blockchain. Similarly, users and consumers can use the Ether (ETH) token to make payments for goods and services from retailers and P2P merchants. Furthermore, the debate that Ether should be treated as a security or not continues to linger in the crypto ecosystem.
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Can Ether be Classified as a Security?
You can imagine you wake up someday and the Security and Exchange Commission (SEC) decides that Ether will be classified as a security. The first implication will be that Ether will be treated as a stock.
Similarly, the network will have to comply with all the regulations and requirements for registration, disclosure, and investor accreditation. You would recall that at its initial issuance/ offering, it bypassed all these procedures. Declaring it as a security means it will have to follow the entire rules— making it difficult for many exchanges to operate.
Another strong argument that Ether should be classified as a security is the Howey Test. According to Gary Gensler, a former chairman of the Commodities Futures Trade Commission (CFTC), he said Ethereum meets the Howey Test. The test says any instrument that exhibits features such as the profit depending on the actions of a third party is a security.
Similarly, if such an instrument represents an investment in a common enterprise, it should be considered a security. Gary Gensler, therefore, believes that Ether should be treated as a security.
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What If Ether is Not Classified as a Security?
The status quo is that Ether is not a security. This is because the initial offering of Ether was not a security offering. The investors of Ether in 2014 invested in it as a product— a smart contract on a blockchain. Therefore, they do not expect the SEC regulation that applies to securities.
Implications Of Classifying Ether As A Security
The negative implication of changing the status quo — classifying Ether as a security is that crypto exchanges will be badly affected. They would be required to register with the SEC and be liable to fines for non-compliance. Finally, most of these exchanges will stop Ether trading to avoid the SEC regulations. The implication is that Ether prices might likely fall leading to investors’ loss.
