SEC Director of the Division of Corporation Finance William Hinman used a speech on Thursday to offer a fairly detailed assessment of the agency’s standards for determining when a cryptocurrency or ICO can be defined as a security. In his remarks to attendees at the Yahoo All Markets Summit: Crypto Conference, Hinman said that the agency’s assessment depends on the way a coin or token is being sold and what investors expect to get from their purchase.
Hinman suggested that many ICOs are viewed as securities under the agency’s current definition, since “funds are raised with the expectation that the promoters will build their system and investors can earn a return on the instrument – usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases.”
He suggested that those types of offerings required investors to simply hope for a return based on the promoters’ efforts. According to Hinman, “at that stage, the purchase of a token looks a lot like a bet on the success of the enterprise and not the purchase of something used to exchange for goods or services on the network” – which means that the SEC will tend to treat them as securities and regulate them accordingly.
Hinman pointed to two specific cryptocurrencies as examples of coins that the SEC does not deem to be securities: Bitcoin and ether. He noted that both networks are operational and decentralized and suggested that there would be no value in applying current security laws to either coin.
The Director acknowledged that the SEC’s analysis is not static, suggesting that it looks at each coin and project on a case-by-case basis:
“Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.”