William Hinman, Director of Division of Corporation Finance in US Security and Exchange Commission has recently given a speech at the Yahoo Finance All Markets Summit in San Francisco.
In this speech he have said a lot of things that the cryptocurrency community interpreted as being very positive for the crypto space.
However, before we all can start celebrating and shouting “to the moon!”, it is important to note that, as stated on the SEC official website
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 views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff.
This means that, whatever positive things Hinman might have said, it doesn’t mean that it is an official statement or opinion of SEC.
Now let’s dissect the actual speech. One of the very important points that Hinman addressed was that a digital asset that can originally be offered in a securities offering and later sold in a manner that does not constitute an offering of a security. In other words a scurity token can over time become a utility and therefore escape the regulatory scope of SEC.
Whether a token represents a security can be assessed by Supreme Court’s “investment contract” test. This test requires an investment of money in a common enterprise with an expectation of profit derived from the efforts of others.
Just as in the case of Howey Co. that tried to sell interests in a citrus grove to its hotel guests, tokens and coins are often presented as assets that have a use in their own right, coupled with a promise that the assets will grow in value and can be sold later at a profit. And, as Howey sold the gorves to hotel guests, not farmers – the tokens and coins typically are mostly sold to a people who’s primary goal is to profit and not to use them on the network.
Expectation of a financial return currently is the foundation of the buisiness model for most ICOs. Hinman points out that how the token is being sold and the reasonable expectations of purchasers are central to determining whether the token is being, while the token in itself might not posess any properties that would make it a security.
The digital asset itself is simply code. But the way it is sold – as part of an investment; to non-users; by promoters to develop the enterprise – can be, and, in that context, most often is, a security – because it evidences an investment contract.
Based on these criteria most ICOs, by Hinman, would have to be classified as securities.
However, when talking about Bitcoin and Etherium, Hinman concluded that buying and selling these assets should not be classified as securities transactions. HE explained that applying the disclosure regime of the federal securities laws to current transactions in Ether or Bitcoin would not add value to its users. He brings up the issue of decentrelization and suggests that when assest are distributed throug a decentralized network, their value doesn’t depent on performance of a single entity. And where there is no such entity in charge there can not be a promise of future earnings.
What is important is, acoording to Hinman, if a project is centralised and its tokens value depends on the success of its managers, that means that it can be treated as a security in order to protect the investors.
To sum up - decentrelzation and “investment contract” test matter the most in determinig what is a security and simply labeling a digital asset a “utility token” does not turn the asset into something that is not a security. Many ICOs are securities, while Bitcoin and Etherium are not. Overall this seems like a very sensible approach to asess digital assets but we need to remember that Hinman’s speech doesn’t nessessarily represent SEC’s official opinion on the matter.