A Clear Path for Ethereum

The SEC wrote that the requirements apply to those who offer and sell securities in the United States,"Regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology."

SEC enforcement of ICOsSince the SEC released its groundbreaking DAO Report 2017, there have been more than 30 SEC enforcement actions against ICO issuers and their officers, as well as countless subpoenas and information requests relating to ICOs.On Nov. 8, 2018, the SEC announced that it settled charges against Zachary Coburn, the founder of EtherDelta, who was found to be operating an unregistered national securities exchange and thus in violation of federal securities laws.

This is one of the most popular tokens and, according to Investopedia, "It has emerged as the technical standard used for all smart contracts on the Ethereum blockchain for token implementation." Further, in its order against Coburn, the SEC stated that ERC-20 tokens are commonly issued in ICOs.On Nov. 16, 2018, the SEC explained that both CarrierEQ Inc. and Paragon Coin Inc. conducted ICOs in 2017, after the DAO Report, warning that ICOs can be securities.

Stephanie Avakian, co-director of the SEC's enforcement division, warned that the SEC has "Made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities," and it will "Continue to be on the lookout for violations of the federal securities laws with respect to digital assets."

Determination of whether a particular digital asset is a security, and therefore, whether the securities laws apply, is today governed by whether the subject tokens or coins fall under the definition of "Security" as defined in the Securities Act of 1933, as amended, and a landmark U.S. Supreme Court case that followed.

The Howey test, explainedThe Howey test is a formula created by the U.S. Supreme Court used to determine whether a transaction qualifies as "Investment contract" - therefore a security - and subject to federal securities laws.

Taking the analysis a step further involves determining whether the digital asset itself is a security, including an "Investment contract." The present answer for Ethereum is no.

Ethereum is not a securityFor Ethereum, the regulatory uncertainty was somewhat abated on June 14, 2018, when the SEC's Director of Corporation Finance, Mr. William Hinman, stated that Ethereum is currently not a security.

In relation to Ethereum specifically, Mr. Hinman stated that the Ethereum network has a decentralized structure, and as such, "Current offers and sales of Ether are not securities transactions." Therefore, "Applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value." To further elicit the reasoning behind his statement, Hinman clarified that "The economic substance of the transaction always determines the legal analysis, not the labels."

The SEC considers digital currencies as securities if they meet the Howey test, the CFTC considers them commodities and the IRS taxes them as property.