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The debate about cryptocurrency regulation continues to draw mixed reactions from different quarters. Recently, Ethereum co-founder Joseph Lubin shed some light on Ether regulation, saying that he was “extremely comfortable” that according to U.S. law, the cryptocurrency does not qualify as a security.

In the words of Lubin, “We spent tremendous amount of time with lawyers in the U.S. and in other countries… it never was a security.”

Lubin, who spoke in an interview with Distributed Magazine, declared that he participated strongly in the early development of the Ethereum token.

“I helped structure the Ethereum token sale, did the bulk of the legal work, interfacing with the lawyers on that, helped with the crowdsale…,” said the BSc degree holder from Princeton who also served Goldman Sachs as VP Technology for two years.

Lubin expressed doubt on ether regulation, saying that the tokens were designed to be “a way of accessing a shared computing resource.”

No need for ether regulation

Ethereum

Digital tokens that operate on a particular blockchain network are essential to attracting talent and services to the growth of the network.

“Because all these different actors are providing their resources to run the platform, you need to pay them for providing their resources,” stated Lubin.

As such, ether regulation is uncalled for, according to Lubin.

“I think we already have a regulatory scheme; securities laws in this country govern securities. If you fail the Howey test, you’re not a security,” said Lubin.

Toward the end of April, Gary Gensler, a former Chairman of the Commodities Futures Trading Commission (CFTC), declared that he believed the distribution of digital “utility tokens” usually involves, at any rate, implied promise of future returns.

“The fungible nature of (“utility”) tokens and the expectation of profits distinguish it from a theatre ticket. It’s fungible and you are expecting profits when the network comes together… There is a strong case that one or both of (Ethereum and Ripple) are noncompliant securities,” said Gensler.

On his part, Lubin said that his company, Consensys will continue to generate sustainable revenues by helping to launch, issue, and manage digital tokens. The Ethereum co-founder also announced that Ethereum thrives better in Switzerland than in the U.S. because cryptocurrency “already had a bad rap” there. However, Lubin remained confident that “The SEC is comprised of pretty reasonable people.” He believes that the regulatory body will focus only on outright fraudulent ICOs.

Cryptocurrencies could fall under securities

SEC Logo

In the meantime, some quarters agree that ether regulation is a requirement in the crypto space. Recently, ICO-based tokens have come under fierce scrutiny by the U.S. regulatory watchdog and even some of the mainstream cryptocurrencies are not off the hook.

According to Gary Gensler, the former Chairman of CFTC, state officials should focus on not only the ICO-based tokens but also the largest coins by market cap. This move drags both Ethereum’s Ether and Ripple’s XRP into the regulator’s space.

Speaking at MIT Technology Review of Business of Blockchain Conference recently, Gensler said, “The SEC and regulators need to bring clarity,” because several cryptocurrencies “are operating outside of U.S. laws.”

The Howey Test

Even with the heat of ether regulation, it is vital to understand how an asset qualifies to be a security. Regulators use Howey Test to judge whether an asset is a security.

According to Gensler, both XRP and Ether meet the requirement of the test, especially when it comes to buying them. Gensler supports his argument by the fact that there’s an initial investment of money in a regular enterprise and the expectation of a profit from a third party.

In both cases, the regular enterprises are Ripple Labs and the Ethereum Foundation for XRP and Ether respectively. Since Ether is more decentralized, Gensler argues, “There’s a strong case, particularly for Ripple.”

In defense of XRP

In an e-mail by a Ripple representative, the company comes in a strong defense of XRP.

“We don’t believe that XRP should be classified as a security. XRP does not give its owners an interest or stake in Ripple and they are not paid dividends. XRP exists independent of Ripple, was created before the company and will exist after it. Ripple has always promoted XRP as a useful digital asset for enterprise payments because it’s faster, more scalable and more inexpensive than other digital assets. That utility exists completely separate from Ripple,” read part of the e-mail.

The Ethereum Foundation, however, has not given an immediate response regarding Ether regulation.

SEC Classification

If classified as securities by the SEC, the coins and the exchanges offering them would be under great scrutiny. Most exchange platforms in the U.S. that offer Ether continue to list them even though they are not SEC-regulated.

According to Gensler, Bitcoin, Litecoin, and bitcoin cash might not qualify as securities because they did not conduct ICOs. All the same, the CFTC has declared that digital currencies, bitcoin inclusive, are commodities.

Should the SEC decide to classify the coins as securities, then the providers will have to face court battles. On how long it could take to decide, Gensler was confident it could the SEC between nine months and five years to make the decision.

A wider impact

According to Gensler, most of the coins that conducted ICOs fall under the category of securities and utility tokens. The MIT professor said that while increased regulation could cool down the ICO sales, it would also create a positive effect on the broader blockchain and crypto space.

Gensler expressed confidence that cryptocurrencies and the blockchain technology should flourish because they have the potential to boost the financial system. Regarding blockchain technology, he said it can “lower cost and lower risk—the question is how we go forward.”

SEC statement on potentially unlawful online platforms

Bitcoin Diamond Exchanges

Online trading platforms provide great opportunities for investors to buy and sell digital assets, which include coins and tokens offered through the Initial Coin Offerings (ICOs). Through the opportunities of trading the digital assets, these platforms often draw traders together to participate under one roof.

Through the platforms, investors are also able to access the automated systems that provide transaction information, execute trades, and display priced orders.

Several digital platforms provide a method of buying or selling assets that qualify to be a “security” under the Federal Securities laws. For instance, an online trading platform that offers digital assets classified as securities and which functions as an “exchange” according to federal securities laws must register with the SEC as a national securities exchange. Alternatively, the platform could be exempted from the registration.

The federal regulatory authority that governs both the exempt markets and the registered national securities exchanges exists to protect traders and investors against fraudulent and manipulative practices.

Considerations for investors

Investors are advised to use platforms or entities registered with the SEC, which include national securities exchanges, broker-dealers, or alternative trading systems (ATS). This could enable them eligible for the protection offered by the federal securities laws.

South Korea Regulations

South Korea Regulations

The SEC staff is concerned about various online trading platforms that pretend to be SEC-regulated or registered when actually they are not.

In this regard, investors should careful with online trading avenues that brand themselves as “exchanges.” Many of such platforms purport to apply strict standards in their operations such as listing only high-quality digital assets.

However, the SEC does not evaluate these standards or the quality of the digital assets listed on such platforms. Three main reasons exist as to why investors should avoid such platforms, according to SEC.

  • The SEC does not analyze the trading protocols on the platforms.
  • The trading protocols might not meet the standard of the SEC-regulated and registered exchange.
  • Information provided on such platforms does not have the same level of integrity compared to what the national securities exchanges provide.

Is Ethereum a security?

According to Matthew Gertler, a senior analyst, and counsel at Digital Asset Research, there is a grey area regarding ether regulation.

“It is not all clear to us how ‘all ICOs are securities and Ethereum is not,” wrote Gertler, who believes that Ethereum, indeed “conducted a token sale in 2014.”

On February 7, 2018, a similar question arose at Yahoo Finance All Markets Summit: “If all ICOs are securities, what does that mean for Ethereum?” asked Alex Sunnaborg, a partner at Tetras Capital.

All the same, to clear the doubt, it is important to first understand how the digital currencies and tokens work, a process that involves technologists and computer experts.

It’s not an ICO

There seems to be a legal distinction between ICOs and bitcoin. All bitcoins that exist today were mined, which implies that there was no initial money investment involved. This is a key aspect of the Howey Test, which federal regulators apply to judge whether an asset can be classified under securities check. As at now, all bitcoin trading happens at the secondary market. It remains to be seen what an SEC crackdown on bitcoin would look like.

However, Ethereum takes a different direction. Ether’s crowdsale took place between July and September 2014, in which the project raised approximately $18.4 million in bitcoin. At that time, no one called it an ICO. All the same, judging by the fact that it conducted a crowdsale, Jay Clayton, the chair of SEC, agreed that Ethereum meets the threshold of being classified as a security.

Do you think Ether should be regulated? Join the conversation over at Telegram (https://t.me/coinstaker)

Author info

Tony is a writer for the crypto space. He presents cryptocurrency and blockchain topics to the public in a way that he only can. While carefully researched, this article should not be taken as an express investment guide. Do your own research and consult a financial advisor before you invest in cryptocurrency.

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Ethereum Regulations
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