Although most of the crypto community has long believe that Ether ($ETH), the native token of Ethereum, is not a security — as far as the U.S. Securties and Exchange Commission (SEC) is concerned — it wasn’t until this week that we got some evidence that this view may indeed be correct.
William Hinman’s June 2018 Speech
On Thursday, 14 June 2018, William Hinman, the director of the Division of Corporation Finance at the SEC, made a speech at Yahoo Finance’s “All Markets Summit: Crypto” one-day event in San Francisco, California. The speech was about how the SEC plans to use the “Howey Test” to determine whether a digital asset should be considered a security or not. The only two cryptocurrencies Hinman mentioned by name were Bitcoin (BTC) and Ether (ETH), neither of which he said should be considered as securities:
“And so, when I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprise. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value.
“And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.“
Hinman’s remarks brought great relief to the crypto space, which had been uncertain about the status of Ether ever since 22 April 2018, when a New York Times interview with a former chairman of the U.S. Commodity Futures Trading Commission (CFTC), Gary Gensler, revealed that he was planning to say during a speech at MIT on 23 April 2018 that Ether and XRP had been issued and traded in violation of U.S. federal securities law:
“There is a strong case for both of them — but particularly Ripple [XRP] — that they are noncompliant securities.”
Lummis and Gillibrand Introduce Legislation for Regulating Cryptoassets
According to a press release issued on Tuesday (June 7), “U.S. Senators Kirsten Gillibrand (D-NY), member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY), member of the Senate Banking Committee, introduced the Responsible Financial Innovation Act, landmark bipartisan legislation that will create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.”
According to a report by Cointelegraph published earlier today (June 9), Senator Gillibrand said during a Washington Post event on Wednesday (June 8):
“Most cryptocurrencies go to the SEC […] Bitcoin and Ether would be certainly commodities, and that’s agreed upon. That’s agreed with Chairman Gensler as well as the chairman of the CFTC.“
If Senator Gillibrand did not mis-speak, this is the first time that the SEC Chair Gary Gensler has ever mentioned that $ETH is a commodity despite being asked on many occasions during the past few months if he could confirm that Ether, just like Bitcoin, is consider a commodity rather than a security by the SEC.
The SEC’s Lawsuit Against Ripple Over the Alleged Illegal Sale of XRP Tokens
As you may remember, on 22 December 2020, the SEC announced that it had “filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.”
Recently, the lawyers for Ripple and for the SEC have been arguing over whether William Hinman’s speech in June 2018 about the status of Ether represented just his personal opinion or if it represented the official view of the SEC.
According to a report by The Daily Hodl published earlier today, American lawyer Jeremy Hogan — a partner at the law firm Hogan & Hogan, who has been closely following and commenting on the U.S. SEC’s lawsuit against Ripple — said in a video released on June 8 on his YouTube channel “Legal Briefs” that the SEC’s lawyer made a “big mistake” by saying at a hearing before Judge Sarah Netburn that Hinman’s speech reflected the Division of Corporate Finance’s position:
“But there was a big mistake made by the SEC in this hearing… Remember last year we talked about a theory of a case and why it’s so important to stick with your theory in litigation. And then we talked about how it was a mistake for the SEC to change its argument on what Hinman’s speech was. If it was going to make the gambit that it was Hinman’s personal opinion, you have to stick with that, and here’s why:
“Now we know Judge Netburn has already ruled that, at least for discovery purposes, Hinman’s speech was his personal opinion. So the SEC can now argue it’s not relevant to anything, and that’s fine, but we know that now hurts the SEC in those discovery motions, so there was a trade-off there. But the SEC attorney was trying really hard today in arguing various positions in order to try to win this motion, which was probably not really possible to even win…
“The judge asked, ‘Is the SEC taking the position now that the speech reflected the Division of Corporate Finance’s position?’ And the SEC attorney said ‘Yes.’ Now she tried to equivocate a little bit after that, but the first and the direct answer was ‘Yes.’”
This was an important admission because it was the first time ever that the SEC had acknowledged that Hinman’s speech was anything other than his personal opinion on the status of Ether.