On Tuesday (June 13), veteran crypto investor Adam Cochran shared his insights into the implications of the just-unsealed internal emails at the U.S. Securities and Exchange Commission (SEC) related to William Hinman’s famous remarks about Ethereum at the Yahoo Finance All Markets Summit: Crypto in June 2018.
Back on 14 June 2018, William Hinman, the then 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.“
According to a report by CoinDesk published earlier today, the emails were made public today by Ripple as part of its defense in the ongoing lawsuit brought by the SEC against the Californian firm in December 2022.
Cochran’s analysis focuses on the SEC’s stance on Ethereum ($ETH), XRP, and the broader implications for the crypto market.
Cochran begins by summarizing the key points from the Hinman emails. He notes that the release doesn’t significantly impact the SEC’s lawsuit against Ripple but is moderately positive for Ethereum. He also suggests that the nuanced content of the emails could potentially corner SEC Chair Gary Gensler.
He then delves into the details of Hinman’s speech, which attempted to understand the nuanced intent of users versus investors and the concept of “morphing” – the idea that something can start as a security and then later not be a security. Cochran highlights that Hinman was so focused on this idea of “morphing” that he initially wanted it to be the theme of his speech.
Cochran discusses the implications of Hinman’s guidance for Ethereum and Ripple. He points out that Hinman’s view at the time was that Ethereum was not a security, and that secondary sales didn’t raise Securities Act concerns – only Exchange Act and Commodities Act concerns. This is of particular importance as it notes that the SEC internally viewed secondary sales not as sales of the promoter.
Cochran also highlights the importance of the non-transitive property of an investment contract. He explains that the presence of an investment contract does not make the underlying commodity the security – only its sale. This is a key point in understanding the SEC’s stance on cryptocurrencies.
In his thread, Cochran also discusses the list of questions Hinman proposed for determining if something is or is not a security. He notes that some of these questions, which Gensler leans on today, were not blanketly agreed upon by SEC staff at the time.
Cochran concludes his thread by challenging Gensler’s current stance on Ethereum and Ripple. He argues that if the SEC wanted to argue that Ethereum is a security today, the release of this document shows that at one point in time, they thought it wasn’t. This would mean acknowledging a ‘reverse-morphing’ of an asset becoming a security, which Cochran suggests would be a difficult position for the SEC to maintain.