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US regulators looking into whether Ethereum constitutes a security or not

06 May, 2018
by Ryan McInally
News
US regulators looking into whether Ethereum constitutes a security or not

Ethereum (ETH), second largest cryptocurrency by market cap is currently under examination by US regulations to determine whether the coin is a security or not.

An inquiry is currently going on in America by the US Securities and Exchange Commission (SEC) as well as the Commodity Futures Exchange Commission (CFEC) for a pre ICO offering that took place in 2014. The Ethereum Foundation held a pre-ICO sale to raise capital for the development of Ethereum. The total number of Bitcoin raised in the pre-ICO was about 31,000 BTC, worth approximately $18.3 Million (USD) at the time and around $300 Million (USD) currently.  

Regulators believe the sale could under US law constitute a pre-sale of a securities, as they believe most investors bought the coins with the sole purpose of seeing their value go up over time. Ethereum, according to regulators should have registered the coin as a security before holding a token sale.

What’s next?

The next steps involve the SEC and CFTC meeting on May 7th to determine the appropriate course of action. Regulators have various legal avenues to explore if they choose to argue that ETH is a security based on the Securities Act of 1933. If the SEC labels Ethereum as a security, the foundation would likely dispute such label in a court of law. Another tool in the SEC’s bag is to issue a monetary fine of $80,000 to $775,000. As the Wall Street Journal recently reported, this decision could also be precedent setting for other cryptos as the SEC could use this decision to prosecute or fine cryptocurrencies that hold pre-ICO's. 

Ethereum seems undeterred, as co-founder Joseph Lubin made it clear that his organization “spent a tremendous amount of time with lawyers in the US and in other countries, and are extremely comfortable that it is not a security”. Lubin concludes that Ethereum is not a security because it requires multiple people doing multiple tasks as well as the fact that the foundation only holds 1 percent of the total supply of Ethereum, meaning that as an organization they are not involved in a scheme where they are profiting from other people’s efforts.

The Third Dimension

Some Twitter users brought up another point that Ethereum (ETH) is a fork of Ethereum Classic (ETC), which means that regulators may be going after the wrong coin, and if coins can fork off to avoid security issues this may become commonplace. 

Read more about:Ethereum (ETH)

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