Guest post by Cosgrove Gaynard Solicitors

It is really not for the SEC to determine whether tokens are security; this is to be determined by legislation or for the courts to determine. To date, no court has determined whether or not tokens are deemed to be securities. That said it is clear that the SEC has interpreted the matter and are finding tokens to be securities. There is a case currently ongoing in New York which may, however, become the first court in the world to rule on whether or not tokens are deemed to be securities.

There was a lot of talk about an SEC meeting of late which was rumoured to be regarding whether Ethereum was to be deemed a security. However it appears to have been nothing more than just rumour.  Instead it appears to be the case that two subcommittees instead sat to discuss how blockchain technology can be used. The hearing concluded that the technology has a wide variety of applications but a lack of industrywide standards currently.

There was nothing mentioned in relation to Ethereum and whether it could be deemed a security. That said however, the SEC chairman Jay Clayton is previously deemed to have stated that Ethereum is not a security.

Furthermore on an analysis of Ethereum using the Howey Test which looks at 4 factors:

1.Whether there is an investment of money

2. Whether there is a common enterprise.

3. Whether investors have reasonable expectation of profit

4. Whether profits derive from managerial efforts of others

It is clear that Ethereum does not fall into the Howey definition of a security.

There is a case currently ongoing in New York which may, however, become the first court in the world to rule on whether or not tokens are deemed to be securities.

It is a criminal matter concerning an ICO for a real estate coin called REcoin. The case claims there was fraud through misstatement as no tokens were actually given to investors.

One argument proffered by the defence is that currencies are explicitly included in the definition of securities under the 1933 and 1934 Acts and in fact the 1934 Act expressly excludes currency from the definition.

In relation to this specific coin, the defence also argues that it was to act as a currency as this coin was to allow real estate parties including purchasers, lawyers tenants etc to purchase the coin to facilitiate real estate transactions and therefore acted as a unit of account as part of the smart contract. As such it is a currency and explicitly excluded as a security under the Act  .

A constitutional argument has also been put forward considering currencies are explicitly excluded, thus making the statue contradictory as it applies in this case because many courts have said cryptos are currencies.

Again it shows the attempt to regulate this asset class using the framework of the 1930s is causing further trouble for the States. Certainly the arguments proffered above by the defence in this case are arguable however it remains to be seen how the court will determine the tokens. For now, the simple but unsatisfactory answer is that whether a token is a security depends on the full analysis of the particular type of Cryptocurrency product concerned but there is no reason to accept that tokens are automatically a security. We expect this will eventually be dealt with by Supreme Court judgment or by a new law from Congress.


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