Why Ethereum Won’t Be Ruled A Security
In just a few hours the SEC will make a decision about whether Ethereum should be considered a security.
The “Howey Test” is what the SEC and courts use to determine whether something is a security. To be a security, something needs to meet involve all four parts:
1) An investment of money
2) Into an common enterprise
3) With an expectation of profits
4) Generated predominantly from the efforts of others
Expectation of Profits? Mixed Bag.
Did the buyers in the Ethereum ICO expect profits? Surely some ICO buyers bought for an expectation of profits. Yet, others’ primary purpose for buying ETH was to use them. ETH after all is used as “gas” to run decentralized applications on the ethereum network.
I think it is unlikely the SEC will assert that most or all of Ethereum’s ICO investors expected profit.
If the SEC takes the position that any portion of investors expecting profit passes the Howey test, such an argument could be shot down in court due as too broad.
Howey’s Achilles Heel: Profits Not Generated Predominantly From The Efforts Of Other People
Expectation of profits generated predominantly from the efforts of others.
“Others” presumably means other people, when read in the context of the court documents from which the Howey test is based.
One argument for Ethereum not being a security is that any profit is expected is to be generated by machines rather than people.
Is ETH more like Microsoft or Windows?
Microsoft is a company whose shares are securities. Many people go to work every day at the company and provide the efforts that drive the expectation of profit for shareholders.
Windows, on the other hand, is software. Nobody thinks Windows is a security.
Ethereum is more like Windows than Microsoft. The excitement around Ethereum’s smart contracts is largely about eliminating people from processes and instead getting machines to do the productive work.
Admittedly, some people have to write the code. Therefore the Ethereum Foundation could be considered somewhat like Microsoft.
But ETH doesn’t represent shares in the Ethereum Foundation. It represents a software instrument.
If the SEC misses this, the Ethereum Foundation will have a strong case in court.
The Probabilities — My Estimates
The chances that SEC rules that Ethereum is currently a security: 10%
If so, the chances that the ruling is later overturned in court: 90%
The chances that the SEC rules Ethereum’s ICO in 2014 was a security: 30%
If so, the chances that the ruling is overturned in court: 60%
Another thing to keep in mind is the SEC has numerous cases of fraud to pursue. It's unlikely the SEC expends resources pursuing weaker cases like Ethereum.
It’s highly unlikely the SEC will decide Ethereum is a security Monday.
It’s somewhat likely the SEC will decide Ethereum’s ICO was a security when it happened in 2014. If so, I think the SEC may give Ethereum a pass since no bad actors were involved.
At any and all points, the Howey test probably fails because any profits are expected to be generated by machines, code, and algorithms rather than people.
Either way, this presents a big opportunity for any regulatory overreach to be fought against in courts, and there’s a strong chance of Ethereum winning completely in the end.
The SEC Has Many Bad Actors To Pursue In Other Crypto Projects
There are hundreds of cases of other ICOs that involved fraud and were undoubtedly unregistered securities. The American people at large truly do need the SEC’s help in stamping out the fraud and bad actors.
Not all ICOs are fraud or unregistered securities, but many are and they need to be prosecuted by the SEC. We expect their focus will be such cases involving public harm.