Will the SEC Target Cryptocurrency Exchanges in a New Crackdown Wave?

David Drake

Earlier this month, the Securities and Exchange Commission (SEC) announced that ether, a virtual currency, will not be regulated as a security. These news alone saw the price of ether rise by 9.4%, from $468 to $515. The price of bitcoin also rose by 4.8%, from $6,300 to $6,645 following a statement made by William Hinman, SEC's Director for Corporation Finance.

Speaking at a finance conference in California, Hinman went on record having said that based on ether's current state, its decentralized nature, its present offers, the Ethereum network and its sale, its transactions do not constitute securities.

According to Jori Falkstedt, CEO of
GlobalSpy, the Ethereum platform has multiple uses and this recent statement by Hinman seems to acknowledge this fact.

He says, "Ethereum has many uses from exchange instrument to crypto project's operating environment and its enormous popularity, has already acquired a position that is difficult to threaten at least in the short run. The news that acknowledges these facts and acknowledges it not security will certainly give it more credibility even as a investment element and add to its popularity. This will also increase Ethereum's certainty of competition, and Etherium is becoming increasingly difficult to be threaten."

A Win for Crypto Industry?

A determination on whether ether is a security or not was critical for the cryptocurrency industry. This is because a debate has raged in the industry on whether or not tokens issued via initial coin offerings are securities.

For many cryptocurrency players, Hinman's statement presents a winning moment for an industry that has struggled with finding footing in an uncertain regulatory environment that has persistent since the beginning of the year.

With this statement, companies that have kept off the cryptocurrency space for lack of clarity now know whether things stand according to David Scheckel, CEO of
Oxford BioChronometrics.

He says, "This is a strongly positive move by the SEC. Companies that have been hesitant to enter into the world of blockchain are likely to be encouraged by this news and the clarity it brings. Those new participants won’t just be able to benefit individually from token sales and ICOs, the entire ecosystem will be better for it. The greater the number of participants in an open-source environment, the better it is for the robust growth."

A Securities Past

Even so, some players argue that based on its past, ether does pass the securities test and also because it does produce profits for its buyers.

Alex Karasulu, CTO and Founder of
OptDyn says, "There’s been contradictory, good cop, bad cop, commentary coming out across different high ranking officials at the SEC within days of each other. Looking deeper, a clear pragmatic enforcement message appears in Director Hinman’s good cop comment coupled with Chairman Clayton’s bad cop comment just days before."

"Ethereum, it could be argued, passes the Howey test as a security. The Ethereum Foundation’s efforts after receiving capital in exchange for Ether coins benefited purchasers. The foundation used the capital to improve the Ethereum blockchain and made it possible to have others conductICO after ICO. This transferred wealth to the main Ethereum Blockchain from fiat currencies and other cryptocurrencies. It also increased the value of Ether. The capital provided to the foundation financed the work of others to produce a return for Ether buyers," Karasulu adds.

Ether was developed in 2014 partly as a way of helping to finance the Ethereum Foundation. Ether tokens were developed during a crowdfunding campaign that raised bitcoins worth $8 million. Though it has always been viewed as a cryptocurrency for the Ethereum network, it was used to raise capital and for this reason, the SEC started evaluating whether it is a security or not.

There were fears over the SEC declaring ether as a security because that would have affected not just ICOs, but also exchanges, startups and other outfits in the cryptocurrency market.

 Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.