According to experts, one of the things that could cause another bull-run is if there is regulatory clarity on the part of the crypto industry. Until today, regulators struggle how to categorize cryptocurrencies. As for cryptocurrencies, in the past months, many investors are worried whether or not cryptos could be considered as a security or not. In fact, things looked bright for cryptos since US Securities and Exchange Commission Chairman Jay Clayton mentioned that cryptos are not a security, but rather can be used as a replacement for fiat currency. As for ICOs, Clayton said that these can be considered securities.
But recently, SEC’s point man when it comes to cryptos and ICOs echoed the same opinion on cryptocurrencies and ICOs.
William Hinman who is the head of the Division of Corporation Finance at the SEC mentioned Bitcoin and Ether are not securities. He mentioned that “central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchaser”.
What Makes a Security?
So what exactly makes a security? According to Hinman, the primary reason that determines cryptocurrencies and ICOs as securities or not is the expectation of a return by a third party. This is especially true when a person or a group sponsored the creation as well as the sale of a particular asset. If you are an investor, it is important to look closely if the investor is looking for a return on investment. Hinman pointed out that if there is a centralized third party along with purchasers that are looking for an ROI, then this is definitely a security.
Decentralization of Cryptos
Bitcoin isn’t considered a security mainly because it is decentralized. This means that there is no single entity or group that is controlling the cryptos. And for this reason, even Ether is not considered as a security by definition according to Hinman.
However, it is also a good thing to point out that Hinman only clarified Bitcoin and Ether. He never confirmed the status of Ripple whether or not it is a security. There are Ripple investors who took their grievances to court with a claim that Ripple is actually a security. Hinman said that “Over, time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required”
But in terms of ICOs, he acknowledged that there are those ICOs that structured more as a consumer item rather than a security, and he implies that these types of ICOs are not likely securities.
Hinman defended SEC’s tight regulations when it comes to securities laws. He noted that though there is excitement and speculative interest in the crypto market, there are also instances of fraud.
There was a recent study saying that 1 out of 5 ICOs can potentially be a scam. That is a huge number. And if you will look at the amount of money ICOs come up with mainly because of the excitement and speculative nature of the industry, that is a lot of money that investors could lose.