SEC Division of Corporation Finance Director William Hinman asserted that Bitcoin and Ether are not "securities" under U.S. law. In remarks at the "Yahoo Finance All Markets Summit: Crypto" in San Francisco, Mr. Hinman explained that the circumstances surrounding a digital asset, including the manner in which it is sold, determine whether it is considered a security.
Mr. Hinman based his reasoning on the "investment contract" test set forth in SEC v. Howey, which states that a security is created when there is an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. According to Mr. Hinman, a purchaser of a digital token relies on the efforts of the promoter or centralized third party to make the token a success, while the investor is passive. The purchase of an investment contract is a bet on the success of the issuer, he said, rather than the purchase of a medium for exchanging goods or services.
Mr. Hinman concluded that due to the decentralized structure of Bitcoin and Ether, there is no centralized third party on whom investors may rely. In that context, Mr. Hinman noted that attempting to apply Securities Act protections does not make sense for Bitcoin or Ether.
Mr. Hinman emphasized, however, that the definition of a "security is not static," and that the classification of a digital asset may change based on its circumstances. For example, he said, "if a promoter were to place Bitcoin in a fund or trust and sell interests, it would create a new security."
Commentary / Christian Larson
Director Hinman's speech comes one week after SEC Chair Jay Clayton gave an interview in which he expressed a similar view. Mr. Hinman's remarks differ in three respects. First, Mr. Hinman specifically states that Ether is not a security, whereas Mr. Clayton said only that the analysis for Bitcoin alternatives is case-specific. Second, Mr. Hinman delves into the question of whether a digital asset, once a security, is always a security. He reasoned that while a digital asset may begin as a security due to the involvement of a centralized third party, the subsequent decentralization of that party's efforts – to the point where purchasers of the digital asset would no longer reasonably expect a third "person" to carry out essential managerial or entrepreneurial efforts – could take the digital asset outside of the definition of an investment contract. Third, Mr. Clayton spoke primarily about promoters, emphasizing the requirements for SEC registration and oversight when issuing or trading digital securities. By contrast, Mr. Hinman focused equal attention on investors by emphasizing the role securities regulation plays in removing information asymmetry and on promotors by offering to help developers of distributed ledger technology and their counsel navigate the federal securities laws.
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