William Hinman leads the Division of Corporate Finance at the SEC. Last week, he drew a line at the Yahoo Finance All Markets Summit: Ether is not a security. The declaration marked the clearest regu
William Hinman leads the Division of Corporate Finance at the SEC. Last week, he drew a line at the Yahoo Finance All Markets Summit: Ether is not a security.
The declaration marked the clearest regulatory stance yet on where American authorities stand as they navigate cryptocurrency. Hinman based his reasoning on decentralization. Participation in the Ethereum network has spread far enough that current Ether sales no longer function as investment contracts, in his view. The fundraising that created Ether remains a separate question.
"Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions," Hinman said.
The distinction matters because American securities law controls where and how tokens can trade. If the SEC branded Ether a security, US exchanges would need federal licenses to list it. The same logic applies to thousands of other tokens flooding the market.
Hinman addressed the broader class directly. Most initial coin offerings would flunk the Howey Test, he signaled, a legal standard courts have used since 1946 to identify investment contracts. The test originated in a case where a defendant sold orange groves to hotel guests alongside service contracts for their operation. It asks whether investors commit money to a venture expecting profits derived from the efforts of others.
"Simply labeling a digital asset a utility token does not turn the asset into something that is not a security," Hinman said. He focused attention on how promoters market tokens. "The digital asset itself is simply code. But the way it is sold as part of an investment; to non-users; by promoters to develop the enterprise can be, and, in that context, most often is, a security because it evidences an investment contract."
Securities regulation in the United States took shape after the 1929 stock market crash. Congress and courts built a system over decades to prevent fraud and ensure that investors received honest information before committing capital. The Howey Test emerged from case law in 1946. It remains central to determining whether something qualifies as a security or an investment contract.
The crypto world debated this exact question through the spring and into June. Preston Byrne, a lawyer focused on cryptocurrency, published his argument earlier this year that Ether qualified as a security based on its presale mechanics. CoinCenter, a nonprofit that advocates for cryptocurrency policy, disagreed, contending that sufficient decentralization placed Ether outside securities regulations.
Hinman's speech sided with CoinCenter's position. He named both Bitcoin and Ether as non-securities, though his language on Ether carried that important qualifier about the initial fundraising. The distinction signaled that regulators care less about how tokens were created than about how they function now.
His words reverberate through American exchanges and over-the-counter brokers. Many have been selling ICO tokens without the broker-dealer licenses or alternative trading system registrations that securities law requires. Hinman's remarks suggest this activity exists in legal limbo at best.
Reports emerged earlier this year of SEC subpoenas reaching companies involved in the ICO boom. The agency created a fake ICO called HoweyCoins, stuffed with red flags that match real token sales, paired with an investor guide on spotting fraud. The move suggested that the SEC takes the problem of unregistered securities offerings in crypto seriously.
Coinbase has moved to solidify its position. The exchange acquired Keystone Capital Corp., Venovate Marketplace, and Digital Wealth LLC in recent months, purchases designed to secure the licenses needed for operation without regulatory pressure.
Speculation has run wild in the crypto space about whether tokens might become securities. The boom in token offerings raised staggering sums from investors. Many of these projects had no working product, only a pitch and a promise. This environment created room for fraud. The SEC exists to protect investors from this exact dynamic.
Hinman's statement clarifies the agency's thinking on some fronts while leaving questions open on others. Tokens sold now on established networks that operate in a decentralized manner may escape securities classification. But tokens offered during presales, tokens designed to give investors profit expectations tied to company efforts, and tokens marketed primarily to speculators rather than users likely remain securities in the SEC's view. Exchanges and brokers will need to make hard choices about which tokens they continue to list.
The regulatory path ahead remains uncertain, but Hinman's remarks provided more certainty than existed before.
