Ethereum not a Security Because it is Decentralized

Let's parse today's state of regulation for crypto assets, and the glimmers of what the future will look like. Ethereum and Bitcoin are not securities, said a senior SEC official a week ago. Why? The argument rotates around decentralization -- not because regulators care about decentralized networks, but because you need an entity to lead an offering. The Howey test demands a common enterprise that gives purchasers an expectation of profit solely from the efforts of others. Does that make sense in the world of (1) decentralized networks set up by communities for mutual gain, and (2) changing expectation about tokens as platforms are built? Probably not, but until the courts create a new model, it's what we got, and it is beneficial for Ether.

What's probably not really beneficial for Ether as a development platform are ICOs (vs DApps). Yes, they are still the killer app for crypto, but they have also sapped ETH of its role as a currency for DApps. Instead of a single currency that can power a digital smart contracts economy, we have thousands of disparate tokens of questionable liquidity and value. And while Ethereum itself may have avoided being a security, the tokens launched using it as an offering platform are exposed to continued regulatory risk. The CBOE president, for example, expects to see SEC prosecution of many large token offerings, and potential class action lawsuits against projects that fail to deliver. No amount of disclaimers and structuring will help against an angry mob. 


To reiterate the point, ICOs have been narrowing Ethereum towards a crowdfunding offerings platform. Compare an entrepreneur's choice of Ether vs Stellar, for example, as the choice between the corporate law of Delaware or New York. In choosing a state, you have access to all the common law that has emerged from centuries of litigation. This is like choosing a programming language that has the best code libraries. Regulating this choice for financial disclosure makes no sense. When looking at a particular use case, however, regulatory approval will still be a gate. Square needed to get the BitLicense in New York in order to process crypto payments. The same type of regulation may come to Canada for exchanges and payments companies (KYC/AML for $1k transactions, reporting to regulator for $10k transactions). For a sovereign regulator, the best strategy is to control the choke points.


Source: CNBC (SEC on Ether), CrowdfundInsider (CBOE), Autonomous NEXT (Howey test), Coindesk (Square), Cointelegraph ($10k transactions), Techrunch (Square cash), NY State (Bitlicense), (creating a token)