“A working group of regulators including senior SEC and CFTC officials are scheduled to discuss [whether eth is a security] on May 7.”
So reported WSJ last week. We asked SEC for clarification, specifically at what time this meeting is to be held and whether an actual decision is to be expected. A SEC spokesperson said “Decline comment.”
Providing no names for their sources, nor any explanation as to why they are not named, nor any general idea of what office they hold, WSJ says:
“Regulators have studied the role of central actors, such as Ethereum Foundation, which developed ether and oversees improvements to its software network, in driving the asset’s value.
The foundation, for instance, pays “bug bounties,” which reward programmers who fix vulnerabilities in ether’s code, showing the nonprofit influences improvements that can boost the virtual currency’s value, one of the people familiar with the matter said…
Regulators are studying what other factors account for fluctuations in ether’s price, some of which temper the case for calling it a security. For instance, the government is looking at how much of its demand stems from people who use ether to run applications on the software platform.
‘Applying those factors, it’s still sort of gray,’ said one person familiar with the inquiry.”
As we reported recently, 53% of ethereum’s transactions are to smart contract dapps, suggesting considerable use and utility.
There’s the Request Network, which digitizes invoices, there’s Dai of course, there’s Cryptokitties, there’s Brave Browser, and there’s far too many.
Some 1,200 dapps in fact, by our last count. All running on eth and all needing eth for one function or another, making it very much a decentralized global network with considerably utility.
The Ethereum Foundation is not the only one who provides bug bounties. Parity does too. ConsenSys would probably reward you too, we’re sure Blockstream in bitcoin would provide bug bounties, as may ChainCode Labs.
If the Ethereum Foundation did not exist, then there would probably be a community bug bounty of sorts. In fact, the Ethereum Foundation could close shop immediately, and ethereum would keep on chugging along like bitcoin does.
Sure, devs in eth might get together and form a for-profit, like they did in bitcoin with Blockstream, or diverse companies might fund some of them to work on the code, or the community stands up and forms another foundation, or the dapps dedicate more resources towards the protocol and so on.
On that point of influence towards improving the network, EF of course has some influence, but so do so many others. Parity is one, the many dapps who are working on scaling and casper is another, like plasma which is a protocol improvement of sorts. Any dev who wants to code can have influence.
It’s open source code, something which SEC probably isn’t very familiar with. There is no person or entity that has control over the code, the code is in the open, legally copyable by anyone, like linux, something with which SEC might not be familiar with either.
Linux is an operating system like Windows or Mac, but it is developed and coded by people around the world in their free time or perhaps under pay from Red Hat and other firms. Anyone can fork linux and many have. There are so many linux versions, all free to use, all available to all.
Like Linux, there are many other parts of the internet infrastructure that are coded for free in an open source manner by people around the world. Much of the internet, in fact, and many coding tools as well as plenty of software programs, are developed in the same way.
Eth and bitcoin are of course code software programs. They have value because the code ensures they are scarce and not duplicatable. People trust that code because they know no one person or group can change or manipulate it without their full agreement.
So if, for example, SEC or any other entity ordered the EF or anyone else to incorporate code that say prints 1 million eth, the nodes would reject that code, so the network would remain unchanged.
There obviously can be influence. SEC, for example, or whoever spoke to WSJ, revealing a meeting that is to discuss eth without any public consultation and presumably without the meeting even being public, can and has had influence on price.
Which is why we are discussing it and speculating on it especially considering the complete information vacuum on this meeting which we don’t even know, and are not told, of the time when it will be held.
The greater context here is a dividing of jurisdiction between CFTC and SEC. CFTC has claimed jurisdiction over decentralized public blockchains, like bitcoin, while SEC has claimed jurisdiction over ICOs, but not over any running network.
It is unclear what SEC’s position is regarding say Cryptokitties. Or regarding the Brave Browser. Or more generally regarding tokens which have a running network and are in use.
This meeting may well decide that aspect. It comes just weeks after VCs asked SEC for safe harbor provisions. NYT reports:
“The proposal suggests that digital tokens should generally be exempt from securities laws if they achieve “full decentralization” or “full functionality.”
It adds that full decentralization could occur under several conditions, including ‘when the token creator no longer has control of the network based on its ability to make unilateral changes to the functionality of the tokens.'”
The meeting therefore may be wider than eth to concern a general category of tokens with a running network and use, such as say Gnosis.
Eth however is the biggest such currency or asset, and since all tokens run on top of it then it necessarily has by far the most utility.
It may therefore be used as a poster boy in the carving of jurisdictions between the two regulators. That’s because while initially usually tokens are created through a promise to deliver a running network, thus can be considered securities, once the network is up and running they can move to the jurisdiction of CFTC under the classification of commodities.
That would provide some clarity and it would be a fairly reasonable approach because before the network exists there needs to be some level of responsibility to ensure the ICO-ers do what they promise. Once the network is out, however, then it sort of runs by itself.
The problem with that initial requirement of responsibility is the discriminatory nature of the Securities Act because it makes an exception for the very rich and banks.
That exception means no one goes to SEC for registration, but instead limit themselves to the very rich and banks, who then become richer by carving the early big growth gains, with the rest then let in only once the gains are relatively small.
Which is why there should be wider exceptions even in that initial aspect for fundraising of say up to $10 million or $20 million or ones which limit investment to $1,000 or $10,000 per individual.
Or, alternatively, there should be no exception whatever, neither for accredited investors, nor banks, nor anyone. Otherwise, as it stands, it’s injust.
So the outcome here in this meeting, if there is any outcome at all, might be on the positive end, that we gain some clarity on tokens with a running network, like BAT, Dai, Gnosis and far too many others.
SEC might say it is fair to now say they are utility tokens, and therefore they no longer have jurisdiction over them, but CFTC might have jurisdiction for the basics of market fraud and other obviously bad stuff.
As far as eth itself is concerned, SEC’s chairman has already said eth is not a security, but you never know, especially with SEC which has not been nice to this space at all so far.
So if they do what Peter Van Valkenburgh, director of research at Coin Center, said “would make a shambles of U.S. innovation policy. It’s going to throw up a lot of barriers that aren’t necessarily sensible,” by beyond common sense declaring eth a security, then a lot of things can happen.
First, London’s FCA, which is sort of a version of SEC but with a wider remit, has previously told trustnodes:
“As you are no doubt aware, we don’t regulate digital currencies and the DLT infrastructure beneath them. We can’t give a steer on future policy work.
We are however interested in the sector generally and it would be worth you reading the Discussion Paper on DLT we have issued (please see Q 14 on the DAO, Q 16 on ICOs). and Firms like Nivaura are included in cohort 2 of the Sandbox as well.”
That means London could become a lot more appealing for dapps and other blockchain projects. Neutral Switzerland, where the Ethereum Foundation is based, might also try to take advantage by making it very clear eth is not a security.
In America, Coinbase has applied to list securities, so eth would probably continue being listed.
The only practical question would be who exactly should be responsible for filing paperworks and all the rest with SEC. You could say the Ethereum Foundation, but they don’t quite decide what code nodes run or how the network behaves or anything like that.
Because you’d have to ask if the Ethereum Foundation closes down, would the network still keep running? Of course. So then who should file all the paperwork if EF closes down?
Because they may well do, why not? Or they could break themselves into a Geth foundation, a Solidity foundation, and so on. They could also just file the paper work, but eventually there might not be an EF or it might be so irrelevant like the Bitcoin Foundation became which then closed down.
So that in itself clearly shows it is not a security, but even if clueless lawyers say it is, it wouldn’t really matter. The network would keep on doing what it does, the coders would keep on doing what they do, while SEC would keep on showing itself to be out of touch, to put it mildly, and to have not yet bothered to even do its homework.
The most likely outcome here, however, or at least the one we’d like, is that SEC declares tokens with a running network are utility tokens, and therefore outside of its jurisdiction, but CFTC might have jurisdiction for fraud and so on.
Then, SEC has a laddered approach for initial coin offerings which do not have a running network, with jurisdiction passed to CFTC once the network is up and running.
That would be the sensible approach, but we’ll see what they say once the meeting finishes, if they say anything.