Is Ethereum a Security?

Is Ethereum a Security? Blockwolf addresses this question in this text guide and in this Youtube video:

With rumors of talks between the SEC and the CFTC lately (May 7th, 2018), asking if Ethereum is a security is one of the hottest questions in the cryptocurrency industry. If Ethereum were ruled a security, there would be great implications. The US government could make it illegal to invest in, and the government would require investors to register their holdings. There has not been a press release from the US government, but we may look at legislation currently in place to form our own opinion if Ethereum is a security. In this post, information was created from a person without a law degree. If you want a professional opinion, seek a certified lawyer.

First, what is a security? We have bolded some parts of the definitions that we thought were specifically interesting in regard to cryptocurrencies.

A page from TheStreet website simplifies the definition of a security as:

“A simple definition of a security is any proof of ownership or debt that has been assigned a value and may be sold. (Today, evidence of ownership is likely to be a computer file, while once it was a written piece of paper.) For the holder, a security represents an investment as an owner, creditor or rights to ownership on which the person hopes to gain profit. Examples are stocks, bonds and options.”

The full definition of a security from the Securities Act of 1933 is:

“The term ‘security’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”

Does Ethereum fit into these definitions? It may be hard to decide whether something falls under the definition of a security. The Supreme Court uses the Howey Test to help determine if something is an investment contract, or a security. The Howey Test Investopedia page states that the Howey Test determines if a transaction represents an investment contract if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”

Simplified versions of the Howey Test determine transactions as securities if all the following characteristics are met:

1. It is an investment of money
2. There is an expectation of profits from the investment
3. The investment of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party

Lets break this down one-by-one for Ethereum:

1. It is an investment of money
Perhaps, Ethereum’s ICO could have been a form of investing in money, but if one were to buy Ethereum today, they are not necessarily providing money to Ethereum’s team to expect that the team would produce something in the future. Instead, they are just buying it to either use some or to hope that demand increases for it later.

2. There is an expectation of profits from the investment

Ethereum has no profits, therefor profits are not shared. However, somebody may buy Ethereum with the intent of selling it at a higher price in the future, therefor providing some profits for those specific holders.
3. The investment of money is in a common enterprise

The legal definition of a common enterprise is unclear. It is possible that Ethereum could be a common enterprise, but Ethereum is comprised of decentralized sources, which complicates this matter.

4. Any profit comes from the efforts of a promoter or third party
As mentioned earlier, Ethereum does not have traditional profits. One may be able to sell their Ethereum for a higher price than what they bought it for, but somebody who owns Ethereum does not have a share of Ethereum’s profits because Ethereum itself has no profits. Additionally, the promoter or third party in this instance would be a decentralized party, which complicates things.

Determining if Ethereum and other cryptocurrencies are securities is not simple. One caveat to Ethereum is that it enables people to launch ICO’s, which could potentially meet security definitions.