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SEC says Bitcoin and Ether are not Securities

“I believe every ICO I’ve seen is a security and we have jurisdiction and our federal securities laws apply.” Clayton, J., Testimony, Sen. Banking, Housing and Urban Affairs Committee (Feb. 6, 2018).

This was SEC Chairman Jay Clayton’s testimony on February 6, 2018 to the Senate Banking Committee in a hearing on the SEC oversight of virtual currencies. The Chair’s sentiments in February were in line with the SEC’s historic approach to asserting jurisdiction over the nascent cryptocurrency marketplace. Beginning as early as 2013, the SEC began issuing investor alerts asserting the Commission’s jurisdiction over cryptocurrencies that functioned as securities. SEC Investor Alert, Ponzi Schemes Using Virtual Currencies, July 1, 2013. This early assertion of jurisdiction has been confirmed through the SEC’s position in the DAO Report, and reinforced through multiple SEC enforcement actions.

Four months after the Chair’s comments before the Senate Banking Committee, there are signs that the SEC is refining its opinion on the extent of its jurisdiction. Last week, Chairman Clayton stated that Bitcoin and cryptocurrencies like Bitcoin are not securities. See link here. This in itself is not particularly progressive. Bitcoin has widely been considered only an asset used as a store of value or method of payment, and it was never subject to an ICO. The CFTC has already claimed Bitcoin as a commodity, and even called it a currency (though in a twist of regulatory nuance it is not a “foreign” currency). See In re Coinflip, Inc., CFTC No. 15-29 (Sept. 17, 2015), See In re BFXNA Inc., d/b/a Bitfinex, CFTC No. 16-19 (Jun. 2, 2016). Nevertheless Clayton’s recent comments are some of the most concrete “no action” language the market has heard from the SEC regarding cryptocurrencies.

Last week, there was even more interesting news. William Hinman, the Director of the Division of Corporation Finance, in prepared remarks stated that “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.” Full speech available here. Behind Bitcoin, Ether is the next largest traded cryptocurrency by volume (see market cap statistics here), and many other cryptocurrencies utilize the Etherium structure and employ Ether as a method of payment or investment. With Clayton and Hinman’s comments the SEC is providing the market some needed clarity on the Commission’s jurisdictional limits. As expected, the market reacted positively to news, with Ether’s price rising 10% intra-day, and Bitcoin rising 6%.

Hinman’s speech is significant for another reason. Ether started out as an ICO. Development of the Etherium network was funded by participants purchasing Ether. Over time, however, Ether’s characteristics have changed; it is produced exclusively through mining efforts, and the network it operates on is decentralized. Ether has essentially morphed into a method of payment more akin to Bitcoin. Hinman addresses this change in his speech, and concedes that coins can change over time from an ICO to a currency. He specifically emphasizes “that the analysis of whether something is a security is not static and does not strictly inhere to the instrument.”

It is uncertain how the SEC would seek to regulate a security that, over time, transforms into a currency or from a currency into a security, but this concession from the Commission is important for the crypto space as it provides some needed guidance to the marketplace.

©2018 Drinker Biddle & Reath LLP. All Rights Reserved

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One of the largest and most experienced of the firm’s practice areas, the Corporate and Securities group’s practice today builds upon a history that dates back nearly to the founding of the firm. The group provides a full range of services to public companies, financial institutions, investment vehicles and substantial private businesses.

The core practice includes mergers, acquisitions and complex joint ventures, securities compliance, advice for public companies, commercial lending, corporate finance and private equity, including venture...

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Nicholas Wendland Attorney Chicago
Counsel

Nicholas A.J. Wendland represents and advises financial institutions in navigating securities, commodities and exchange regulations. Drawing on his extensive experience at FINRA and the New York Stock Exchange (NYSE), as well as in private practice, Nicholas assists his clients in understanding and complying with securities and commodities laws, as well as regulations and rules set by self-regulatory organizations. Nicholas’ in-depth understanding of complex financial products, global regulations, and the business and operation requirements of his clients allows him to develop successful and creative solutions while providing concrete, practical guidance.

Nicholas has provided guidance for business and trading activities worldwide, and has developed, implemented and maintained global processes and procedures designed to ensure legal and regulatory compliance for business lines in cash equities, options, futures, fixed income, foreign exchange, and swaps in numerous jurisdictions and markets. Nicholas also has significant derivatives and broker-dealer experience.

Nicholas also is a contributor to the firm's SEC Law Perspectives Blog, which provides reports, discussions, and analyses on noteworthy trends in enforcement and regulatory activity of the U.S. Securities and Exchange Commission (SEC) and other agencies, such as the U.S. Commodity Futures Trading Commission (CFTC).

Prior to joining Drinker Biddle, Nicholas was General Counsel and Chief Compliance Officer at a group of companies with a global trading presence in equities, futures, fixed income, foreign exchange and swaps. Nicholas has also served as an extern to the Honorable Rebecca Pallmeyer of the U.S. District Court for the Northern District of Illinois.

Education

  • Chicago-Kent College of Law, J.D., 2007, cum laude, Editor - The Seventh Circuit Review
  • University of Saint Thomas, B.A., 2003
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