SEC Official Confirms Ether Is Not Classified as a Security

Bill Hinman, the Director of Corporate Finance at the U.S. Securities and Exchange Commission (SEC), has officially stated that ether is not considered a security.

During the Yahoo Finance All Market Summit: Crypto, Hinman explained, "Based on my understanding of ether’s current state, the decentralized nature of the ethereum network, and its structure, we believe that current offers and sales of ether are not securities transactions." Ether, which ranks as the second most valuable cryptocurrency after bitcoin, functions as the essential "fuel" powering the ethereum blockchain. (Related: Joe Lubin Addresses Whether Ether Is a Security)

Hinman’s remarks came shortly after SEC Chair Jay Clayton criticized initial coin offerings (ICOs) at an SEC meeting in Atlanta, stating, "Much of what I have observed in the ICO or token space constitutes a security offering…I don’t know how much clearer I can be." (Related: Is Ethereum a Security? SEC Chair Sparks Debate)

At the summit, Hinman outlined key criteria used to determine if a financial instrument is a security. He emphasized the significance of third-party efforts to manage and promote an enterprise and the presence of information asymmetry between promoters and investors. "If a network is sufficiently decentralized, and buyers no longer reasonably expect a third party to perform entrepreneurial or managerial roles—especially when third-party efforts are no longer crucial—then material information asymmetry diminishes," he explained. The decentralized frameworks of bitcoin and ether imply that third parties are no longer actively promoting them.

What About Ripple and Other Cryptocurrencies?

While Hinman’s statement on ether was positive, he did not address the status of XRP, Ripple’s cryptocurrency. Critics argue that XRP should be classified as a security because it is heavily promoted by Ripple Labs—a private entity—and is designed for international bank transfers using Ripple’s technology. Additionally, Ripple Labs holds 60% of all XRP tokens, benefiting from price increases. (Related: Former CFTC Chief States ICO Tokens Are Securities)

Hinman’s comments should not be interpreted as a blanket exemption for ICO tokens, which SEC officials have frequently scrutinized. By specifically mentioning only ether, Hinman left open the possibility that other tokens could be classified as securities. Notably, he did not consider ether’s fundraising method in his assessment. Conversely, SEC Chair Clayton has made no such distinctions regarding ICO tokens. Consequently, the SEC is likely to continue monitoring the crypto market closely and take action against tokens it deems securities offerings.

Investing in cryptocurrencies and ICOs carries significant risk and speculation. This article does not constitute investment advice from Investopedia or the author. Individuals should consult qualified professionals before making financial decisions. Investopedia does not guarantee the accuracy or timeliness of this information. As of this writing, the author holds 0.21 bitcoin and 1 Litecoin.

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