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Is Ethereum a Security? To be Decided today

Ethereum (ETH), the second largest cryptocurrency by market capitalisation, is facing scrutiny from American regulators, the SEC and CFEC today.

The US Securities and Exchange commission (SEC) along with Commodity Futures Exchange Commission (CFEC) are taking a close look at Ethereum, and whether it can be classified as a security.

The main focus is on the tokens pre-mined for the Ethereum token sale in 2014. 31000 BTC were raised for the development by Ethereum foundation. The value at the time was $18.3 Million, today it would be about $300 Million.

Arguments for  ETH being a security

The US relies on something called as the Howey Test to determine if an asset is a security. Gary Gensler, a former chairman of the commodities Future Trade Commission (CFTC) says ethereum meets the test.

The Howey Test considers an instrument to be security if

  1. Profits Depend on the actions of a third party or
  2. whether instrument represents an investment in a common enterprise.

Basically, if you participated in ethereum token sale with an intention to make profit out of the work done by the ethereum foundation or not? Ethereum foundation is also the common enterprise the token sale participants invested in.

Arguments against ETH being a security

Ethereum foundation co-founder Joseph Lubin stated that there were no concerns that the cryptocurrency would be classed as a security.

“We spent a tremendous amount of time with lawyers in the U.S. and in other countries, and are extremely comfortable that it is not a security; it never was a security… many regulators that matter understand what Ethereum is.”

-Joseph Lubin’s argument as on Cointelegraph.

Coin Center’s Peter Van Valkenburgh argues that ETH tokens today are not a security. In the current scenario, Miners from around the world are putting in work for the running and functioning of the network.

“Just because Apple uses invested money to build iPhones doesn’t mean that the iPhones are securities,”

-Van Valkenburgh writes

What if ETH is declared a security?

If ETH is declared a security in the US, then the exchanges will come under the radar first. Exchanges need to be registered with the SEC to trade securities. Since none of them are, we can see an abrupt end to ETH trading in the US on many exchanges.

From there on, we may see prices plummet worldwide in short term. However, a regulation legalises the cryptocurrency so the price may turn around in long term.

The Ethereum foundation will likely take the matter to court and a legal battle may ensue.

What are the chances?

Chances are that the decision won’t be made today. We might see the meeting ending in a stale mate as both parties fail to prove themselves right or win a majority. The US has to consider the implications on the innovation and technical development as well.

The outcome, if too restrictive can move innovation around cryptocurrency out of America. Also Ethereum is a globally available asset. One country may call it a security, while many won’t. The trading may become difficult, but not impossible.

For us in India, we still have to wonder what happens when we reach the RBI deadline.

Disclaimer: This is not a legal or trade advice. Please conduct your own research before investing.

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