As Ethereum and Ripple Face Securities Classification, What Can We Expect?

In the United States of America, a security is a tradeable financial asset of any kind. So when a new way of exchanging value comes along, such as cryptocurrency, and the government wants some control over it, the term 'security' seems like a pretty wide net.

But the term asset is the part that is cutting holes in this broad net. Some would say that an asset is anything of value that can be owned, and by that definition, Ethereum and Ripple are clearly securities. If on the other hand, an asset is a part of someone else's property that can be owned, then neither Ethereum nor Ripple can be defined as a security.

What Happens Next
Whether or not these cryptocurrencies get determined as securities is important, because they've been sold. And selling unregistered securities is against the law. Securities have to be registered before they are sold so that the people buying them can have certainty about things like who is behind them, what assets they have, and if their plan to make the securities worth more is reasonable.

It is important to remember here that the SEC only has civil enforcement authority, so must rely on cooperation with the FBI or other authorities to bring charges. And this is the real problem. Neither Ethereum nor Ripple are suspected of fraud, insider trading, or anything else.

And if you're holding Ethereum or Ripple, you'll be wondering what that might mean for you? There appears to be a risk that they will become 'restricted' or 'control' securities. These are securities that are no longer tradeable on the stock exchange. It is a bit like they are under embargo. Because of this, there is concern that it might become illegal to trade Ethereum or Ripple if they are found to be unregistered securities. Of course, that would be expected to have an impact on their value.

The Upside
There is also hope that a clear determination by the SEC that Ethereum and Ripple are not securities, and didn't require registration will be made. In the uncertain world of cryptocurrency, having officially passed that test might give confidence to buyers and push up the value. It might also increase the confidence of developers and traditional businesses that are considering the benefits of smart contracts and other cryptocurrency endeavours.

There are plenty of reports going around the cryptosphere saying there is a meeting on the 7th of May which will impact whether Ethereum and Ripple are securities. This seems to stem from a Wall Street Journal article about it.

But as stated by Sporticus, "What is happening on May 7th is, what I can best describe as: an informal review or dialogue by a working group from both agencies, whose legal mandates overlap on the subject matter of this new legal and technological precedent, crypto, and how it fits under the law and regulations."

Whether Ethereum, Ripple, other cryptocurrencies, or even ICO tokens can be legally regulated in the United States of America by their SEC, is an important issue. But don't expect that issue to be resolved on the 7th of May.

Further notes: Ripple is apparently involved in "Coffey v. Ripple Labs Inc., Superior Court of the State of California (San Francisco)" But the author found no mention of it on their website.

An SEC investigation document that clarified its securities position when investigating The DAO is called:
Release No. 81207 / July 25, 2017
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934:
The DAO

Interesting take. I wrote this on another thread about Ethereum, but it applies all the same to Ripple:

"The technology remains unchanged regardless of this hearing's results, and it is the technology itself that ultimately matters in the long haul. Ultimately, this hearing shouldn't matter much, but it will still be interesting to follow--and could possibly set a precedent for future hearings of other cryptocurrencies."

Expect price to drop in the short-term, however? Maybe XRP is deemed a security and ETH is not?

Are these hearings actually happening? Seeing stuff all over the crypto news sites, but other places are saying it's "fake news".... Anyone know for sure?

@devnasty Judging by the amount of buzz, it seems like they are both on schedule for today.... but then again, stranger things have happened.

It's evident that big money investors would like to get their hands on some Crypto-currency, but this is definitely going to drag on for some time and I don't expect it to be concluded anytime soon. However, as stated by some people, there is no statement from the SEC on a meeting regarding the issue. One could argue though that it will be more of a "closed door" meeting whereas only select officials will be in attendance.

Yeah - apparently, there is a fierce debate on whether blockchain projects like Ethereum and Ripple should be viewed as securities and regulated by the SEC. It all depends on how much the Ethereum and Ripple's arguments will weigh during the meeting between CFTC and SEC officials, which should start soon. Anyway, we don't have any official sources talking about the meeting except that anonymous guy telling the WSJ about it. Should we view it as a reliable info? I saw TrustNodes asked the SEC for clarification on the supposed meeting, but a SEC spokesman declined to comment. Chances are that the meeting will actually take place - otherwise, couldn't the SEC just deny the rumors?

If the meeting takes place, the SEC will probably apply that "Howey Test" described in the WSJ post. Interestingly, people from the CFTC entourage would also like to see Ripple and Ethereum as securities. Gary Gensler, former chairman of the Commodity Futures Trading Commission (CFTC), said that "There is a strong case for both of them — but particularly Ripple — that they are noncompliant securities,” according to NYTimes.

If Ethereum and Ripple are really classified as securities, of course there will be a strong bearish trend for a while. In fact, Ethereum reacted to that WSJ post alone, and it wasn't even confirmed as official source. However, don't expect XRP and ETH to collapse - they're global phenomenon and not bound to the US legal regulatory system, though the trading will be affected anyway.

If we check Ethereum's USD trading volume data, then we can suppose that US traders are getting a big share of this (US traders rely on Coinbase, Gemini, etc)

0_1525710546437_12.jpg

Such a news (SEC regulating ETH, XRP) will surely hit the markets, but in the end - prices will recover in a few months.

At least Bitcoin traders can feel relieved as it is regulated as a commodity by the Commodity Futures Trading Commission (CFTC), but Ethereum and Ripple have nonprofit foundations behind them.

We'll see what happens.

It will be interesting to see the institutional reaction, as there are a lot more 'traditional' financial stakeholders backing Ripple such as banks and MIT...

@castr131 said in As Ethereum and Ripple Face Securities Classification, What Can We Expect?:

more of a "closed door" meeting whereas only select officials will be in attendance.

That is just everything that blockchain is about fixing and disrupting. No wonder they are battening down the hatches in fear...

Looks like the ETH hearing is nothing more than "a routine discussion (in private / behind closed doors) on the possibility of regulating ALL crypto in general. No official hearing. No official announcements are being made today!"

https://www.reddit.com/r/CryptoCurrency/comments/8ho5mb/apparently_there_is_no_sec_hearing_on_ethereum/

@afridylan said in As Ethereum and Ripple Face Securities Classification, What Can We Expect?:

No official hearing. No official announcements are being made today!"

Hmm so WHO is pulling the strings here and feeding the FUD? I think that's the real story...

I wonder if it will ever be told.

@blocksparks said in As Ethereum and Ripple Face Securities Classification, What Can We Expect?:

@afridylan said in As Ethereum and Ripple Face Securities Classification, What Can We Expect?:

No official hearing. No official announcements are being made today!"

Hmm so WHO is pulling the strings here and feeding the FUD? I think that's the real story...

I wonder if it will ever be told.

Our over-reliance on secondary news sources certainly isn't helping the cause. The more that I think about it... doesn't take too much to get something like this rolling. With enough believers and a little momentum, anything is possible in the age of "fake news" 😂

@blocksparks said in As Ethereum and Ripple Face Securities Classification, What Can We Expect?:

@afridylan said in As Ethereum and Ripple Face Securities Classification, What Can We Expect?:

No official hearing. No official announcements are being made today!"

Hmm so WHO is pulling the strings here and feeding the FUD? I think that's the real story...

I wonder if it will ever be told.

That's what is creating lots of speculation around the Crypto community. The information presented to us is unable to be confirmed, yet, not denied conclusively.

@afridylan This is a big concern. Apparently, there is no SEC hearing today. But I wonder why representatives of the CFTC refused to comment on whether a hearing was scheduled or not.

It was obvious while all the news of a hearing made rounds that an impactful decision--assuming the hearing did take place--would not have been reached in just a single sitting. Complex regulation of this sort takes months if not years.

I think it will be more chances for Ethereum to be classified as security, if it adopts Proof-of-Stake algorithm (I'm sure all you heard many discussions on this).
Otherwise for me I would better say that Ethereum is the fuel for ICO and tokens (which might be security tokens, but might be utility)
And Ripple is just a currency, which is not to appreciated in blockchain communities, as its't not decentralized.

But we know that even assumptions or big media mentions that ETH or XRP can be classified as unregistered securities might affect the price.

It is not at all surprising that a government department refuses to comment on something that is not going to happen. In this case they really are acting responsibly. When I was studying journalism, we were actively taught to use denial as a means to generate news. Ask a politician if his son was going to be sentenced to jail, and if the politician is a bit green or inexperienced, they'll say, "No, my son is not going to jail, he hasn't done anything wrong. Why would my son be going to jail?" And the reporter records it and reports. "Politician Confused about Why His Son Should Go To Jail" He stated to our reporter on the 22nd, "My son is not going to jail. He has not done anything wrong." Then the rest of the article is guff about rise in youth crime, other politicians' children getting into trouble etc.

So when the CFTC refuses to comment on something that is not true, they are doing the right thing by not adding fuel to a fake fire. When speculators say, "it must be true, otherwise they would have denied it", it only makes their impossible situation worse.

As for making a determination that Ethereum or Ripple are securities, the SEC will have to be very careful. It is part of the United State's legal system that laws must be enforceable, and that it must be possible to do it equally and fairly. Otherwise the law can be used as a tool to arbitrarily focus on and attack minorities or other advantageous targets like someone you want to pressure into divulging information.

Due to this, the SEC can't just come down on Ethereum and Ripple, without casting that same net over every other cryptocurrency and token that also meets the criteria applied to Ethereum and Ripple for their finding. And because both Ethereum and Ripple are much less like securities than many ICO projects, they'll have to either try and bring them all down, or none of them.

The trouble with trying to bring down all ICO and cryptocurrencies, is the same as the trouble caused by The Prohibition, and now The War on Drugs. When something is common and you ban it, you just drive it underground and make it harder to manage. And with its psuedonymity and borderlessness, cryptocurrencies are already half underground to begin with. Exerting pressure on this industry will just drive it further in this direction. And that is that last thing they want.

So don't expect Ethereum or Ripple to be determined as unregistered securities any time soon. And certainly not before a lot of the fraudulent and more securities-oriented ICOs go down first.

@timmarsh I couldn't agree with you more, but I think it is irresponsible for a government agency that is at the center of a disinformation campaign not to send some feelers out there to the general public about the true status of things. Fake news everywhere [sigh!].

In the spirit of the public good, and the economic implications of disinformation, it behooves the agency to at least say there wasn't a meeting scheduled.

@timmarsh It is fair to assume everyone knew yesterday's hearing--had it taken place--would not have produced far-reaching decisions, regulations, and roadmaps for cryptocurrency/blockchain, but it would have at least swung the ball into motion.

Individual and institutional investors are tired of the cat and mouse game the regulators are playing. I am sure everyone wants something definitive in terms of regulations. But the government, it seems, is still sitting on the fence because they're not sure how to proceed.... whoa -- interesting times!

You're right @Coin_Raven, it would have been responsible of the SEC and CFTC to make an independent press release stating what events are coming up in the near future with regard to the regulation of cryptocurrencies. That way they are not being baited by media and fake news, but still making the facts clear. These sort of actions are more necessary when dealing with industries that suffer from an unfair share of fake news. It is also necessary for industries subject to high levels of speculation. Cryptocurrency ticks both of those boxes.

An interesting update on this whole dilemma:

Ethereum Foundation Advisor: SEC Lacks Fundamental Understanding of Core Nature of Crypto

"They see everything as a security and they are trying to fit a square peg into a round hole, but not everything is a security right now."

Obviously, Ethereum being deemed a security by the SEC would be a huge short-term blow, so it makes sense that their team is taking a stand.

Is the SEC simply overstepping its bounds? Perhaps trying to maintain a level of control that is insustainable in the long-run?