SEC Commissioner reinforces vague stance on securities

Jay Clayton followed up on a colleague’s earlier comments about whether Ethereum is a security. His position remains unclear.

Crypto Twitter was abuzz today with jubilant news: SEC commissioner Jay Clayton has finally  clarified the Commission’s position on Ethereum and similar cryptocurrencies, which fellow SEC staffer William Hinman last year said were “sufficiently decentralized” and not securities.

Look a little closer, however, and you’ll see it is in fact more of the same—a word salad, salted with ambiguity and drizzled with a deceptively flavorless linguistic vinaigrette. (Much like the preceding sentence.)

What Clayton did say

In comments made to crypto research firm Coin Center and U.S Rep Ted Budd, Clayton explained that the Commission might not deem a token a security if investors cannot “reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts.” He also said that a digital asset’s status as a security is subject to change, and is not by default a security. (“They do not strictly inhere to the instrument.”)

Here’s the comment in full:

“Your letter also asks whether I agree with certain statements concerning digital tokens in Director Hinman’s June 2018 speech. I agree that the analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument. A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition. I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.”

What we still don’t know

Clayton makes zero specific reference to Ethereum, instead speaking broadly about “digital tokens.” Nor does he repeat Hinman’s term, “sufficiently decentralized,” instead relying on ambiguous phrasing—what does it mean, for instance, for investors to be unable to “reasonably expect” a person or group to “carry out essential managerial efforts”?

Note also the hedging: a digital asset “may” not represent an investment contract; whether a digital asset is a security does not “strictly” inhere to the instrument; the security designation “may” change over time.

View from an attorney

Drew Hinkes, an adjunct professor at NYU Law and Athena Blockchain general counsel, pointed out to Decrypt  that the statement merely confirms Clayton’s position, not that of the Commission. “Clayton’s statement is a staff member’s statement agreeing with a prior staff member’s public statement,” he said. “Although there is political capital necessary to make these public statements, they do not create or establish the law for these topics.”

Hinkes added that the statement does at least confirm that there is a system of “internal analysis used by the regulator when considering the status of certain instruments.” Yet this is “not as useful as guidance, rulemaking, a regulation, or a law would be for issuers” and leaves startups—and their lawyers—“unclear as to whether offerings should be structured around these comments.”

In other words, we’re still in the dark.

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