Gary Gensler, former chairman of the CTFC, recently said that Ethereum and Ripple were likely “unregistered securities.” If this proves true, they will be operating illegally in the US in their present state of compliance.
His remarks come during a period in which US authorities are trying to get a grip on this new industry. Genser said last week: “2018 is going to be a very interesting time. Over 1,000 previously issued initial coin offerings and over 100 exchanges that offer I.C.O.s [sic] are going to need to sort out how to come into compliance with U.S. securities law.”
Following these comments, an analysis conducted by US federal employees has now inconclusively concluded that Ethereum might have been launched illegally, according to a report in the Wall Street Journal.
The extent to which a coin or token is centrally controlled is a key criterion for deciding its status. According to the federal employees that conducted the analysis, if an agency has “significant influence” over a coin’s value, that coin beings to enter the realm of a stock.
Gensler had said that Bitcoin is not a security because it had an initial coin offering and has no central control. Ethereum differs from Bitcoin in a number of ways, the most salient here being that 1) it has a leader who could theoretically control its value and 2) that the tokens it sold have a utility other than payment.
Ethereum made more than $18 million at its launch sale in 2014, but more importantly in the eyes of the law, the money was used to develop the platform. Its value rose as a result of this so in some ways the tokens resemble bonds/securities.
Under US law a company selling stocks must undertake a number of legal obligations, one of which is registering with the Securities and Exchange Commission. Ethereum did not announce itself to the authorities at its launch in 2014. It also sold tokens to anyone who wanted to buy them, another thing which is contrary to American law.
During the analysis a number of factors were considered – the extent of centralisation, incentives awarded within the Ethereum blockchain, fluctuations in the prices and what causes them, and a thought experiment based on oranges dating from 1946 – but these tests did not turn up anything definite. As Gensler remarked: “There’s no legal precedent for it.”
Aya Miyaguchi, head of the Ethereum Foundation, responded by way of an email to the New York Times in which she said that Ethereum “neither controls the supply of nor has the ability to issue Ether, and the quantity of Ether that the foundation holds (under 1 percent of all Ether) is already lower than that held by many other ecosystem participants.”