Take a Hint: Ethereum Not A Security, Fails Howey Test

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The Chairman of the Securities and Exchange Commission has hinted, in an official response to a US House of Congress Representative that it agrees with the previous statements made by other SEC representatives, specifically those of William Hinman, who had stated that Ethereum (ETH) did not look to fall into the definition of a security.

As expected, the key test will be the Howey Test, a long-established method used to determine whether something is a security. The letter details the process of consideration, which isparticular to the facts and circumstances of each transaction:

Generally, we look at whether the digital asset fits the definition of a security as set forth in the federal securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 define “‘security” broadly to encompass virtually any instrument that may be sold as an investment. We also apply tests developed through case law, including the well-established “investment contract” test articulated by the Supreme Court in SEC v. Howey and its progeny, including United Housing Found, Inc. v. Forman. As those cases explain, the “touchstone” of an investment contract “is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The determination of whether a digital asset is an “investment contract” depends on the application of Howey and its progeny to the particular facts and circumstances of the digital asset transaction.

The Honorable Ted Budd

We hope the response provides some insight and much-needed clarity on the matter for US residents, as well as globally as other nations look to the SEC to gauge their response. American exchanges will be watching this regulatory space closely, as it means they can support Ethereum and similar digital assets without falling foul of the unregulated securities laws.

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