William Hinman, head of the Division of Corporate Finance at the SEC, said that Bitcoin and Ethereum are not securities.

Speaking at the Yahoo All Markets Summit in San Francisco on June 14, 2018, Hinman noted that most, if not all, initial coin offerings (ICOs) and initial token offerings (ITOs) are securities. “Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers,” Hinman stated.

According to Hinman’s thinking, a key factor in determining whether a crypto asset is a security is the purchaser’s expectation of a return on the investment through the efforts of a third party. This concept dates back to the 1946 Supreme Court case SEC v. Howey, and the so-called Howey Test, which has served as the basis for the SEC’s security analysis for over 70 years. Most ICOs and ITOs are created, promoted, sponsored, and sold by centralized groups or business entities. These centralized third parties play a significant role in the development and maintenance of the asset. Couple that with the purchaser’s expectation of profit on the crypto investment, and you have a security.

Bitcoin and Ethereum, on the other hand, are not securities because they are decentralized. There is no central party whose efforts are a key factor in the success or failure of the enterprises. While Bitcoin and Ethereum investors may still have an expectation of profit, due to the decentralized nature of the networks, investors cannot rely on the efforts of a third party for those returns.  

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