I have long argued that government would eventually involve itself in the regulation of crypto‘s. I do not see that as a bad thing. As a matter of fact, I see it as an indication that cryptos are becoming mainstream. I also see it as an acknowledgment by those people who regulate criminality and fraud, that at present crypto is infected with fraud and criminality. It must stop. We had a choice, regulate it ourselves or they would.
Rightfully, if any crypto could or should be considered a security it would be Ethereum. But what is a security? That determination depends on the Howey test.
To be a security these questions must be answered yes.
-Is it an investment of money?
YES
-Is there an expectation of profits from the investment?
YES/NO*
-Is the investment of money in a common enterprise?
YES/NO**
-Does profit come from the efforts of a promoter or third party?
NO
*There is an expectation of profit. However, in the historical model profits derive from operations. In Crypto, while there may be exceptions, profits derive from trading alone.
** The same holds true for a “common enterprise”. The Howey test assumed investment in equity in a for-profit enterprise (company) with all investors being of the same class with certain, but identical equitable rights and remedies. With crypto, there is no investment in equity and therefore none of the traditional rights attendant to stocks and other securities. However, profits arise from consensus and goodwill. I think a real case can be made for the goodwill value as it applies to both current security models and also crypto. Goodwill is a less empirical, yet tangible asset of both types of enterprises. As there is no current limitation on the percentage of a company’s value that can be goodwill v. hard assets, who is to say it cannot be 100%?
As a factual matter, I do not believe a ETH meets the original test of a security. However, I think they should rule it so anyway.
The Howard test is an old law: Think of it as the Constitution. People need to read the constitution in a modern world and try to find how things fit - all the while adhering to original intent. The same is true with the Howard law. It was written at a time before all of this technology was even a dream. Crowd funding, ICOs, airdrops and pre-sales may be new but the question for the SEC is this: If these models are the new investment realities should we adjust our thinking to allow for them or let modern investment and trading escape our control forever? There must be some method of control that was not anticipated by the law. There must be a precedent to set for the future, all the while adhering to former precedent. That’s where I think the SEC can do the right thing.
I can hear people out there pounding their fists and asking God to strike me down with lightning. Sadly, the simple fact of the matter is we have done a shit job regulating crypto. That is why people lose fortunes on a daily basis. We allow criminals to run exchanges. We allow criminals, tricksters and worse - morons to launch ICOs. We require no financials or performance reporting data. Token holders have no rights. We don’t tie the success of the company to the actual crypto’s value. Cryptocurrencies are generally (99.9% of the time) not equitable to a stock or holding.
Rather than waiting for the legislature to do something, I believe that the SEC should just do this and be done with it before it cannot act at all. If they do find ETH a security you will see crypto’s star rise. Crypto’s day will have come. It was always going to be regulated: better now than later.
Think of what Ethereum does. Ethereum is not only a settlement currency, it’s an airplane. It’s a train. ETH is a technology that makes other cryptos possible. Regardless of what innovation or revolutionary crypto or blockchain use emerges, virtually all run on Ethereum’s blockchain. Think for a moment how incredibly important ETH is to our future? If the government decided to protect just one crypto, it must be Ethereum. With all that ETH has made possible, it should be treated differently.
For those who are panicking at the thought of the SEC getting involved, consider the manipulation of crypto‘s by bad actors. At Crypto Criterion we are pretty confident that we can now make a compelling case, if we had to, that more than one exchange in this world is engaging in a form of naked crypto short selling. This is made possible because all market trading is happening on a ledger and off blockchain. (Article coming) Exchanges are manipulating the market and stealing your money. SEC regulation will go a long way to stopping this practice.
Consider that crypto is a consensus commodity. We put value into cryptos based on what we believe. The problem is that belief can be shaken on a whim. You shake the belief in just one crypto somewhere in the world and you can crash them all with the domino effect. That’s not the way it should be. If a stock fails it’s because some empirical measurable financial metric said that it was failing. When it fails it does not take the market with it. That’s not true of crypto‘s. We have sympathetic resonant disasters in crypto, mutually assured destruction. Some little junk ICO falls somewhere. It’s being traded/paired with Etherium. The junk goes down and takes its trading pairs with it and pretty soon that Podunk ICO, with the market cap of $12 and not a single actual customer has just cost the world a hundred million dollars. It has to stop. It must stop. If cryptos are going to take off and become mainstream this shit has to stop. And the fastest way to get it to stop is to regulate it. It will take just one or two cryptos to alter our world. And that requires just one criminal prosecution.
If you recall I once said that for stabilization to come to the crypto market the best thing we could do was break the trading pairs so that the sycophant cryptos couldn’t be used to bring down Ethereum, LiteCoin, and Bitcoin. Some regulation at this point would actually accomplish that. If the SEC removes ETH from being part of a manipulation game it will effect all crypto positively. Government regulations are going to carry very strict protections and penalties for fraud and manipulation.
I don’t fully grasp sometimes how the community thinks. I don’t know if it’s the Disney world mentality. Crypto is our future. But we cannot will it into being by contentiousness. The angels will not just sing and the ponies will not just fart rainbows because “its the best thing”.
The entire concept of crypto‘s is not for it to remain underground. Decentralized crypto does not mean the "Wild West" continues forever. If crypto is ever going to be mainstream there has to be government involvement. Did people think we would force crypto onto the world’s governments? What you are seeing today with the SEC, regardless of its decision, is that governments are aware of crypto. They see it as inevitable too and they are setting the stage for adoption. For all of this to happen, for us to realize our dream, institutional money has to have a sense of security. Take a few moments and read our prior posts.
The best thing that could happen for Ethereum and crypto would be some government control. It would send a message to the world that we understand, we see it too and we accept that crypto’s going to be the future. They are acknowledging we’re probably going to have to adopt it at some point, but we cannot allow people in America to lose their life savings because someone in China hacked into someone else’s wallet and started a landslide that ate $400 billion in value. Now I fear government and virtually everything it does, but there are certain things that governments are actually good for. Consumer protection is one. Imagine a world without consumer protection? Imagine if people could sell you anything and cheat you. Imagine you had no rights. That’s where crypto is today. If crypto is going to have any viability whatsoever it has to have the mainstream government’s participation. There must be controls. I agree that bitcoin will never be a security because bitcoin wasn’t created as an investment and that is what makes BTC the most likely $1,000,000 token.
The long and the short of it is today the crypto world is going to change forever if the government determines Ethereum to be a commodity. It is a positive and necessary thing. If they rule ETH is a security, we will witness the rise of Ethereum to heights never seen before. ETH will become the first stable crypto. Imagine the money that will run to it?
If the government comes out at this time and says it’s not a security Ethereum will just go back to it’s up and down, up and down, up and down pattern. However, it will continue to rise because it’s a viable and important crypto. Eventually, the government will step in and will regulate crypto. I’ve been saying that for a very long time and I can see no other way for this to end other than governments become involved in protecting valuation. Remember the government doesn’t care if Ethereum goes to $25,000 or $2 a coin. Government cares about manipulation and fraud. So think for a moment how the crypto world will change when at least one crypto, probably the most important one, can no longer be manipulated without legal criminal penalty. The fraud chain will be broken. The changes I have been calling for will begin. Financial tests will be the norm.
For new ICOs, these changes are all positive things. In either case, I really don’t see a downside whether the United States government finds Ethereum to be a security today or not. The markets will react, but I bought a load of ETH on a limit order early this morning. Regulation is for our own good because right now crypto is a license to steal. And if it’s ever going to get past the 30 million or 40 million of us that that believe in it and get to the billions of people that need to use it, it has to be dependable. It has to be safe. So regardless of whether or not you find the government involvement an affront to your sensibilities, if you understand how it all actually works, how the world actually functions, you will understand that at some point crypto‘s are going to have to be regulated. There’s no getting around it, so sit back and wait it out. Nothing bad is going to happen today.
