Ethereum and Bitcoin prices both tumbled ahead of an expected meeting by U.S. Securities and Exchange Commission officials regarding Ethereum’s status as a security.
It is unclear, however, whether such a meeting actually took place.
A spokeswoman for the SEC declined to comment on whether a hearing on Ethereum was held or was scheduled. The spokeswoman also declined to comment on whether such a hearing would be public or private.
The Wall Street Journal initially announced the meeting May 1, citing an unnamed source for the alleged May 7 meeting between the SEC and the Commodities Futures Trading Commission. The SEC’s website does not list any scheduled meetings regarding cryptocurrency for Monday, May 7, although conferences concerning securities and financial market regulations are slated for May 10 and 11.
Whether or not a meeting was held or will be held, the markets reacted negatively to the prospect of additional scrutiny.
Bitcoin and Ethereum hit lows Monday near $9,300 and $720, respectively, before rebounding slightly before the close of traditional financial markets. At the close, Bitcoin prices had fallen about 1.3 percent from the previous day, while Ethereum prices were down about 3.2 percent.
The question the SEC was reportedly mulling was whether Ethereum passed the Howey Test, a four-point test for determining whether something can be classified as a security. The judges of the original 1946 Howey case ruled that an orange grove could indeed be classified as a security. According to the Howey Test, a security involves an investment of money by a pool of investors who expect a profit and who cannot directly impact the price of the instrument in question. The SEC has mostly shied away from declaring cryptocurrencies to be securities, with the exception of German-born coin The DAO.
Ethereum, which provides a platform for numerous other cryptocurrencies, would be a particularly difficult pill for the cryptocurrency market to swallow due to the knock-on regulatory effects.
As its name suggests, the SEC is in the business of regulating securities. Companies dealing with securities have to adhere to strict financial reporting requirements and stringent know-your-customer standards. The SEC has already warned U.S. citizens that at least some cryptocurrency exchanges and initial coin offerings might not be legal, should they be found to be dealing with unregulated securities.
If Ethereum is a security, that means that all exchanges offering ETH trading pairs – that is, all of them – are in violation of U.S. law.
Moreover, that securities marker is likely to cascade down to all of the coins built on the Ethereum platform. Many cryptocurrency developers take pains to exclude U.S. investors from initial coin offerings due to the possibility of future regulation. An affirmative ruling from the SEC would set those exclusions in stone, unless the developers managed to rustle up the money for accountants and lawyers to comply with SEC regulations. This has been the regulatory model in the business world for some time, but most cryptocurrency developers are working with much smaller pools of capital. Indeed, the initial coin offerings are often used as a way to jumpstart underfunded projects.
- Telephone interview, SEC Office of Public Affairs, (202) 551-4120