On June 14, 2018, Bill Hinman, Director of the SEC’s Division of Corporation Finance, delivered a speech to an industry conference providing additional insights into how SEC staff analyze crypto assets under the Supreme Court’s Howey test. Since issuing the DAO Report nearly one year ago, the SEC has largely avoided providing additional guidance on the rapidly evolving world of ICOs. Hinman’s remarks represent a welcome departure from this position and provide critical insights into several areas of interest to the crypto community.
First, Hinman reiterated that Bitcoin is not a security. In a somewhat surprising move, he also indicated that the SEC staff does not view Ether as a security either. In both instances, the view is based on their decentralized nature and the lack of informational asymmetries typical of assets for which the protections of the federal securities laws are required. In a footnote, however, Hinman made clear that he expressed no view of the status of so-called SAFTs—simple agreements for future tokens—though he did encourage market participants to engage the staff with questions on SAFTs and other products. He even opened the door to possible no action relief, something the staff ordinarily avoids as a matter of policy in the private placement context.
Hinman also weighed in on the ongoing debate as to whether a crypto asset that is a security at one point in time may evolve into a non-security at a future date. Securities lawyers are split on this issue, with some viewing this kind of transformation as a theoretical possibility, and others holding the view that an instrument cannot cease to be a security once it assumes those attributes. Here, Hinman noted that “the analysis of whether something is a security is not static and does not strictly inhere to the instrument,” which seems to suggest that it is in fact possible for such an instrument to cease to be a security over time. The speech concludes with two sets of questions that go to the characterization of digital assets, one dealing with the role played by third parties in any transaction involving digital assets, and a second set regarding whether a digital asset is consumable.