We have heard of the SEC in the United States probably in crypto news or in the popular season ‘Suits’. Apparently, the law in the United States labels Ethereum and Bitcoin as commodities and not a security. A security means an investment contract that two or more people involve themselves in. One is the issuer and the other is the buyer who intends to use it for some goods or services.
How Does the SEC Identify a New Asset Class as Security and Commodity?
Well, the SEC uses the Howey test to assess if the asset falls into the category of a security or a commodity. Furthermore, the Howey test is an old method of studying an asset class.
Back in the day, WJ Howey, the founder of the Howey company, leased citrus farms in Florida to carry out their operations. The owners of the citrus farms did not have much knowledge of agriculture and Mr. Howey’s success was impressive. Soon, the farm owners leased their land with an expectation to get a small percentage of their firm’s gains generated by using the land. With this the plot leased by the firm became an investment contract.
However, the SEC blocked the sale and took the land plot case to the court to register the plot lease as an investment. Ever since then, the Howey test has been used to determine any asset as a security or commodity. The Howey test examines an asset by looking at its substance rather than its form.
SEC – ETH Ruled as a Commodity
The CFTC (Commodity Futures Trading Commission) ruled ETH as a commodity. Many policymakers believe that Bitcoin should be deemed as a commodity while Ethereum must be seen as a security. The argument here is simple. Ethereum crowdfunded months after its launch making it a ‘Security’. While Bitcoin today can be seen as a commodity since there was zero investment made by the anonymous inventor of Bitcoin.
Garry Gensler, The chairman of the Securities and Exchange Commission sees ‘Ethereum’ as a security. However, due to its decentralized infrastructure, the asset class cannot be identified as a security.
Source: Tokenomics – Sean Au and Thomas Power & Cointelegraph
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