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Bitcoin and ether are not securities, but some initial coin offerings may be, SEC official says

Bitcoin and ethereum are not securities, but some initial coin offerings may be, SEC official says
Bitcoin and ethereum are not securities, SEC official says

The SEC's point man on cryptocurrencies and initial coin offerings (ICOs) says that bitcoin and ether are not securities but that many, but not all, ICOs are securities and will come under the regulatory control of the SEC and relevant securities laws.

"Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers," William Hinman, head of the Division of Corporation Finance at the SEC, said in a speech at the Yahoo All Markets Summit: Crypto conference in San Francisco.

Bitcoin and ether surge on new SEC ruling
Bitcoin and ether surge on new SEC ruling

Hinman said the primary issue in determining whether cryptocurrencies and ICOs were securities was the expectation of a return by a third party, specifically whether there was a person or group that sponsored the creation and sale of the asset, and who played a significant role in its development and maintenance. For purchasers of the asset, the key is whether they are seeking a return on the investment.

How to start your very own cryptocurrency
How to start your very own cryptocurrency

If there is a centralized third party, along with purchasers with an expectation of a return, then it is likely a security, Hinman said.

But Hinman also gave examples where cryptoassets would not be considered securities and would not come under the purview of the SEC.

Decentralization is key

Hinman specifically said that bitcoin is not a security because it is decentralized: there is no central party whose efforts are a key determining factor in the enterprise. In addition, ether is also not a security because the ethereum network is also decentralized.

Hinman did not address the securities status of other cryptocurrencies, notably ripple (XRP), which is the subject of a lawsuit alleging that it is a security, noting only that, "Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required."

Regarding ICOs, Hinman also acknowledged that some digital assets could be structured more like a consumer item than a security, particularly if the asset is purchased for personal use and not intended as an investment. He seemed to imply that these types of offerings — an investment in a book club, or a golf club membership, for example — were likely not securities.

Hinman defended the SEC's strict interpretation of securities laws, noting that, "There is excitement and a great deal of speculative interest around this new technology. Unfortunately, there also are cases of fraud."

Hinman acknowledged that there may still be some confusion over how to determine if any cryptocurrencies and ICOs are securities and that his office was willing to help: "We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use."

Bill Hinman is scheduled to appear on CNBC's "Closing Bell" at 3 p.m. ET.