The question is very important because if this were true, such investments would be subject to the legislation of a government agency, which in the case of the United States would be the Security and Exchange Commission (SEC).
To answer this question, let’s take a look at the definition of investment given by the SEC. The so-called “Howey Test” is a test created by the United States Supreme Court to determine whether certain transactions can be considered “investment contracts”.
In this case, such transactions are to be considered as company securities and therefore subject to certain transparency requirements and rules which, according to industry experts, could slow down the process of capital fundraising.
According to Howey’s test, a transaction is considered an investment contract if:
- It is an investment in money
- There is an expectation of return on investment
- The money is invested in a company
On May 7th, 2018, William Hinman, finance director of the SEC, stated that cryptocurrencies such as Ethereum are to be considered as raw materials, but ICOs are to be considered as investments in companies.
Ether was initially offered through an ICO, but since then the blockchain of Ethereum has become extremely decentralized, without a central body controlling it.
According to Howey’s test, investing in Ethereum would not give rise to an expectation of a return on investment as there is no real owner company.
Therefore, the purchase of Ethereum (and in the same way also of Bitcoin) would not be considered as an investment contract, but equal to the purchase of a commodity.
Commodities are goods that can be bought or sold on a market. The prices of these commodities are mainly based on the law of supply and demand. As a commodity, in the United States Ethereum is regulated by the Commodity Futures Trading Commission (CFTC). At present, the CFTC focuses only on the aspects of fraud and manipulation of the cryptocurrency markets.
On the other hand, according to Hinman, a token is a digital asset. Investors buy it with the idea that it will provide income in the future or will later be sold at a higher price for a profit. The company that sells the token through an ICO uses investor funds as a means of promoting its roadmap and launching a product.
This is exactly the definition of investment and therefore most ICOs today are considered a form of investment, and as such, are regulated by the SEC.
From an investor’s point of view, this could be an advantage, as their investment will be protected under the country’s supervisory bodies if the issuance occurs in America, or if the investor is American.
Ultimately, according to the SEC definition, the main issue is how the crypto asset was generated.
If such an asset is offered through an Initial Coin Offering (ICO) or a Token Generated Event (TGE) in which a token is provided in exchange for money to raise capital and create a product that does not yet exist, such a token is considered an investment.