Is Ethereum a security? What about Ripple? SEC Chairman Gary Gensler candidly avoided answering this question.
Ethereum like Ripple? Gary Gensler’s opinion
The awkward moment happened a few days ago during an interview aired on CNBC’s ‘Squawk Box’ programme.
The question from journalist Andrew Ross was the following:
“Can you explain your view on whether Ethereum is a security or not, I think you have actually suggested that it is not, but then why do you think Ripple is a security? I know there is a lawsuit going on related to Ripple, but could you talk about the Ethereum issue?”
Gary Gensler’s response was very evasive:
“We don’t get involved in these types of public forums to talk about any projects or possible circumstances and give legal advice through the airways that way”.
At this point, however, he said some sentences that create even more confusion:
“But again let me talk more generally about the general market. If you’re raising money from the public and the public is in anticipation of profit (…), that’s within the securities laws because Congress painted with a broad brush that they wanted to protect you, the investing public, so that you have proper information or what’s called full and fair information and protect you against fraud and scammers, and the like.”
“It’s a simple basic idea: you get to decide whether you want to invest in this or that security, and if they call themselves a token, it is probably still a security. You get to decide, but there has to be some basic disclosures and protection against lies and fraud.”
At this point, Gary Gensler combines something new and something old. The new, he says, are cryptocurrencies or forms of investment known as SPACs (Special Purpose Acquisition Companies), but these investments cross over into an old idea that those who raise money from the public by promising a profit, must abide by laws that have been known since the 1930s. It doesn’t matter what the investment instrument is, but the SEC, says its chairman, has to make sure that investors are protected.
Is Ethereum also a security?
Put in this way, it seems that any ICO could involve the sale of securities. In fact, the concept of an ICO is based on having funds by convincing the public to buy a cryptocurrency that when launched on the market will have some utility that will cause it to grow in value.
It fits right in with what Gensler said about promising profits. This would mean that more or less all the cryptocurrencies that have launched via ICOs would be securities.
Ethereum would also be a security at this point.
The ICO of Ethereum
Ethereum funded itself via an ICO in 2014. It raised around $16 million, selling each ETH at $0.31. Today, one Ethereum is worth $3,300, a very profitable return for investors.
And is Ripple a security?
Ripple didn’t fund itself through an ICO, but in order to create liquidity, it actually offered XRP for sale. The supply of XRP is limited to 100 billion tokens, which are initially held by Ripple who then places them on the market. This has also raised questions about Ripple’s decentralization. In fact, XRP was created in 2012 as a token that was supposed to facilitate fast cross-border payments through the Ripple Labs network.
Indeed, Ripple Labs’ technology has also been very successful in traditional finance, so much so that it has begun to compete with SWIFT payments, but XRP’s adoption has been much more limited due to volatility.
In any case, the SEC holds Ripple accountable for this very practice of selling XRP tokens for liquidity with the promise that their increase in value will generate profit for investors.
The consequences of the Ripple-SEC lawsuit
As Brad Garlinghouse, Ripple’s CEO, has repeatedly pointed out, the lawsuit against the SEC is a threat to the entire crypto ecosystem.
Gary Gensler’s words confirm this, because they would suddenly make the hundreds of digital currencies that have financed themselves through ICOs illegal. At the time, however, the sector was fairly deregulated. Now, as is well known, ICOs have faded away, leaving room for other forms of investment, but the problem remains.
At this point, it is even clearer that the New York court’s ruling is likely to disrupt the future of cryptocurrencies.