The world's second-most popular cryptocurrency isn't an investment vehicle, at least according to the Securities and Exchange Commission. William Hinman, the agency's director of the division of corporate finance, said Thursday that ether—the currency that powers the Ethereum network—shouldn't be regulated in the same way as stocks and bonds.
His statements follow similar ones made in April by SEC chair Jay Clayton about bitcoin. Taken together, the two sets of remarks provide the clearest understanding of how the regulatory agency views the cryptocurrency market. In essence, when a cryptocurrency becomes sufficiently decentralized, as the widely popular bitcoin and ether have, the agency no longer views it as a security. In contrast, smaller initial coin offerings, or ICOs, are almost always securities in the SEC's eyes. That distinction matters, because securities are subject to the same regulations as normal stocks.
“Based on my understanding of the present state of ether, the Ethereum network, and its decentralized structure, current offers and sales of ether are not securities transactions,” Hinman said at Yahoo's All Market Summit: Crypto in San Francisco. "And, as with bitcoin, applying the disclosure regime of the federal securities laws to current transactions in ether would seem to add little value."
'Current offers and sales of ether are not securities transactions.'
William Hinman, SEC
Joe Lubin, a cofounder of Ethereum and the founder of CosenSys, a major Ethereum application company, says he is grateful for the SEC's decision. "We applaud the clarity provided by Director Hinman and the SEC today," Lubin said in a statement. "Ether and other next-generation consumer utility tokens will continue evolving the web towards networks that are more fair, secure, and evenly distributed. ConsenSys looks forward to continuing to engage with regulators around the globe to promote responsible adoption of this transformative technology."
Hundreds of different developers run applications on top of the Ethereum network and contribute to its code. A similar number, if not more, help to develop Bitcoin. "The network and the software development is sufficiently decentralized that there isn't a discernible third party upon whom we would really expect investors to be reliant," says Peter Van Valkenburgh, the director of research at Coin Center, a think tank focused on policy issues facing blockchain technology. That's an important distinction from traditional securities, like Apple or Microsoft stock, in which you're betting on a specific company's efforts to develop products and services and generate income.
The SEC's Hinman notably stopped short of declaring that the initial investments made in ether weren't securities. It's possible that investments made early, before the currency became truly decentralized, could still be viewed as traditional investment vehicles. "The director was pretty clear to not be definitive about that activity," says Van Valkenberg, who also suggests that this indicates the people who got in first—and have likely made the most money—could someday face regulation.
Hinman also said that other cryptocurrencies may become "sufficiently decentralized" in the future, to the point where "regulating the tokens or coins that function on them as securities may not be required." But this doesn't mean all cryptocurrencies can evade scrutiny from US regulators. The SEC has held that most so-called token sales and ICOs are likely subject to regulation, because they generally power a single startup's product or application. ICOs are opportunities for investors to purchase the tokens that power a blockchain startup, typically before its product has gone live.
Complicating the issue: Many tokens run on top of the Ethereum network itself. So while buying and trading ether is not seen as making a traditional investment, buying and selling specific tokens that run on top of that network would be.
The SEC has ramped up its enforcement efforts against fraudulent ICO schemes in recent months. In December, the agency's new cyber unit announced it had filed its first ever complaint, against the cryptocurrency PlexCorps, for allegedly swindling customers out of $15 million. A month later, it halted one of the largest ICOs ever, for the Dallas-based startup AriseBank.
This doesn't mean all cryptocurrencies can evade scrutiny from US regulators.
In February, the SEC told the Senate's Committee on Banking, Housing, and Urban Affairs that it was open to "exploring with Congress, as well as our federal and state colleagues," whether to regulate cryptocurrency exchanges, websites that allow customers to convert and trade different coins for a fee.
And then in April, the agency charged the two founders behind an ICO that raised over $32 million, for allegedly selling fraudulent and unregistered investments. The scheme had received endorsements from professional boxer Floyd Mayweather and music producer DJ Khaled.
Owners of bitcoin and ether, however, now appear safe from that sort of close scrutiny. That doesn't mean that investing in either cryptocurrency is necessarily safer. Researchers at the University of Texas found that a price manipulation campaign may have partially accounted for an increase in bitcoin's price last year, for example. All that the SEC's declarations really say is that you're betting on an entire ecosystem, rather any one player.
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Finman used his fortune to fund an educational business and hes not as awful as he seems on Instagram
Erik Finman is one of the worlds youngest bitcoin millionaires an achievement hes not shy about flaunting. The 19-year-olds Instagram feed is full of ostentatious photos of himself stepping out of private jets or lying on beds covered in money with captions like: Cash so worthless compared to Bitcoin Im sleeping on it
In one photo he is pictured smoking, with the caption: Sometimes you just need a good smoke to relax when you have to live with the exhausting burden of so much money and too many beautiful women. After one of his fans admonishes him, he replies: Dont worry guys. Its not a real cigarette. Just a hundred. Dont smoke!
The teenager, who first bought bitcoin at age 12 with $1,000 from his grandmother, styles himself in a similar vein to the notorious Martin Shkreli; hes just younger and not in jail.
However, all is not as it seems with Finman. Far from being a vapid bitcoin bro, he admits his social media presence is a carefully calculated front. I think being a provocateur is a fun way to get people to pay attention to my ideas, he tells me over the phone from his current base in San Francisco. You see the reaction to it, people go crazy. But that helps draw attention to the actual world-changing projects that I want to do.
Finman first heard about bitcoin when his older brother took him to an Occupy Wall Street protest. He fell in love with the revolutionary potential of cryptocurrency, he says. An early adopter, Finman bought his first bitcoin when it only cost around $10. Just a few years later, it hit around $1,100. Finman sold $100,000 worth of bitcoin when the currency was on the up and, at age 15, used the money to start an online educational business called Botangle, which matched students with tutors via video chat. He was inspired to start the business, he says, because he had a terrible school life. One teacher told him to drop out and work at McDonalds while another held an Erik Finman roast session where students were encouraged to make fun of him. Despite his business success, his parents wouldnt let him completely drop out of school. So he made a bet with them: if he made $1m before turning 18, he wouldnt have to attend college. He won that bet last year.
Education is a big deal for the Finman family. His parents met at Stanford while getting their doctorates in electrical engineering and physics and his entire family, he says, is very smart. I think of them as the Elon Musk version of the Kardashians, he says. His mom was involved in Nasa in the 1980s and, Finman says, almost became an astronaut on the Challenger mission. However, she got pregnant with Finmans brother and, luckily, avoided the tragic launch. Apart from his experiences with high school, Finman seemed to have an idyllic childhood. He grew up on a llama farm in Idaho, for one thing. We had one llama called Sausage who unfortunately got turned into a sausage, he reminisces.
In 2015, Finman made his best business move: he sold Botangles technology. The buyer offered him either 300 bitcoin or $100,000 cash he opted for the bitcoin. At the time it was a gamble, as bitcoin had dipped and were worth around $200. Even though the currency continues to fluctuate wildly (I spoke to Finman shortly after the South Korean cryptocurrency exchange Coinrail was hacked, causing the value of bitcoin to plummet 10% to two-month lows) hes still made good on his investment. One bitcoin is now worth around $6,500. Finman has 401 bitcoin as well as various other cryptocurrencies and continues to bet on its future. Bitcoin will either be nothing or everything, and I think it will be more everything. Or crypto will, at least, he said.
Like his mother, Finman is also interested in space exploration. Hes currently working on a project with Nasa to launch a satellite containing a digital time capsule into space. The capsule will contain popular music and videos as well as other representative sounds of life on earth, and a Taylor Swift CD. Why Taylor Swift? We just reached out to her out of the blue, and she was into it, Finman shrugs. The project is meant to commemorate the 40th anniversary of the Voyager launch, which carried the Golden Record, a compilation of music and images from Earth, curated by the astronomer Carl Sagan, into space as a gift for any extraterrestrials who might stumble across it.
Sending satellites into space might be enough to occupy one person, but not Finman. The entrepreneur has a number of projects on the go. He recently created a robot suit based on the four-armed contraption worn by Doctor Octopus in Spider-Man for a 10-year-old child with hypermobility issues. The child, Aristou Meehan, is the son of one of Finmans mentors, and wanted his own Doctor Octopus suit to help solve his problems. So Finman made it for him. I wish someone would have helped me like that when I was his age, he says. There has already been some interest by investors in adapting the suit for various uses, says Finman, but hes moved on from it. Right now his big project is building a physical school and disrupting education. Hes tight-lipped on the actual details: Im still in early stages.
While Finmans social media presence may be satire, hes still rich and young. Doesnt he ever go a little off the rails? Oh yes, I got a fast car, did all that, Finman says. Traveled all over the world. Went a little crazy. Made a couple of stops in Ibiza and Monaco. I had to get it out of my system, you know. Hes also been careful to make sure his former teachers know about his success. I remember when the first article [about me] came out, I sent it to the worst teacher I had. The subject heading just said look at me now bitch. Finman put a tracking pixel in the email so he knows the teacher opened it. But I didnt hear back.
The world of cryptocurrency just got some much needed good news.
With the prices of bitcoin and ether on a steady downward trend, the Securities and Exchange Commission today provided hodlers with a flash of hope: Neither of the cryptocurrencies are considered securities.
So reports CNBC, which notes that the SEC’s head of the Division of Corporate Finance, William Hinman, delivered the news at the San Francisco Yahoo All Markets Summit: Crypto conference. If the SEC had decided differently, then exchanges and markets would likely have faced some serious regulation.
And, well, no one in cryptoland likes regulation.
The announcement was celebrated by big names in both the Ethereum and Bitcoin space.
But all this doesn’t mean the SEC is washing its hands of the entire emerging industry. According to Hinman, many ICOs are in fact securities and will be on the receiving end of SEC regulatory action.
Interestingly, Yahoo News reports Hinman as explaining that simply calling something a coin or a token makes no difference in the eyes of his agency. More important is the extent of decentralization involved in the network in question.
“Over time,” CNBC quotes him as saying, “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.”
So, you know, better hype up your blockchain project’s decentralized attributes now. It may save you from the SEC’s wrath later.
The prices of Bitcoin, Ethereum, and all other major cryptocurrencies have experienced big drops in the last 24 hours, following the news that South Korean cryptocurrency exchange Coinrail has been hacked.
In a statement on its website Monday, Coinrail said that hackers stole up to 30% of the coins from its storage.
According to Coinrail, the hackers struck on June 10 and made away with a number of different cryptocoins, including the recently launched Pundi X (NPXS), which makes roughly two thirds of Coinrail’s trading volume. Korea’s Yonhap estimated that a total of 40 billion won ($37.2 million) of coins went missing.
Coinrail is a fairly small exchange with roughly $2.5 million in daily volume according to CoinMarketCap. “(Coinrail) is a minor player in the market and I can see how such small exchanges with lower standards on security level can be exposed to more risks,” Reuters quoted Kim Jin-Hwa, a representative at Korea Blockchain Industry Association, as saying. Coinrail said it is cooperating with the police investigating the hack and said it will release an announcement with more details as soon as possible.
The cryptocurrency markets tumbled sharply following the news, with Bitcoin dropping from $7,240 to $6,752 in less than two hours, with the current price being $6,794. The second largest cryptocurrency by market cap, Ethereum, dropped from $570 to $511 before recovering slightly to $533.
Other major cryptocurrencies experienced a similar drop. EOS, the fifth largest currency by market cap, had it worst of all: It plummeted 15% in the last 24 hours, and is currently trading at $11.2. EOS’s price drop is notable as this cryptocurrency is currently in the process of launching its main blockchain network (also known as mainnet) after having raised a reported $4 billion in a year-long initial coin offering (ICO), dwarfing all similar crowdfunding efforts.
The Coinrail theft is the fourth major cryptocurrency exchange hack this year. In January, $400 million worth of cryptocurrency was stolen from Japanese exchange Coincheck, and in February, $200 million worth of cryptocurrency went missing from Italian cryptocurrency exchange Bitgrail. In April, cryptocurrency exchange Coinsecure said some $3.3 million worth of Bitcoin were stolen from its wallet.
The total market cap of all cryptocurrencies has descended below $300 billion for the first time since early April; it currently stands at $297 billion.
The world of finance isn’t done yet with its effort to turn artistic masterpieces into tradeable securities. A decade ago it was hedge funds and bankers selling small shares in works by Andy Warhol and his ilk as investment opportunities. Today it's the cryptocurrency crowd.
If history’s a guide, the risk and cost of owning a tiny part of an illiquid, hard-to-value asset still outweighs the rewards. And all that without ever getting to hang the picture on your wall.
The new tilt at art trading is as much a throwback to pre-crisis financial engineering as it is about crypto-futurism. A British gallery is promising to sell up to 49 percent of Warhol’s 14 Small Electric Chairs in a blockchain-powered online auction. Buyers can pay in Bitcoin, Ether or other tokens. They’ll take cash too if you’re that way inclined.
These micro-stakes would then be traded on a marketplace. There may be a blockchain verifying transactions, and crypto-currencies changing hands, but we've seen art investment pools and art stock markets before. They don't always end well.
Despite all the airy talk about democratizing art ownership and disrupting the gilded world of auction houses and dealers, this doesn’t really do that. Nobody owning a piece of the Warhol will take it home. It's locked up in a tax-free zone somewhere. What’s being traded is a stake in the special purpose vehicle that holds it.
This may be a wonderful way for the ultimate owner to make money from an artwork without taking it out of storage or ceding control, but it's hardly the Barnes Foundation.
As for the idea that this is a clever bet on the future value of a piece of art, these assets are as risky as any others. The art market is illiquid and can be volatile. Blue-chip artists are no protection against a market crash. Even Warhols were sold at a loss during the financial crisis. Do punters know the difference between this “Electric chairs” canvas, which the gallery says has been valued at 4.2 million pounds ($5.6 million), and others by the same artist?
Imagine what the combined volatility of cryptocurrency markets and the art market might create in times of stress. Liquidity would evaporate. That initial buy-in fee of 2 percent wouldn’t seem so cheap then.
Warhol himself might have enjoyed the idea of trading and owning pieces of art that you've never seen. And there is at least one tangible thing on offer: The people running the auction say buyers can choose to receive a special scanned print of the work in question, which to the naked eye looks just as good as the original. As David Bowie once sang in a song about Warhol: “Can't tell them apart at all.”
If people do manage to make money from this, then finance truly will have reached its post-modern apotheosis.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
James Boxell at [email protected]
In a delightful bit of irony BitBay, a Central European exchange, has shut down operations in Poland even as it received an invitation by the Polish government to participate in a national blockchain working group. The news, which appeared in a Tweet, states that the group will assess regulations for cryptocurrencies, blockchain, and ICOs.
“Our exchange has received an invitation from the PFSA to participate in the Blockchain Working Group. 💪 As we have recently said, we do not want to abandon crypto activity in the Polish community,” wrote BitBay.
Look, understanding cryptocurrency can be confusing. We here at Mashable are dedicated to helping our readers understand the complexities of this new form of currency and how it affects our day-to-day lives.
But even we are having our collective minds blown by this video, an “explainer” of cryptocurrency created by Botnik Studios that was “written using predictive keyboards trained on dozens of Bitcoin explainers.”
And the results are as insane as you might expect:
“To understand how bitcoin transactions are created, randomly pick a number between 1 and 30,000. Now spend that amount of money on Ethereum.”
“Despite the risk, one benefit of bitcoin is that you can upload a version of your future self on the dark net.”
“The popular form of bitcoin is the ‘Wild Richard.'”
You get the idea: absolute nonsense poetry.
Don’t worry, though. If you need to cleanse your mind and get the real ins-and-outs of crypto down straight, we’ve got you covered.