In a Thursday research report, JPMorgan analyst Nikolaos Panigirtzoglou wrote that the internal SEC messages related to a 2018 speech by former Director William Hinman suggest ether did not look like a security.
The report said that the SEC officials acknowledged back then that the “fact that tokens on a sufficiently decentralized network are no longer securities creates a regulatory gap.”
“The speech acknowledges that there is an other category,” Panigirtzoglou wrote, adding that “it is not a security because there is no controlling group (at least in the Howey test) yet there may be a need for regulation to protect purchasers.”
The Howey test is a legal test used in the United States to determine whether a transaction qualifies as an investment contract and, thus, is considered a security under federal law.
JPMorgan Says SEC Hasn’t Taken Action Against Ether Due to Hinman Documents
JPMorgan analysts said that the SEC’s decision not to take action against ether so far this year while targeting other crypto tokens could be explained by the Hinman documents.
According to the analysts, the Hinman documents could influence the direction of the ongoing US congressional effort to regulate the cryptocurrency industry in a way that allows ether to avoid being designated as a security.
The easiest solution for Congress would be to regulate ether in the same manner as bitcoin (BTC), and oversee it as a commodity under the Commodity Futures Trading Commission (CFTC), JPMorgan said.
The bank said that a new “other category” could be introduced for ether and other cryptocurrencies that are decentralized enough to avoid being classified as securities.
“This ‘other category’ that would involve more restrictions and investor protections than currently envisaged for commodities but less onerous than those required for securities.”
JPMorgan noted that the more decentralized a cryptocurrency is, the higher its chance of not being categorized as a security.
Why Are Hinman Documents Important For Crypto?
The Hinman documents refer to a speech given by William Hinman, the former director of the Division of Corporation Finance at the SEC, in June 2018.
In the speech, Hinman discussed how the SEC would approach classifying cryptocurrencies under securities laws.
The Hinman documents are important in the crypto world because they provide guidance on whether a particular crypto asset is a security or not.
Hinman outlined a framework for cryptocurrency classification based on the Howey test, which looks at whether an investment involves the expectation of profits from a common enterprise, and whether those profits come from the efforts of others.
The Hinman documents have been cited in several legal cases involving cryptocurrencies, with the most prominent one being the SEC vs. Ripple case.
The Ripple SEC case centers around whether the XRP token is a security or a currency, and whether Ripple conducted an unregistered securities offering with it.
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