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Is Ethereum (ETH) A Security Under US Law?

Published August 25, 2023 8:51 AM
Andrew Kamsky
Published August 25, 2023 8:51 AM

Key Takeaways

  • Determining Ethereum’s legal classification as a security will impact the cryptocurrency space, influence trading, issuance, and investment regulations.
  • The Howey Test defines asset security. Debate continues on Ethereum’s classification.
  • Legal clarity is vital to avoid regulatory uncertainty and to guide industry growth. 
  • Ethereum’s journey from ICO to decentralization has shaped its status. 

Importance Of Determining Ethereum’s Legal Classification As A Security

Determining Ethereum’s legal classification as a security is considered to be an important regulatory decision that would impact the cryptocurrency space. The reason is because securities laws affect regulations with trading laws, issuance laws, and investment practices.

The Howey Test,  referenced by the Securities and Exchange Commision (SEC), defines whether an asset is a security. The outcome of this decision will also influence investor protection, market stability, and innovation in the crypto space. 

Background On Securities And How Securities Are Regulated Under US Law

The regulation of crypto-assets, particularly in relation to securities is a complex issue. In general, securities sold or traded in the U.S. must be registered, and the registration process involves providing essential facts about the company’s or cryptos properties, business, and the security itself. 

The SEC’s role includes minimizing compliance while ensuring investor protection. These regulations are designed to provide investors with access to relevant information about investments before and after investing, and to prevent conflicts of interest in the securities industry.

Definition Of Securities 

Securities  are fungible and tradable financial instruments to raise capital in both the public and private markets. Securities  can include notes, stocks, bonds, certificates of interest, collateral trust certificates, and more. These instruments then serve as a means for individuals and entities to invest, speculate, and manage risk within the financial markets. 

The term “security” covers a broad range of investments, and its definition can vary based on jurisdiction and context. Securities play a pivotal role in capital markets, enabling companies and governments to access funding while offering investors opportunities for potential returns and income.

What Is The Howey Test? Explanation Of The Howey Test 

The SEC is a U.S. government oversight agency responsible for regulating the securities markets and safeguarding investors. The SEC’s jurisdiction extends to various aspects of financial markets, including investment banks, trading, financial dealings, product offerings, advertising, and fiduciary responsibilities. 

The Howey Test is a legal framework used in the United States to determine whether a transaction qualifies as an investment contract and thus falls under securities regulations. The test originates from the landmark Supreme Court case SEC v. W.J. Howey Co in 1946. 

The test consists of three main elements: 

  • An investment of money, 
  • In a common enterprise, 
  • With an expectation of profits primarily from the efforts of others. 

If these three elements are met, the transaction is considered a security, subject to the regulations set forth by SEC. The Howey Test serves as a fundamental guideline for classifying various financial arrangements and offerings in terms of whether they require compliance with securities laws and regulations, ensuring investor protection and transparency in financial markets.

Ethereum’s Characteristics And SEC’s Perspective On Ethereum 

Ethereum is a decentralized blockchain platform known for its programmable smart contracts and decentralized applications (DApps). It enables developers to build and deploy decentralized applications on its network, offering features like transparency, immutability, and trustlessness. Ethereum’s native cryptocurrency, Ether (ETH), is used for transactions and to incentivize network participants. 

The U.S. SEC has indicated that whether a particular cryptocurrency, like Ether, constitutes a security depends on its specific characteristics and how it is marketed and sold. The SEC has noted that if a cryptocurrency operates as a security , it falls under its regulatory jurisdiction, subject to applicable securities laws. The classification of cryptocurrencies like Ethereum is based on the Howey Test and other legal considerations to determine their status as securities or commodities, impacting their regulatory oversight and legal compliance.

SEC’s Statements and Actions Regarding Cryptocurrencies And Tokens 

The U.S. SEC has actively engaged with the evolving landscape of cryptocurrencies and tokens through its statements and actions. The SEC’s emphasis on investor protection and market integrity has led to a series of public statements clarifying its position on digital assets. It has consistently emphasized that whether a particular cryptocurrency or token qualifies as a security depends on the underlying facts and circumstances, with the Howey Test being a pivotal framework. 

On July 25, 2017, the SEC released an investigative report  addressing the treatment of digital assets, specifically tokens offered by “virtual” organizations through distributed ledger or blockchain technology. The report emphasized that these assets, often marketed as “Initial Coin Offerings” (ICOs) or “Token Sales,” could fall under the scope of federal securities laws. The SEC’s stance was whether an asset is a security depends on the factual and economic nature of the transaction rather than the terminology or technology employed.

The investigative report on the case of “The DAO,” a virtual organization that offered and sold tokens. The SEC concluded that these tokens were securities, thereby subject to federal securities laws. The report underscored that entities issuing securities via distributed ledger or blockchain technology must adhere to registration requirements, unless a valid exemption applies. 

Additionally, unregistered offerings and securities exchanges facilitating trading in these securities could face liabilities.While the SEC is open to innovative technologies, its measured approach underscores the need to balance innovation with the protection of investors and the integrity of the markets.

Examination Of SEC’s Stance On Ethereum’s Status As A Security 

The position on whether Ethereum’s status is a security or not is not so well defined. While Ethereum initially launched through a token sale, the SEC’s perspective has evolved over time. Former Chairman Jay Clayton highlighted that as Ethereum decentralized and its network matured, it might not fit the traditional definition of a security subject to securities regulations. 

The determination hinges on whether the sale of Ether, Ethereum’s native cryptocurrency, involved the investment of money in a common enterprise with an expectation of profits primarily from the efforts of others, the key elements of the Howey Test. The SEC’s cautious and nuanced approach reflects its commitment to balance innovation and investor protection in the rapidly evolving digital asset landscape.

Contrary to initial concerns, Gary Gensler, head of the SEC, reportedly indicated in 2018, that he also doesn’t view Ethereum  as a security based on his interpretation of its historical issuance and network distribution. He referenced his earlier remarks from a 2018 lecture at MIT, where he emphasized that Ethereum was likely offered and sold as a security during its initial coin offering (ICO) phase.

Gensler’s statement aligns with the idea that the initial sale of a token could be considered a security offering, but over time, if the token’s network becomes sufficiently decentralized, it may no longer meet the criteria of a security. This view holds significance for Ethereum’s regulatory treatment and could impact how other cryptocurrencies are evaluated by the SEC.

Analysis Of Speeches, Regulations, And Enforcement Actions Relevant To Ethereum

The analysis of speeches, regulations, and enforcement actions relevant to Ethereum, offers insight into the SEC’s evolving stance. Various officials’ speeches have indicated the importance of evaluating the underlying characteristics of a cryptocurrency and its manner of distribution to determine its regulatory status. The issuance of guidance, the establishment of a framework, and subsequent statements by SEC officials have further clarified its position. 


Determining Ethereum’s legal status as security is key for cryptocurrency regulation and market prices. The SEC’s approach using the Howey Test emphasizes investor protection, market stability, and innovation. While Bitcoin is often seen as a commodity, Ethereum’s classification remains debated. 

Clarity is crucial to alleviate regulatory ambiguity, fostering industry growth. Understanding securities and the SEC’s role is essential; they govern investment instruments and ensure market fairness. Ethereum’s evolving journey from ICO issuance to a decentralized network shapes its status. Former and current SEC chairs, Clayton and Gensler, offer nuanced perspectives on the definition of Ethereum.


What is the significance of determining Ethereum’s legal classification? 

Ethereum’s classification impacts its regulatory treatment, influencing trading, issuance, and investment practices in the cryptocurrency space.

How does the Howey Test affect cryptocurrency regulation? 

The Howey Test helps determine if a transaction qualifies as an investment contract, potentially subjecting it to securities regulations for investor protection.

What is the SEC’s role in regulating securities? 

The SEC safeguards investors and maintains market fairness by overseeing securities markets, ensuring transparency, and preventing insider advantages.

Why is legal clarity important for cryptocurrencies like Ethereum? 

Clear classification mitigates regulatory uncertainty, fostering industry development while balancing innovation and investor safeguarding in the digital asset landscape.

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