In what would become one of the most consequential regulatory statements in cryptocurrency history, William Hinman, Director of the SEC’s Division of Corporation Finance, declared on June 14, 2018, that both Bitcoin and Ethereum are not securities under U.S. law. Speaking at the Yahoo Finance All Markets Summit: Crypto in San Francisco, Hinman’s remarks provided the clearest regulatory guidance the digital asset industry had received to date — and the market was still absorbing the implications as Bitcoin traded near $6,734 and Ethereum sat at approximately $519 on June 18.
TL;DR
- SEC Director William Hinman stated definitively that Bitcoin and Ethereum are not securities
- Decentralization was identified as the key factor separating non-securities from regulated assets
- The ruling did not address XRP’s status, leaving Ripple in regulatory limbo
- Some ICOs may still be classified as securities depending on their structure
- The announcement came as crypto hedge funds reported 35% losses year-to-date
The Decentralization Test
Hinman’s framework for determining whether a digital asset qualifies as a security centered on one critical question: is there a centralized third party whose efforts are the key determining factor in the success of the enterprise? For Bitcoin, the answer was clear. The network’s decentralized nature means there is no central party whose efforts drive its value, placing it outside the scope of securities regulation.
Ether received the same classification, with Hinman noting that the Ethereum network’s decentralized structure means current offers and sales of ETH do not constitute securities transactions. This was particularly significant because Ethereum had initially raised funds through a 2014 presale — a fact that had led some legal scholars to question whether ETH might retroactively be deemed a security. Hinman’s remarks effectively drew a line: regardless of how a token was initially distributed, sufficient decentralization removes it from securities classification.
The Howey Test Applied to Digital Assets
Hinman’s speech, titled “When Howey Met Gary (Plastic),” applied the Supreme Court’s 1946 Howey test to the cryptocurrency context. The key considerations included whether purchasers had a reasonable expectation of profits derived from the efforts of others, whether a person or group sponsored the creation and sale of the asset, and whether that group played a significant ongoing role in its development and maintenance.
For tokens like Bitcoin and Ethereum, where no centralized team drives value creation, the Howey test does not apply. However, Hinman made clear that many initial coin offerings would fail this test. If a centralized team raises funds with promises of future development that will increase token value, that arrangement likely constitutes an investment contract — and therefore a security — regardless of the technological packaging.
The XRP Question Left Unanswered
Conspicuously absent from Hinman’s analysis was any mention of Ripple’s XRP, the third-largest cryptocurrency by market capitalization at the time, trading near $0.54. XRP was already the subject of allegations that it functioned as an unregistered security, and Hinman’s silence on the matter only intensified speculation about its regulatory fate.
Hinman acknowledged this gap indirectly, stating: “Over time, 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.” The implication was clear — decentralization exists on a spectrum, and each digital asset must be evaluated on its specific characteristics.
Consumer Items vs. Investment Contracts
Not all token sales would be classified as securities, according to Hinman. He acknowledged that some digital assets could be structured more like consumer items than investment contracts, particularly when purchased for personal use rather than as an investment. He offered examples such as memberships in book clubs or golf clubs — purchases where the buyer is seeking access to a service rather than a financial return.
This distinction would prove crucial for the emerging ecosystem of blockchain-based applications, including digital collectibles and tokenized utilities. If a token granted access to a decentralized application or service without promising financial returns, it might avoid securities classification entirely — a principle that would later inform the development of non-fungible tokens and decentralized application ecosystems.
Market Reaction and Hedge Fund Struggles
Despite the positive regulatory signal from the SEC, the broader crypto market remained under pressure. Cryptocurrency-backed hedge funds were reporting approximately 35% losses year-to-date through mid-June 2018, reflecting the dramatic correction that had followed Bitcoin’s peak near $20,000 in December 2017. The total market capitalization had shed hundreds of billions of dollars, and even the SEC’s blessing for the two largest cryptocurrencies by market cap wasn’t enough to reverse the bearish trend.
The simultaneous release of a scathing BIS report questioning whether cryptocurrencies could ever function as money further complicated the picture. While the SEC was providing legal clarity, the world’s most influential central banking institution was challenging the fundamental premises of the entire asset class.
Why This Matters
Hinman’s June 2018 speech established the decentralization framework that would govern cryptocurrency regulation in the United States for years to come. By explicitly stating that Bitcoin and Ethereum are not securities, the SEC effectively greenlit institutional participation in the two largest digital assets and provided a roadmap for other projects seeking to avoid securities classification. The speech also revealed the regulatory gray area occupied by tokens like XRP — a gap that would eventually lead to landmark litigation. Perhaps most importantly, the framework Hinman outlined acknowledged that digital assets could evolve over time: a token that begins as a security could transition to non-security status as its network becomes sufficiently decentralized. This dynamic interpretation would become a cornerstone of crypto regulatory theory and remains relevant as regulators worldwide continue to grapple with the classification of digital assets.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Cryptocurrency investments carry significant risk. Past performance is not indicative of future results.