Last Week’s On-Point Ether Analysis Paid Off!
Attentive Cryptovest readers would have garnered themselves a tidy profit over the course of an hour on Thursday last week.
On Thursday, June 14th William Hinman, who heads the Securities and Exchange Commission’s division of corporation finance, said in remarks prepared for a Yahoo Finance conference in San Francisco, “Putting aside the fundraising that accompanied the creation of Ether, 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”.
Ether’s price jumped more than 10 percent on the news, pulling up with it other digital currencies, such as Bitcoin, which rose almost 6 percent, and Ripple over 7 percent.
This SEC ruling, however, should come as no surprise to Cryptovest readers. Last week, in our review on the institutionalization of the crypto market, we reported that Brett Redfearn, the SEC’s new trading and markets director, alluded in a CNBC interview that the SEC would be forthcoming with a statement on one of the altcoin products and providing some more guidance. He neither mentioned when the statement would be released, nor which product he was referring to.
In the post last week, we not only were on point with the SEC ruling (almost word for word), but also were able to infer that the product alluded to is the Ethereum network. Had a diligent reader paid attention to our analysis he/she could have pocketed a nice profit, in less than an hour, on Thursday.
So, what is ahead? And what could we infer from this ruling on the SEC’s overall view of Altcoins and/or tokens?
The SEC statement on Thursday is a great, much-awaited-for first step – providing clarity not only on the definition of digital currencies but also on the future of the crypto market as a whole.
Ether, the second largest cryptocurrency by market cap, being cleared as non-security, signals to Wall Street players that it’s time to “get in the game”. CBOE, the commodity and futures exchange, which started offering Bitcoin futures in December 2017, is already preparing to include Ether futures to their exchange. In a statement on Thursday, Chris Concannon, the CBOE president, said: “We are pleased with the SEC’s decision to provide clarity with respect to current Ether transactions. This announcement clears a key stumbling block for Ether futures, the case for which we’ve been considering since we launched the first Bitcoin futures in December 2017.”
Goldman Sachs would most likely add Ether to their already existing Bitcoin trading desk. As more altcoins “get SEC clearance” as non-securities, Goldman Sachs’ Bitcoin trading desk would soon grow to become simply its digital currency trading desk. Goldman might be the first mover, but it would most definitely not be the last. Other Wall Street firms will join and open competing digital currency trading desks. Fidelity, which stepped up its hiring for crypto projects and possibly a crypto exchange, would have the incentive to bring them to market faster. Rumors on Morgan Stanley’s interest in the Crypto market might soon become tangible actions.
Wall Street players are known for “following the money”. The crypto market has massive profit potential, and Wall Street will ultimately find its prominent role in this market. The crypto market is here to stay, and there is no looking back.
How soon this process happens, however, depends on the SEC’s future statements and rulings on other digital currencies. The SEC, like most government institutions, is known for its slow pace of new regulation adoption. As the SEC chairman said last week: “I understand that there is a great deal of discussion about these crypto assets, but again, we are not going to relax on rules based on the level of discussion. We need to know that the pricing is certain, we need to know that the assets are there and we need to know that it is going to function as our retail investors would expect these products to function,”
Therefore, the SEC will take its time to test and examine each digital currency separately, and release a separate statement on each, accordingly. We should make a clear distinction, though, between altcoins and tokens. Altcoin, an alternative to Bitcoin, has developed a separate blockchain protocol from that of bitcoin, such as Ethereum, Ripple, Zcash. Tokens are digital currencies built on top of an existing blockchain, such as the ERC 20 tokens built on the Ethereum blockchain.
Most ICO’s are tokens and offer no more than a mere business plans rather than a developed and tested blockchain. This is the reason why the SEC position on ICOs is that most, if not all, are securities. If an ICO is raising money to be able to build a business, be it a blockchain or something else, at this stage it is no different than any other company raising capital. The fact that they call it a token does not change the reality that this is fund raising for building a business that does not exist yet.
Furthermore, with ICOs, the risk is much higher than an IPO. With current IPO regulations, a company must have at least 100 million dollars in annualized revenue and at least two profitable quarters before filing for an IPO. Most ICO’s, if not all, don’t have any revenue, let alone profit. It is nothing but a promise to build something great.
The ones which will not fall under securities are the altcoins that already have a functioning developed blockchain network.
Now that we have a clear ruling on the Ethereum network, we can compare the state of each altcoin network to the state of Ethereum network and infer from that whether they would be exempt from securities regulations or not.
Ripple is an example of an altcoin awaiting clarity. Ripple spokesman Tom Channick said on Thursday, “We are pleased that the SEC has announced that it does not view Ether as a security. We believe that XRP likewise should not be classified as a security and look forward to confirmation from the SEC.”
Since Ripple is involved in litigation, it might be that the SEC will postpone its statement regarding Ripple and let this issue be determined in court. If the SEC stays silent in Ripple’s case, given its stand on Ether, it is quite likely that Ripple would have a stronger argument now to defend its case in court.
Bitcoin cash, Litecoin and Zcash are most likely the next to be cleared as non-securities. Stellar could also follow suit, depending whether the SEC is concerned or not with the “no mining availability” on the Stellar blockchain network.
In the meanwhile, as the SEC slowly, but surely, releases its statements, we could consider the Ethereum network as a benchmark to deduce the state of the other altcoins in question.