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ERC-20 Tokens Aren’t Securities Under U.S. Law, Suggests Coin Center Report

August 11, 2018

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ERC-20 Tokens Aren’t Securities Under U.S. Law, Suggests Coin Center Report

Altcoins may be primed for a recovery after a disastrous midsummer plunge seeing even the bellwether Alts down 80-90 percent or more from their highs in early 2018.

That’s because fundamental news, which could be very positive, is suggested from a Coin Center report in turn suggesting altcoins built on a decentralized platform, like Ethereum’s ERC-20 Protocol, are not and should not be considered “securities” under United States securities laws.

Many recently emerging altcoins have been using the ERC-20 protocol that’s become so popular for token sales over the last two years. Coin Center writes that these tokens and others which rely on the “consensus mechanism and blockchain of the underlying [Ethereum] network,” should not be considered securities under the securities laws of the United States.

Although cryptos are bought, sold, used and traded worldwide, their potential classifications as “securities” in a bellweather jurisdiction like the United States is thought to sharply dampen the attractiveness of any token which could run afoul of the regulation. Despite the United States barely accounting for four percent of the world population, it is still considered the leading financial and legal jurisdiction with perhaps the strongest rule of law protecting property rights in the world. Henceforth, the danger of any token being classified as a security, even in just one major jurisdiction, could be viewed as negatively impacting demand and usage.

However, reassurance from respected industry leaders that certain protocols should not and likely would not be “securities” should cause the “utility tokens” governed by those protocols, if not all tokens using the protocols, to be governed by a decentralized framework (i.e., Ethereum) and thus not meeting one of the necessary “profit coming from efforts of a third party” elements of what is called the “Howey test” (based on a 1946 United States Supreme Court decision U.S. v. Howey) which is accepted as the basis for American regulators’ determining what is and is  it a security.

Ethereum has fallen from its January high of over US$1400 to barely over US$300 at press time, or levels last seen in mid-November 2017.

This story is based in part on a Coindesk.com report accessible at https://www.coindesk.com/coin-center-updates-its-securities-framework-for-cryptocurrencies/.