After the much-anticipated and widely-disseminated story that US regulators were to convene on Monday to decide Ethereum's future as either a security or a utility token, the price of ether has been on a steep ride which ended Monday when the meeting transpired to be fake news.
The crypto sector has been on tenterhooks for months since the market capitalization grew to such a size last year that it forced regulators to take notice and any utterances from the Security and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC) has a pronounced effect on prices.
The story first appeared in the Wall Street Journal on May 1 in which it reported that “regulators are examining whether other widely traded cryptocurrencies should be regulated as securities, according to people familiar with the matter… The inquiry includes a focus on ether.”
According to another of the Journal’s sources: “A working group of regulators including senior SEC and CFTC officials are scheduled to discuss the matter on May 7". However, there was no mention of the meeting on the calendar of either body's website.
The story gathered momentum and credibility across the crypto news media and while the price of ether rallied for several days from May 1, the day the rumor was first published in the WSJ, the nerves of traders appeared to get the better of them as the supposed day of reckoning came closer.
"Fish will ride bicycles before Ethereum could be called a security" - John McAfee
However, with May 7th now history and no announcements or confirmation of a meeting from either agency, there has been some finger-pointing and conjecture as to why the WSJ published such inaccurate details. Technology maverick John McAfee has been characteristically blunt: "The SEC made us fear Ethereum because Bitcoin was so obviously just a currency and out of their realm. They want to crush crypto, so the only way to scare us is to frown at Ethereum. The legal field is clear: Fish will ride bicycles before Ethereum could be called a security."
Ripple faces class action around ICO
These discussions are no doubt taking place against a backdrop of crypto market scrutiny; Gary Gensler, a former CFTC chairman, said back in April that “there is a strong case that one or both of ETH and XRP are noncompliant securities.”
Ripple is also facing a class action law suit predicated on whether its ICO amounted to an unregistered security issuance. Lead plaintiff Ryan Coffey, who invested $1,690 at the ICO stage, is acting on behalf of all XRP holders and claims that Ripple created surplus XRP out of thin air for the sole purpose of promoting and manipulating the price of the coin when it was first sold to the public.
Coffey wants an admission from Ripple Labs and its CEO Bradley Garlinghouse that it sold unregistered securities, which would amount to full mea culpa.
In both instances, Ripple and Ethereum will be evaluated pursuant to the famed Howey Test, which since 1933 has been used as a framework to discern whether a transaction is deemed an "investment contract" and thus considered a security. The test determines that a transaction is an investment contract if "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."
The Ethereum Foundation is confident that its open-source project and the voluntary nature of its "workers" preclude it from being classified a security. Before regulators do come around to a ruling we can expect it to be long-deliberated because the foundation will have recourse to appeal any decision, which could start years of litigation. In the meantime, it looks like the confidence of crypto markets will continue to be whipsawed by any regulatory rumblings.