Holders of Ethereum’s ether token ( ) breathed a sigh of relief last Thursday when William Hinman, the SEC’s director of corporate finance, announced at the Yahoo Finance All Markets Summit: Crypto that ether is not a security.
Many were not just heartened by the development but surprised, since the currency had clearly been released as a way to fund operations, which those following the developing regulatory picture consider a warning sign. But at least one party with a lot riding on Ethereum’s success doesn’t seem to have been caught off guard.
Coinbase, the largest U.S. exchange, appears to have been anticipating the move, leading some industry insiders to wonder just how closely the San Francisco-based exchange is working with—and possibly even advising—the SEC as the agency considers how to classify different coins. That conversation, taking place right now with a flurry of meetings, could represent an existential threat that could crater the value of many widely held tokens.
The reason that eyebrows have been raised is that on June 11, three days before Hinman’s remarks, Coinbase announced that it would be adding Ethereum Classic ( ) to its roster. This was a strange and vexing decision, because Ethereum Classic is not a natural fit for an exchange that lists only four other currencies. Its inclusion means that, of the hundreds of available tokens, Coinbase now lists those in first place in terms of market value (bitcoin; ), second place (ethereum), fourth place (Bitcoin Cash; ), sixth place (litecoin; ) and 18th place (Ethereum Classic).
Coinbase has been slow to add other tokens such as third place Ripple’s XRP token ( ), fifth place EOS ( ) or seventh place Stellar’s lumens token ( ). It has repeatedly stated that its reluctance is over the possibility that a listed currency might be declared a security, which would cause many legal headaches for Coinbase since it is not registered to sell securities.
However, before Hinman’s surprise announcement, many in the crypto world thought that Ethereum itself—and thus Ethereum Classic—faced a strong possibility of being declared a security.
Gary Gensler, who was a top regulator in the Obama administration and the finance chief for Hillary Clinton’s 2016 presidential campaign, now enjoys an influential perch at M.I.T. Media Lab. He gave a speech in late April positing that both Ethereum and Ripple may be in violation of American securities regulations. He also told the New York Times that “They are noncompliant securities.”
So how did Coinbase feel so certain that Ethereum Classic would be safe to list, a theory that became fact just three days later?
Fortune magazine seems to have noticed the amazingly prescient call, as well. In a story about Anthony Di Iorio, founder and CEO of blockchain company Decentral (which makes the Jaxx cryptocurrency wallet), the magazine wrote,
“If Di Iorio had any indication about the SEC’s plans, he didn’t let on—other than to take notice of a clue the night before: Coinbase had announced it would add Ethereum Classic, forked out of the Ethereum blockchain, to its cryptocurrency exchange. Coinbase, which has been careful not to list any cryptocurrencies that might be a security, would likely only add Ethereum Classic if it was sure Ethereum and its kin had officially escaped the label.”
One crypto executive, who declined to be named because of regular business dealings with Coinbase, insisted to Modern Consensus that the timing was no coincidence.
“What I find interesting is Coinbase has been vocal in saying they can’t list new assets right now because they don’t know what is and is not a security. Two days before the SEC’s public statement, Coinbase announces that they’re going to list Ethereum Classic. They must have known about the SEC decision. Otherwise, they would not have made that announcement because they would have had to be regulated as a securities exchange. It’s like, really? That’s not a coincidence. There are cabals acting in the background that are largely unfriendly to other securities, and if you look at the language of Hinman’s speech, I’m guessing he did not write that, but it was influenced by other parties who are hostile to tokens that aren’t Bitcoin and Ethereum.”
The discussion of what is and is not a security has been consuming Washington and gripping the crypto community for months now. It seems to be coming to a head as holders of various tokens anticipate rulings over the summer and fall.
One of the criterion that seems to have emerged is the degree to which a currency is decentralized. Oddly enough, regulators seem to have no understanding of just how vulnerable the two biggest currencies are to potentially hostile foreign governments.
The crypto executive who declined to be named told Modern Consensus, “Bitcoin is controlled by four miners in China. Ethereum is controlled by three miners in China. Those are facts. They have 51 percent of the hashrate.”
This executive points out that the regulators seem to have the belief that because the holders of bitcoin and ether are decentralized, the currency is less subject to manipulation. “That’s actually a very naïve and frankly dangerous understanding, at least from the point of view of American regulators.”
This puts the American regulators at the SEC in the precarious position of having essentially approved of bitcoin and ether, while looking askance at American-developed technology that does not rely on Chinese miners.
“I’m not sure the regulators understand that at this very moment—not at some hypothetical future date, but right now—the most totalitarian regime on earth could simply decide not to validate whatever bitcoin transaction it chooses. It could just deny all donations to Bernie Sanders, say, or Donald Trump, or whatever. That’s dangerous for America.”
This sort of “51% Attack” as it’s become known in the crypto world, would also, according to Investopedia, allow bad actors “to reverse transactions that were completed while they were in control of the network, meaning they could double-spend coins.”
The Trump administration has emphasized the disadvantage at which American technology operates. So it would be ironic if American regulators were to regulate XRP or lumens, which would surely hurt the value of those currencies, while allowing Chinese technology to prosper.
The concentration of mining power in Chinese hands is actually growing more acute. According to bitcoinist, “Bitmain, the Chinese chip maker, is manufacturing hardware and chips that deliver such hash power that those using them could end up controlling the Ethereum transaction confirmation process, obliterating small miners.”
The fact that proof-of-work technologies at the heart of Bitcoin and Ethereum are devastating to the environment as well is almost beside the point, but also argues in favor of the consensus methods that are more prevalent in American-developed currencies such as XRP and lumens.
Coinbase displayed eerie prescience in determining a critical decision the SEC made last week. As the summer unfolds, look for crypto investors to keep a close eye on future business moves made by the exchange. Coinbase might just have the best handle on what’s going on in Washington.
Michael Craig is a securities industry attorney and the author of four books, including “The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time” and “The 50 Best (and Worst) Business Deals of All Time”.