Unpopular Opinion: ETH is Totally a Security (Basically All of Crypto Too)
Mental Models for Crypto Investing
Theo Delarosa
March 10, 2023
The rise of crypto has been one of the wildest developments in the financial world in decades. While many see them as a way to decentralize finance and empower individuals, the cold harsh truth is that basically most things in crypto should be considered securities, and subject to regulation by government agencies like the SEC. 😤
Let’s cut to the point: Why don’t we want any of this to be a security? So we can continue making money in the wild west! No rules, just pure unrestricted online gambling and speculation. Nothing more than an anonymous wallet and off we go, Hell or Valhalla.
There has been soooo much opportunity for early participants and adopters. Fortunes minted. Now the government wants to come in and try to regulate, enforce rules and bring order to our chaotic corner of the internet? Eww.
But why in the grander scheme of things and in spirit should crypto be considered a security?
To understand why, we need to look at the history of financial regulation in the United States. Prior to the formation of the SEC in 1934, financial markets were essentially the wild west, with little oversight or regulation.
Unimaginable fraud and insider trading at the expense of everyday people was rampant, and investors were often left holding the bag when companies collapsed or ran off with their money.
The Great Depression of the 1930s was a direct result of this lack of regulation, and it prompted the government to take action.
The SEC was formed to protect investors and ensure fair and transparent markets. It regulates the issuance and trading of securities, which are essentially investments in companies or projects that promise a return on investment.
The SEC requires companies to disclose information about their financial health and operations to potential investors, and it monitors trading activity to prevent fraud and market manipulation.
In 1946, the Supreme Court ruled in SEC v. W.J. Howey Co. that an investment contract, which is essentially a security, exists when there is an investment of money in a common enterprise with the expectation of profits solely from the efforts of others.
So, how does this relate to cryptocurrencies like Ethereum?
At their core, most cryptos are investments in a technology or project that promises some kind of return on investment.
Plain and simple. It is the primary thing that draws people to the space - the expectation of investing their money and the price going up, as they have historically seen crypto do.
You can try and brushing off the argument with stupid technicalities, interpretations of the Howey Test and try to add things in like utility and focus on the consensus mechanism to change the definition but it’s insincere and doesn’t capture the honest state of what crypto is.
Everyone is here for the money. The continuous expectation of investing your money and profiting is why this space exists. Let's just call a spade a spade.
In the case of Ethereum, it's a platform for building decentralized applications and executing smart contracts.
Investors buy ETH tokens with the expectation that the value will increase as more people use the platform and demand for the tokens increases.
This is no different from buying shares in a company with the expectation that the stock price will increase as the company grows and becomes more profitable.
Then there’s the fact that many cryptos were issued through initial coin offerings (ICOs), which are essentially the crypto version of an IPO.
Companies sell tokens to raise funds for development or expansion, with the promise that the tokens will have value as the company grows.
This is exactly what a security is: an investment in a company or project with the expectation of a return.
Please Let’s Just Call a Spade a F*cking Spade
So there it is. The truth you hate to hear. We want crypto to stay unregulated so we can continue our online shenanigans.
We want the opportunity that comes from the wild west. But in practice there are so many faults with this space.
From insider trading to manipulation to pure criminal behavior, this space can often be a shitshow.
Normal everyday people enter the space with the hope of making some money and more often than not they are run through the meat grinder and used as exit liquidity.
A little regulation for the space would be healthy.