According to an investigative report seen by CoinDesk.
Ripple published the Hinman documents on June 12 as part of its defense against the SEC’s lawsuit. They shed some light on why the regulator may have designated some cryptocurrencies as securities in its complaint against Coinbase and Binance.US, but left others, like Ethereum, off the list.
JP Morgan analysts led by managing director Nikolaos Panigirtzoglou studied the documents and wrote that their release bodes well for Ethereum and general decentralization in the cryptocurrency industry.
The analysts added that the content of the document would likely “influence efforts by Congress to regulate the crypto industry” in a way that will ensure that Ethereum cannot be considered a security.
As such, the lender believes that altcoins will be forced to imitate Ethereum and its holdings, likely amplifying competition between them.
According to the lender:
“(The) more decentralized a cryptocurrency is, the greater the chance that it will avoid being designated as a security.”
‘Sufficiently decentralized’
In recent times, most regulators around the world have come to accept the idea that Bitcoin is probably a commodity due to its nature and origin. The United States intends to bring Bitcoin under CFTC control with other commodities.
However, there has been a distinct lack of clarity regarding altcoins and whether they should be considered securities, especially in the US. The SEC has strongly argued that almost all cryptocurrencies are securities, but had only really gone after Ripple in one legal fight until recently.
The watchdog’s complaint against two major cryptocurrency exchanges in early June cemented its stance that some of the largest cryptocurrencies, such as Solana, Cardano, and Polygon, are, in fact, Howey-test-based securities.
Meanwhile, Hinman’s documents show that SEC higher-ups did not consider Ethereum to be a security in 2018 because the cryptocurrency had no “control group” and its network was “sufficiently decentralized.”
On the other hand, the SEC argues that cryptocurrencies like Solana and Cardano are classified as investment contracts because they have a controlling group under the Howey Test, and their buyers had a “reasonable expectation” of benefiting from the investment.
regulatory gap
JP Morgan said that the Hinman documents also show that the SEC recognizes that there is a regulatory loophole in the current system if Ethereum cannot be classified as a security.
This means that new laws and rules are needed to regulate the industry properly and ensure that consumers are protected, as that remains a problem even if cryptocurrencies are not securities.
JP Morgan believes that the easiest approach for Congress is to classify Ethereum and other cryptocurrencies that pass its standards as commodities and regulate them under the CFTC, like Bitcoin.
Another option would be to create an entirely new “Other” category for altcoins that do not fall under the securities umbrella.
