Is iEthereum a Security?

What defines a cryptocurrency or token as a security? The truth is it has shown to be subjective based on the currently residing SEC administration. We understand crypto is new, its certain classification is under ongoing scrutiny and regulatory clarity is actively being sought and the information provided in this article may change.

Currently, as the security law exists, a digital asset may be classified as a security if it meets the criteria outlined by the Howey Test, a legal standard in the United States established by the Supreme Court in SEC v. W.J. Howey Co. (1946). This test determines whether a transaction qualifies as an "investment contract," and therefore, as a security under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Under the Howey Test, an asset is classified as a security if it involves:

1. An investment of money – Investors must commit capital or resources to the project.

2. In a common enterprise – The success or failure of the project is shared among the investors.

3. With an expectation of profits – Investors expect to receive returns from the investment.

4. Primarily from the efforts of others – The profits are derived largely from the efforts of the promoters, developers, or a third party, rather than the investors themselves.

For digital assets, if these factors are present, the asset might be subject to securities regulations, including registration with the Securities and Exchange Commission (SEC). The SEC has used this framework to regulate initial coin offerings (ICOs) and other cryptocurrency-related projects that involve selling tokens as potential securities.

Furthermore, some digital assets may not be classified as securities if they are sufficiently decentralized or if they function as a digital commodity or utility tokens, where the primary purpose is to grant access to a service or network rather than to generate profits from an investment.

And, lets be honest, The Securities and Exchange Commission has a problem right now as they are interpreting their policies as they see subjective fit. This means, none of the above is guaranteed or considered a precedented law. This reality allows for the SEC to become corrupted; picking winners and losers which is not good representation of a free market society looking to attract investment and development. We have seen many projects be unfairly treated while others are allowed to flourish. Veritaseum is a great example of such unfair treatment while FTX is an example of being allowed to flourish when it was an obviously money laundering ponzi scheme.

Thesis: iEthereum is Not a Security

The source code for the iEthereum token, coupled with its fair distribution mechanism through a 99% airdrop into the marketplace, provides a strong case that iEthereum should not be classified as a security. As mentioned above, the classification of a digital asset as a security often hinges on the Howey Test, which determines whether an asset involves an investment contract. The iEthereum token does not meet the criteria of the Howey Test for several reasons, as outlined below:

Key Points Supporting iEthereum as Not a Security:

1. Fair Distribution and Lack of Initial Investment:

   • The fact that 99% of iEthereum tokens were airdropped into the marketplace rather than sold directly to investors means there was no initial investment of money from the public. In the context of the Howey Test, the first criterion (an investment of money) is not met since recipients of the airdrop did not pay for the tokens.

2. No Expectation of Profits from a Common Enterprise:

   • The iEthereum token does not inherently promise profits from the efforts of others. We do not even know who founded the project; there is no centralized voice. The code defines standard ERC-20 functions, focusing on transfer, balance management, and approval mechanisms without suggesting that holding the token will yield returns derived from the work of a centralized entity or a common enterprise.

3. Utility and Functionality:

   • The iEthereum token has clear utility and functionality. It enables transfers, approvals, and other token operations as defined in the ERC-20 standard. Additionally, iEthereum includes a token factory function, allowing the creation of new tokens under its framework, enhancing its use case as a versatile tool for decentralized applications and platforms. The primary purpose of iEthereum is to facilitate transactions and act as a medium of exchange within these decentralized ecosystems, rather than functioning as an investment vehicle. The code defines standard ERC-20 functions, focusing on transfer, balance management, token creation, and approval mechanisms, without suggesting that holding the token will yield returns derived from the work of a centralized entity or common enterprise.

4. Decentralization:

   • While iEthereum does not have any formal governance mechanism, its operations are decentralized. There is no single entity that controls or manages the token’s functions, use, profits, or decision-making processes. The decentralized nature of iEthereum’s operations—particularly in terms of token distribution and the execution of its smart contract—supports the argument that it functions primarily as a digital commodity or utility token, rather than a security. This lack of centralized control diminishes the likelihood of it being classified as a security, as it does not rely on the efforts of a centralized entity to generate returns for holders.

5. Absence of Profit-Generating Activities by a Central Entity:

   • The smart contract and its functions do not indicate any activities that would generate profits for token holders. There are no dividends, interest payments, or profit-sharing mechanisms embedded in the contract, which are typical features of securities.

6. Focus on Interoperability and Use by Humans:

   • The token is designed to be used by humans for various purposes, such as voting, utility, dapp development, currencies, and other applications. This aligns with the notion of a digital commodity or utility tokens, which are intended for use within specific ecosystems rather than as investments.

Legal Argument: iEthereum is Not a Security

To determine whether iEthereum qualifies as a security, lets examine its characteristics and functions against established legal definitions and regulatory frameworks for securities. This analysis will leverage the provided source code and distribution method, and compare these with the criteria typically used by financial regulators.

Examination of iEthereum's Characteristics:

a. Investment of Money

• Regulatory Insight: This element is satisfied when investors commit capital in exchange for an asset, regardless of the medium of exchange (fiat or cryptocurrency).

• iEthereum Analysis: While acquiring iEthereum may involve an exchange of value (such as using Ether to obtain iEthereum tokens), this alone does not necessarily indicate an investment of money in the context of the Howey Test. The simple act of exchanging value for a token does not automatically make it an investment in a common enterprise or imply an expectation of profit.

  Furthermore, the absence of a centralized entity that manages or controls iEthereum is critical when considering the other prongs of the Howey Test, particularly whether holders have an expectation of profit derived from the efforts of others. This decentralized nature reduces the likelihood of the token being classified as a security, despite the exchange of value to acquire it.

b. Common Enterprise

• Regulatory Insight: This element examines whether the investment is part of a collective pooling of funds or resources, which ties the fortunes of the investors to one another or to the success of the promoter or a centralized entity.

• iEthereum Analysis: iEthereum's distribution method, where 99% of the supply was airdropped, significantly diminishes the argument for a common enterprise. Airdrops distribute tokens to a broad base of individuals without requiring them to pool resources or contribute capital to a shared endeavor. This decentralized distribution further supports the view that iEthereum does not involve a common enterprise or pooling of funds. Furthermore, there is no centralized entity managing or controlling the token's operations, iEthereum holders are not dependent on the efforts of others to profit, which weakens the argument that the token functions as part of a common enterprise under the Howey Test.

c. Expectation of Profits

• Regulatory Insight: Investors must expect to earn profits from their investment, either through capital appreciation or participation in earnings.

• iEthereum Analysis: iEthereum functions primarily as a digital commodity or utility token within the Ethereum ecosystem. Its primary use case involves facilitating transactions and applications rather than generating profits for holders. The code does not mention dividends, profit-sharing, or any inherent value appreciation mechanisms that would create an expectation of profits.

d. Derived from the Efforts of Others

• Regulatory Insight: The anticipated profits must come from the managerial or entrepreneurial efforts of others.

• iEthereum Analysis: iEthereum's decentralized nature and utility functions suggest that any value derived from the token is based on its use within the Ethereum ecosystem, not on the efforts of a centralized team or management. The code and distribution model do not indicate reliance on a central entity for value generation.

Conclusion:

Based on the legal definitions and regulatory frameworks, iEthereum does not qualify as a security. It fails to meet the criteria of the Howey Test, as there is no investment of money in a common enterprise with an expectation of profits derived from the efforts of others. iEthereum functions primarily as a digital commodity or a utility token within the Ethereum ecosystem, facilitating specific transactions and applications. Whether it is a digital commodity or a utility is for another discussion. iEthereum’s decentralized nature, fair distribution method, functionality and practical use cases support the classification of iEthereum as a digital commodity or a utility token rather than a security. This classification aligns with guidance from the SEC and other regulatory bodies.

iEther Way, We See Value!