First Release | How does the United States determine the securities nature of virtual currencies?

This article was originally written by Deng Jianpeng (Professor and doctoral supervisor at the School of Law of Central University of Finance and Economics) and authorized for first release by Golden Finance.

introduction

Due to its huge wealth effect, the craze of virtual currency has been sweeping the world in recent years. With the development of many functions of the underlying blockchain technology, virtual currency has been given various connotations, among which the most widely concerned by regulators in various countries is security tokens. Such tokens often mean that they have the nature of debt or equity. Holders can get a corresponding proportion of dividends in the process of project income with tokens, or have voting rights on the development of the project according to the proportion of holdings, obtain investment income, etc. Therefore, some security tokens have gradually become a new type of virtual assets favored by current investors. However, the issuance and sales methods of such securities products often conflict with securities regulatory laws, and have great financial and compliance risks, which have attracted the attention of regulators in various countries.

Many issuers hide the securities characteristics of virtual currencies and carry out securities issuance activities under the guise of "Utility Tokens". For this reason, the U.S. Securities and Exchange Commission (SEC) has sued a number of blockchain and virtual currency issuing companies, placing their related activities under the supervision of U.S. securities laws to protect the rights and interests of investors on the grounds of unregistered issuance of securities or fraudulent issuance. Among them, on December 21, 2020, the SEC filed a lawsuit with the local court on the grounds that Ripple Labs had not registered for securities and had issued the virtual asset Ripple coin without authorization. Ripple coin is a virtual currency originally issued by OpenCoin, called Ripple Credits, referred to as "XRP", and its Chinese name is Ripple coin. Ripple is now developed, operated and maintained by Ripple Labs. As of August 30, 2021, the market value of Ripple coin ranked sixth among all virtual currencies, with a currency value of approximately US$52 billion, which has a huge impact in the "currency circle". This lawsuit is called the largest legal event in the history of virtual currency, and it is also the first comprehensive conflict between the virtual currency project and the SEC. Since the SEC filed the lawsuit, Ripple has become a token of concern for the world's leading virtual currency exchanges. Well-known virtual currency exchanges in Hong Kong, Europe, and the United States have issued risk warnings to remove the token. In the short term, a large number of market sell-offs have caused its price to fall sharply, further causing local investment risks. In response to this lawsuit, the judiciary will respond to the US securities law and determine whether to include Ripple in the scope of securities supervision.

In my country, on September 4, 2017, the People's Bank of China, together with the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce and other ministries and commissions, issued the "Notice on Preventing the Risks of Token Issuance and Financing" (hereinafter referred to as the "94 Notice"), which determined that ICO (initial virtual token issuance) was suspected of illegal fundraising, illegal issuance of securities and other activities, and prohibited the establishment of virtual currency trading platforms in China to provide trading services to investors. The China Internet Finance Association has repeatedly issued risk warnings, reminding investors to raise their awareness of self-prevention and not to participate in related activities. Although a large number of trading platforms have stopped related businesses, many blockchain financing projects continue to target Chinese investors through overseas trading platforms. There are gaps in traditional economic laws and financial supervision when dealing with blockchain finance and virtual currencies, and there are varying degrees of "regulatory failure". Since the release of the "94 Notice", the relevant regulatory measures of the Chinese government have not been adjusted and revised, and a mature, flexible, rigorous and effective regulatory framework has not been formed, and the relevant normative documents are relatively rough. For example, how to determine whether financing involving ICO is illegal issuance of securities? What are the various detailed rules for illegal issuance of securities applicable to ICO? How to effectively regulate and guide domestic blockchain companies and virtual currency markets with such detailed rules? Trading platforms are prohibited from providing token financing and trading services. Is it permitted for citizens to trade virtual currencies privately? It is difficult to find a clear answer from existing domestic laws, policies and regulatory practices.

The United States is a world leader in the development of blockchain startup projects and plays an important role in the field of virtual currency investment. The SEC's lawsuit against Ripple will greatly affect the survival and development of virtual token investment and blockchain projects. Studying the US regulators' identification of the nature of virtual currency securities in the context of this case is of reference value for China to strengthen the supervision of virtual currency and standardize and guide blockchain startups in the future. To this end, this article first explores the details of the dispute between the SEC and Ripple; secondly, it analyzes the SEC's methods and ideas for identifying the nature of virtual currency securities and predicts the possible judgment results of the court; then, based on the comparison with Ripple, it explores the possibility of other influential token securities legal attributes; finally, it uses this as a reference to provide suggestions for my country's virtual currency supervision.

SEC’s allegations and Ripple’s defense

The two parties in dispute in this case are the U.S. Securities and Exchange Commission and Ripple. The defendant Ripple is a well-known virtual currency issuer, mainly engaged in Ripple currency development, payment, exchange and other businesses. The core of the company's business is to build a bridge with Ripple currency and provide cross-border remittance transaction services for users in different countries, that is, user A can exchange any legal currency held for Ripple currency for payment, and user B can exchange it for any currency required after receiving Ripple currency. Since 2013, Ripple has successively sold Ripple currency worth 1.3 billion US dollars to the public. According to the "U.S. Securities Act of 1933", securities issuance activities must be registered in accordance with the law before they can be carried out. The SEC has issued a recommendation to Ripple that Ripple currency meets the definition of "investment contract" in the "U.S. Securities Act of 1933" and the "Howey Test", and requires Ripple currency to apply for registration in a timely manner. Ripple currency has always regarded itself as a functional token. Ripple claims that Ripple currency has never been a security and continues to sell it on a large scale despite the SEC's advice. Therefore, the SEC submitted an indictment to the court in December 2020, requesting the court to rule: (1) order the defendant Ripple to return the illegal gains; (2) prohibit the company from participating in any virtual asset securities issuance activities; (3) impose a corresponding civil fine on the defendant.

The SEC took the view that "Ripple is always a security" as the core and filed the above three lawsuit requests to the court. In the 23-page opinion argument, it cited the "Howey Test" standard of the US Supreme Court to explain the reasons for the lawsuit, which can be specifically divided into the following four points: (1) Ripple investors need to invest a certain amount of money; (2) Ripple encourages investors to reasonably expect that the company and its agents' management efforts will promote the success or failure of the Ripple project; (3) Ripple buyers invest in a common cause; (4) Ripple allows investors to reasonably expect that they will benefit from the defendant's efforts. After fully arguing the above four points, the SEC determined that Ripple meets the definition of "investment contract". In addition, considering that many virtual currency trading platforms previously believed that Ripple was only a functional token, the SEC also explained the above doubts: Ripple did not sell Ripple for the purpose of "use" or as "currency". For Ripple, there is no obvious non-investment "use", and the "international virtual asset" trading service claimed by Ripple has never become a reality. Moreover, according to the provisions of the US federal securities law, Ripple is not a "currency". Based on this, the SEC insists that Ripple is not a functional token and should be considered a security.

In response to the SEC's allegations, Ripple subsequently made a series of statements on its official website. The company's CEO Brad Garlinghouse publicly stated: "The US SEC has made mistakes in both factual and legal determinations. Ripple is a currency rather than a security. The reason is: First, Ripple is not an 'investment contract'. Ripple investors do not participate in the company's dividends nor obtain voting or other company rights. Token buyers will not receive any income from Ripple, and holders have no relationship with the company; second, Ripple has its own shareholders. If you want to invest in the company, investors need to buy company shares instead of Ripple; third, unlike securities, the market value of Ripple has nothing to do with Ripple. On the contrary, currency fluctuations are related to other virtual currencies." In the view of Ripple and the two accused executives, the SEC's various measures are "illogical assertions" and the lawsuit filed by the SEC against it is an attack on the entire virtual token industry in the United States. At the same time, Brad Garlinghouse believes that Ripple is similar to Bitcoin and Ethereum as identified by the SEC. According to the view of William Hinman, the former chairman of the SEC, Ripple, Bitcoin and Ethereum are not investment contracts.

In summary, whether Ripple can be judged as a security is the key to resolving the case, which essentially involves the following three core issues: First, is the US SEC's judgment sufficient in law and reason? Second, based on the US Securities Act and the Howey Test, is Ripple's defense valid? Third, can the relevant statements of former SEC Chairman William Hinman on Ethereum and Ripple prove that Ripple does not have the nature of a security?

Analysis of the “Howey Test” and the Securities Nature of Ripple

Qualitative characterization and classification are important prerequisites for legal norms. The criteria for determining the securities attributes of virtual currencies determine the scope of the SEC's regulatory power. Under the U.S. federal securities law, the term "security" has a very rich connotation, and it is generally believed that any profit or investment participation certificate can be considered a security. The U.S. judiciary uses the "Howey Test" standard for judging "investment contracts" to define the attributes of tokens. In 2017, the SEC issued an investigation report on the "The DAO" case, formally establishing the principle of identifying virtual currency securities. The "Howey Test" includes four elements: (1) whether there is capital investment; (2) whether it is invested in a common cause; (3) whether there is an expectation of investment benefits; and (4) whether the benefits are obtained by relying on the efforts of a third party. Virtual currencies determined by this standard will be identified as "investment contracts", and the issuance process will be carried out in full compliance with the rules of the U.S. federal Securities Act. The SEC may take securitization regulatory measures against them.

However, in the lawsuits involving virtual currencies, project developers carefully constructed a token system to prove to the court that the tokens they developed did not meet the "Howey Test" standard, making the relevant tokens unable to be identified as securities. In the SEC v. Ripple case, although the SEC believed that XRP was a security and submitted evidence such as Ripple's advertisements and news, the total amount of XRP issued, and the price, Ripple pointed out that XRP does not represent any equity, beneficiary rights, and that the XRP income has nothing to do with Ripple's activities, which conflicts with the "Howey Test" standard. By integrating the relevant case facts, we believe that Ripple's defense is actually intended to explain two issues: First, XRP holders do not enjoy company equity, and XRP is only used for payment. Therefore, from the perspective of economic function, XRP does not have the financing potential similar to equity. On this basis, XRP holders do not expect investment benefits when purchasing XRP, which does not meet the requirements of the third element of the "Howey Test". Second, after XRP enters the network system, its price fluctuations are mainly determined by the secondary trading market, and Ripple's influence is minimal. At this time, Ripple does not meet the fourth requirement of the "Howey Test", that is, Ripple investors do not rely on Ripple (a third party) to obtain benefits. The above defense challenges the "Howey Test" standard. Is Ripple's defense tenable? Can the nature of Ripple be clarified under this standard? We believe that further analysis is necessary for the above two issues.

Do Ripple buyers expect to make a profit from their investment?

Some researchers say: "Cryptocurrencies developed primarily for consumption should not be considered investments, that is, if consumers can exchange their cryptocurrencies for services or products, it is no longer an investment." This statement fundamentally denies that the holders of such virtual currencies have the intention to make a profit from their investments, and therefore are not "investment contracts" as defined by the "Howey Test." Such virtual currencies used for consumer services often belong to "functional tokens" that have special usage functions, that is, holders can use them to enjoy services or pay in the developed projects. Unlike security tokens, functional tokens cannot be used for financing or dividends, and holders purchase them only for consumption purposes.

However, in the virtual currency trading market, people have noticed that there is such a trading situation at present. The active secondary market has caused the value of "functional tokens" to fluctuate greatly, attracting a large number of users to participate in speculation with the mentality of "small bets for big gains". The original intention of people to buy "functional tokens" is no longer "use", but to earn investment benefits. These tokens may be attractive to some buyers because of their potential consumption functions, but there are also buyers including venture capitalists and newly established hedge funds. In response to this special situation, the US Supreme Court took the lead in the "Forman Case" to emphasize that the purchaser's investment purpose plays an important role in judging whether something is a security. With the extension of the thinking of the SEC and scholars from all walks of life, we should start with distinguishing the purchaser's purpose (consumption or investment) to prove that the purchaser has an investment intention, so as to regard the relevant virtual currency as a security. However, subjective intention needs to be judged by external objective evidence. In practice, advertising materials that incite users to buy tokens are regarded as important judgment data, because advertising is the most powerful propaganda tool to attract investors. For example, advertisements for online discussion groups or websites centered on investment tend to stimulate buyers' expectations of profits. On the contrary, advertisements that are aimed at potential users who enjoy platform consumption or services may focus on stimulating the desire of buyers to use the service. Once developers overemphasize the investment benefits and price difference dividends brought by virtual currency, the issuance of virtual currency may be regarded as virtual economic speculation. Even if the token is a functional token on the surface, it is necessary to regulate it as a securities token.

Ripple is often presented as a "functional token" that provides low-cost, high-speed payment services to Ripple's users, and does not include any rights to company shares and dividends. Company executives therefore believe that Ripple does not have investment benefits. But in fact, Ripple has huge investment potential. It is not only used for international payments, but also actively participates in secondary market exchanges as the world's third largest virtual currency. Its market value ranks among the top of all virtual currencies. At the same time, in the evidence listed by the SEC, Ripple has repeatedly publicly promoted that they will work hard to stimulate market demand for Ripple and encourage investors to expect investment returns from it. Although this "return" does not come directly from the company's equity dividends, Ripple's series of measures have attracted a large number of speculators to participate in transactions, exacerbating the financial risks of the US virtual currency trading market. In an interview on April 4, 2018, the company's executives even made the following promise: "If Ripple successfully implements the xCurrent project and successfully expands the number of xRapid users, the price of XRP will rise within three to five years, and investors will be told that they can trust Ripple's management and protection of the XRP trading market, and many of the company's activities will be centered around promoting the rise in the value of XRP." All signs indicate that the company intends to attract investors to buy a large number of XRP with the considerable benefits of "increase in the value of the currency." In this regard, XRP buyers certainly have the expectation of making a profit from their investment, and Ripple's first defense was overturned.

Are XRP investors dependent on the efforts of Ripple for their benefit?

The fourth element of the "Howey Test" has always been the most concerned point for the SEC and token developers. The US courts initially required the fourth element to be "relying solely on the efforts of the developer or a third party", among which "only", "developer or third party" and many other factors put forward high requirements for the tokens to be judged, and developers can easily make their tokens fail to meet the relevant requirements. In order to solve this application problem, the US courts interpreted "relying solely on" as "relying to a greater extent" or "mainly relying on". Even if investors have a certain influence on the acquisition of benefits, as long as the profit of the token mainly comes from the efforts of the developer, this element can be met. At the same time, the court's understanding of "effort" no longer distinguishes between the efforts before the token is issued and after the purchase. No matter when the developer makes efforts, it is only required that the efforts play a decisive role in the interests of investors. Since then, the connotation of the element of "relying solely on the efforts of developers or third parties" has been fully enriched. William Hinman, former chairman of the SEC, repeatedly emphasized the efforts of developers or managers to realize investment benefits at the 2018 Yahoo Financial Markets Summit. To be precise, such efforts should be "whether the efforts made by people other than investors are undeniably important efforts and are important efforts that affect the success or failure of the enterprise." At the same time, the SEC issued the "Analysis Framework for Digital Asset "Investment Contracts"" in 2019, which lists a series of behavioral characteristics for judging whether digital asset buyers rely on "the efforts of developers or managers." Referring to the above cases and official documents, we believe that "relying on third-party efforts" in the "Howey Test" should be understood as "relying on the undeniable and important efforts of developers or managers that affect the success or failure of the enterprise." When making specific judgments, the behavioral model provided by the "Analysis Framework for Digital Asset "Investment Contracts"" can be referred to separately.

Although the fourth element of the "Howey Test" has been fully explained above, it is difficult to accurately mark virtual tokens as securities using traditional concepts in the Internet environment. This is because many developers are willing to promote the free trading of functional tokens in the secondary market, so that the use and price fluctuations of their tokens no longer rely on the efforts of developers, but are determined by a wider trading market and traders, or make good use of blockchain technology to build a fully decentralized trading environment and dilute the core position of developers themselves. In particular, since the second half of 2020, decentralized exchanges (such as "Uniswap") have been built on Ethereum, and their transactions are facilitated by smart contracts to buy and sell virtual currencies by unspecified traders. The trading volume even exceeds that of some old centralized exchanges, and the influence of core developers has been weakened. The above situation will directly lead to the fact that investment returns no longer rely on the efforts of specific developers or managers on the surface, and thus do not meet the requirements of the "Howey Test". Similarly, Ripple insists that Ripple investors do not rely on the company's efforts to obtain returns. Once this defense is established, it will give other virtual currency developers great confidence to evade securities supervision, and the risk of virtual currency investment will be further increased, leaving a large number of regulatory gray areas for the country.

In the absence of established rules for new types of problems, we must return to the definition of the "Howey Test" to find answers. It is worth noting that the "Howey Test" emphasizes "whether the efforts of third parties other than investors are undeniable efforts that affect the success or failure of the project", which means: First, the people who work hard for the project can be investors, developers, managers, etc., and this does not deny that investors or the secondary market may affect the success or failure of the project; Second, the efforts of third parties such as developers and managers are the key to the success or failure of the project. Only when the efforts of third parties can still succeed can it be considered that the project does not rely on the efforts of third parties. Therefore, for virtual currencies that rely on the secondary market for profit, if the developer or manager can still affect the price or transaction of virtual currencies in the secondary market, the virtual currency still belongs to the situation of "relying on the efforts of third parties for profit". In this regard, some scholars give examples, saying that the development team builds a network system, issues new tokens, and stimulates the secondary market through social media publicity, which are sufficient to meet the requirements of the Howey Test. The "Analysis Framework for Digital Asset "Investment Contracts"" issued by the SEC also has a few responses to this issue. It believes that when developers, sponsors, and other third parties (collectively referred to herein as "major participants") take the following actions, the more investors rely on their efforts: for example, some important tasks or responsibilities are performed by the major participants rather than by a decentralized community of network users (commonly referred to as a "distributed" network), and investors expect the major participants to complete these important tasks; for example, the major participants determine or maintain the market or price of digital assets. This includes: (1) controlling the development and issuance of digital assets; (2) taking other actions to maintain the market price of digital assets, such as limiting supply or ensuring the scarcity of tokens through repurchases, "destruction" or other activities. For example, major participants play a leading or central role in the continued development direction of digital assets. In particular, they play a leading or central role in deciding governance issues, code updates, or how third parties participate in transaction verification related to digital assets.

In Ripple's defense, it is undeniable that the rise of XRP depends on the secondary market and the behavior of other investors, but the SEC still determined in the prosecution that Ripple's efforts played a decisive role in investors' returns. The logic is that Ripple has vigorously promoted its efforts to promote the issuance of XRP. It is mainly responsible for developing and maintaining the internal ledger verification server to ensure that investors can trade quickly based on open protocols. The company retained 80% of the supply of XRP from the beginning, and even its executives had the final decision-making power over the daily supply of XRP, making XRP largely dependent on the company's management and operation. From the SEC's analysis, we can reasonably infer that Ripple can ensure that the company and investors can make profits by controlling the supply of XRP and ensuring that the currency value remains at a relatively high level, thereby affecting whether XRP can be traded at a technical level. Although the secondary market has an objective impact on the fluctuation of the value of XRP, in Ripple's highly centralized system, it is difficult for XRP to get rid of the management and control of core developers. Therefore, Ripple plays an undeniably important role in the development of XRP. As far as the current situation is concerned, the rise in the value of the currency cannot be separated from the "fueling" of Ripple. Even if the secondary market and other virtual currencies have an impact on XRP, based on the above-mentioned SEC's thinking and the spirit of US securities laws, we can still believe that investors who buy XRP will make a profit by relying on the efforts of Ripple.

In summary, Ripple's defense is difficult to establish. The SEC has made a full discussion in its indictment on how to use the "Howey Test" to determine the securities nature of Ripple. As the above analysis says, Ripple meets all the requirements of the "Howey Test", and there is nothing wrong with the SEC's determination of its securities nature.

Comparison of the legal attributes of Ripple and Ethereum

In addition to denying the securities nature of XRP based on the "Howey Test", Ripple also tried to compare it with Ethereum (ETH), trying to use the reason that Ethereum is not defined as a security by the SEC to exonerate itself. In terms of market value, Ethereum, as the world's second largest virtual currency, is mainly used for transaction payments. Although token holders do not participate in the Ethereum project dividend, they can obtain corresponding income by selling Ethereum. Ethereum is experiencing rapid development from ETH1.0 to ETH2.0, and it has always been a virtual currency weathervane that the US SEC focuses on. In 2018, former SEC Chairman William Hinman expressed the view that "Bitcoin and Ethereum are not securities." Judging from the previous attitude of the currency circle, industry insiders usually put XRP and Ethereum on a par or compare them, or even treat them as equals. The reason is: First, the market value of XRP and Ethereum has a huge influence. In 2018, the market value of XRP exceeded Ethereum and once became the world's second largest cryptocurrency, but was subsequently surpassed by Ethereum. In addition to Bitcoin, the influence and competitiveness of Ripple and Ethereum were once comparable, and they became the object of comparison; secondly, the two are similar in nature. From the perspective of economic function, Ethereum is one of the "currency" payment methods accepted by merchants, and investors can also buy Ethereum for exchange with other tokens. As a fast payment tool, Ripple also has some functions similar to Ethereum. Both are currently widely used trading tools by investors; finally, there are a lot of investment opportunities in both. In particular, with the continuous advancement of ETH2.0, the Ethereum Foundation has built a smart contract platform for investors to pledge Ethereum, and has provided staking services since November 2020. By the end of February 2021, many investors had pledged more than three million Ethereum on smart contracts, hoping to become verification nodes of ETH2.0 to obtain a higher annualized rate of return, which undoubtedly increased the investment possibility of Ethereum in the secondary market.

In Ripple's statement in response to the SEC's lawsuit, executive Brad Garlinghouse once pointed out: "Ripple, as the world's third largest virtual currency with billions of dollars in daily transactions, is not an investment contract, just like Bitcoin and Ethereum as determined by the SEC." So, can Ripple cite relevant statements by SEC officials to prove that Ripple is not a security? The view that "Ether is not a security" actually comes from the speech of former SEC Chairman William Hinman at the Yahoo Financial Markets Summit. The reason for this view is that there is currently no third-party entity that plays an important role in the development of Bitcoin. Bitcoin has long been decentralized in the network. At this time, it is meaningless to require it to disclose relevant information under the federal securities law. Similarly, William Hinman believes that Ethereum has the same characteristics under the current situation. Ethereum, including its decentralized organization, token issuance, and Ethereum trading, is no longer considered a securities transaction. Subsequently, although many Bitcoin and Ethereum developers cited this view to support themselves and successfully evaded SEC supervision, the SEC has not yet agreed with the views of former officials. Whether the view that "Ether is not a security" is correct is still unresolved in the industry. In this regard, in September 2019, U.S. congressmen questioned Jay Clayton, then chairman of the SEC, and asked the SEC to explain the nature of Ethereum. Clayton did not directly express his position on whether Ethereum is a security. In 2019, Heath Tarbert, chairman of the U.S. Federal Commodity Futures Trading Commission (CFTC), said at the Coindesk Investment Conference that both the CFTC and the SEC will carefully consider the upcoming ETH2.0. They believe that the proof-of-stake mechanism (PoS mechanism) established by ETH2.0 will involve securities transactions. In essence, the proof-of-stake mechanism adopted by 2.0 is significantly different from Ethereum's previous mining mechanism, and mining behavior is more decentralized in the network system, so the SEC may review ETH2.0. Although William Hinman previously expressed the view that "Ether is not a security", the official attitude of the United States has changed after ETH2.0 adopted a new PoS mechanism.

From the above disputes, we find that traditional Bitcoin and Ethereum are traded in the blockchain system, which is a "shared, distributed ledger" where all transactions and asset traces are publicly recorded. In this "fully decentralized" environment, Ethereum loses its meaning of being regulated by securities. Therefore, whether Ethereum is still "fully decentralized" is the core of judging whether it is a security.

Some scholars believe that: "In its simplest form, the 'sufficient decentralization' standard requires that the token network system has some basic functions, whether its management is more open and decentralized than a single centralized organization, and whether there are buyers who are not speculators." Others have proposed: "In such a system, it is impossible to find a central organization that decides on matters within the system." However, this interpretation means that no specific entity is responsible for illegal acts. Specifically, according to the relevant provisions of the Securities Law, it will be very difficult to determine the responsible entity for information disclosure and issuance in a "sufficiently decentralized" system. "Sufficient decentralization" has a rich meaning in the blockchain system. If it is judged under the US Securities Law, it will cause more ambiguity and problems. We believe that when understanding its meaning, it should be that the central organization cannot form a state of centralized control by a single organization in the system, or that there are many participants but they should not be unanimous actors. In Bitcoin or Ethereum blockchain networks, we often use "full decentralization" to describe power or the work of managers. Therefore, it emphasizes that: in terms of quantity, the number of power centers or managers must be the majority, not a single group is responsible for the network system; in terms of power form, in decentralized systems such as Bitcoin, power can be everywhere at the same time, not concentrated in a fixed subject, as Melanie Swan said: "Power floats freely."

Ethereum officially claims that the Ethereum Foundation is a non-profit organization dedicated to supporting Ethereum and related technologies. Its role is not to control or lead Ethereum, nor is it the only organization supporting the core development of Ethereum-related technologies. It is just a part of the Ethereum ecosystem. However, from the current promotion mode of ETH2.0, the Ethereum Foundation undertakes the core work of ETH2.0 development and supervision, builds a smart contract platform for pledge transactions, and a group of them formulates relevant rules. The Ethereum Foundation even retains certain shares or interests in digital assets before issuing tokens. Unlike its official statement, the Ethereum Foundation actually plays a vital role in the development of ETH2.0. Investors need to use the PoS mechanism to pledge Ethereum and obtain relevant benefits. At present, there are about 5 million Ethereum locked and pledged by investors, with an annual interest rate of about 5%. This is similar to the income model of investors purchasing wealth management funds. The Ethereum Foundation controls the technical development roadmap of ETH2.0, and some investors are optimistic about ETH2.0 for this reason. The locked-up pledges that may last for about two years in the future will reduce the supply of Ethereum in the secondary market, and the reduction in supply will become the driving force for the rise in Ethereum prices. These conditions have actually affected the current trading price of Ethereum, which runs counter to the requirement of "full decentralization". If measured by the principles of US securities law, William Hinman's previous judgment on the nature of Ethereum may not continue to hold true in the context of ETH2.0. We believe that if the Ethereum Foundation continues to exert the influence of a central organization, Ethereum is likely to be identified as a security based on the principles of US securities law.

The reason for this conclusion is that the Ethereum Foundation has a typical centralized organizational status, which makes it impossible for Ethereum to achieve "full decentralization". If we continue with the above ideas, we find that Ripple and Ethereum are in a similar situation. Ripple has not reached the level of "full decentralization" because Ripple has not adopted the decentralized idea of blockchain technology to operate Ripple. Users of this currency do not obtain Ripple rewards through mining. The 100 billion Ripple coins are uniformly issued and sold by Ripple. Ripple Labs controls the dispersion of new coins. So far, 38.7 billion Ripple coins have entered the market circulation. Ripple Labs will control the supply of tokens under more market demand to increase the value of Ripple. Ripple's status is similar to that of the Ethereum Foundation. Both are committed to building a profit platform for investors. Both use the method of controlling the number of tokens to directly or indirectly raise prices. Ripple is in a core position in the Ripple trading system. Referring to the theoretical discussion of securities law scholars, this behavior is very similar to the manipulation behavior in the traditional securities market.

In summary, although there are still some disputes about whether Ethereum is a security, the views of former SEC Chairman William Hinman are no longer fully applicable to the determination of the nature of Ethereum. William Hinman repeatedly emphasized the "decentralized" characteristics of Bitcoin and Ethereum in his speeches, and it is precisely based on this that the significance and mandatory requirements of securities disclosure may be lost. We believe that from the current changes in the attitudes of the CFTC and SEC towards ETH2.0, Ripple has not achieved "full decentralization", and Ripple and Ripple need to be subject to a series of supervision such as information disclosure under federal securities laws.

Thoughts and inspirations from SEC's lawsuit against Ripple

Since the release of the "94 Announcement" by the regulators in 2017, Chinese regulators have more or less fallen into a one-size-fits-all model of "no regulation, chaos, and death" in the field of virtual currency. Although the relevant policies have effectively resolved the financial risks that may be caused by virtual currency transactions in a short period of time, the original major virtual currency trading platforms in China have "moved" overseas and continued to provide trading services to domestic investors in the form of "export to domestic sales". Therefore, the supervision method during and after the event deserves more attention. With the birth and popularization of Ripple, stablecoin USDT, and NFT (non-fungible tokens) that have been popular since 2021, the relevant financial risks may still penetrate into any corner of the Chinese market. Some scholars believe that although the government has repeatedly issued relevant documents to regulate virtual currencies and prohibit financial institutions from conducting Bitcoin-related businesses, this policy-based suspension of the government has not fundamentally solved the problem. It is better to remove the firewood from the bottom of the pot than to stop the boiling of the soup. Only good laws can provide strong guarantees for its development. Therefore, instead of taking remedial measures after the fact, it is better for regulators to introduce comprehensive risk control measures in advance. The SEC's lawsuit against Ripple shows that Chinese investors should promptly anticipate the risks brought about by regulation; regulators should take initiative, prudence, development and compatibility as the basic regulatory principles, which should be the reasonable attitude of major financial countries towards virtual currencies.

: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : Recently, threatened by lawsuits and potential regulatory penalties in the United States, Binance has begun to downplay the investment attributes of BNB through a series of publicity, focusing on the various payment and transaction functions of BNB, in order to prove that BNB does not belong to securities and stop providing services to US users, in order to evade the jurisdiction of US securities regulatory agencies and judicial systems.

: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : In the absence of effective protection by regulatory agencies, investors' rights and interests face huge risks. Therefore, in response to risks in the field of virtual currency investment, China's financial regulatory agencies should strengthen supervision on illegal and criminal activities such as financial fraud, money laundering, tax evasion, and illegal issuance of securities, and other risk activities that endanger investors' interests, actively promote the relevant judicial trial process, and use potential litigation threats and standardized guidance for some illegal and irregular acts to make a difference in the protection of investors' rights and interests. With the coordination of regulatory agencies, judicial institutions will be encouraged to unveil the true veils of some blockchain virtual currency project parties and virtual currency trading platform legal persons, review the identity of actual controllers in all aspects, ensure that relevant cases fall within the jurisdiction of my country, and effectively protect the legitimate rights and interests of investors.

Finally, in the face of a wide range of virtual currency trading markets, it is particularly important to strengthen investors' own risk education. Once a specific virtual currency is recognized as a securities by US regulators, it will cause huge fluctuations in the market and affect the interests of investors. Therefore, investors from all countries must clearly understand the nature of each virtual currency and learn how to make the right investment choices. The SEC has set up an investor website to provide individuals with free interpretation of virtual currency trading policies and Q&A responses, repeatedly emphasizing that "understanding professional investment background and legal norms is the most important first step in protecting property." This practice of the US SEC is also a valuable reference for Chinese peers, providing a reference for pre-protecting the property rights and interests of Chinese investors.