The SEC Just Said Bitcoin And Ethereum Aren't Securities

Bitcoin (BTC-USD) and other leading cryptocurrencies are rebounding somewhat from their recent losses after welcome news today from the Securities and Exchange Commission. In a speech, an SEC official clarified that bitcoin and Ethereum are not securities, but that some other cryptocurrencies and initial coin offerings (ICOs) might be. If an asset is classified as a security, it becomes subject to much more regulatory scrutiny.

This article originally appeared in The Motley Fool.

Here's what this news is doing to cryptocurrency prices, how the SEC will determine which cryptocurrencies and ICOs are securities, and what this means for investors.

Today's cryptocurrency prices

Here's a look at the 10 largest cryptocurrencies by market capitalization, and how much the price of each has changed over the past 24 hours.

What is a security, anyway?

William Hinman, the head of the SEC's Division of Corporation Finance, specifically said that bitcoin (BTC-USD) and Ethereum (ETH-USD) are not securities, but that other cryptocurrencies and many (but not all) ICOs are.

For some more color, Hinman said, "central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers." In other words, does a third party expect a return? Did a certain company, person, or group create or market the asset?

Hinman didn't single out any cryptocurrencies that are securities, but did say that a centralized third party and purchasers who expect a return are some telltale signs.

Which cryptocurrencies could be in the clear?

Bitcoin (BTC-USD) and Ethereum (ETH-USD) in particular are decentralized, which is why Hinman singled them out. Other decentralized cryptocurrencies are also likely in the clear. For others, like Ripple, which have a central party that created and distributes the coins, it's difficult to say whether they'll avoid security status.

ICOs are also tricky. If they are structured as consumer items, they can potentially not be classified as securities. The key is whether they're being sold as an investment opportunity or not.

Positive news on two fronts

For cryptocurrency investors, especially those invested in bitcoin (BTC-USD) or Ethereum (ETH-USD), this is good news in two different respects. First of all, it means that bitcoin and Ethereum won't be scrutinized as securities by the SEC and will likely continue to be treated as intangible property.

Second, it gives some much-needed clarity to previous comments by the SEC. As I've said many times, regulations aren't necessarily bad. In fact, the right kind of regulation is essential if cryptocurrencies are going to make the leap into mainstream payment methods. It's regulatory uncertainty that's bad for the markets. Today's news gives a much-desired step toward regulatory clarity and is therefore being welcomed by cryptocurrency investors with open arms.

Matthew Frankel has no position in any cryptocurrencies mentioned. The Motley Fool has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.