Kyle Samani, the Managing Partner at Multicoin Capital, laid down his reasons for why 5 of the top 10 cryptocurrencies are securities. This comes after the SEC took a somewhat concrete stance on the position of cryptocurrencies as securities.
During Yahoo Finance’s All Markets Summit, William Hinman from the SEC said:
“If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.”
Taking up this quote, Samani set out to determine which of the top 10 cryptocurrencies were securities. This quote is a concrete determinant of what the SEC considers a security, especially in the cryptocurrency space. Samani established his argument with the definition of decentralization as stated by the Balaji Srinivasan, CTO of Coinbase. Srinivasan divided a blockchain into six essential subsystems which determine whether it is centralized or not. If one of these 6 is centralized, then the system is centralized.
After establishing this, Samani considered the decentralization of a blockchain by the number of implementations built by independent teams. This was in response to the second part of the SEC’s statement.
Ethereum [ETH] was determined to not be a security, due to the multiple implementations of the client. While the Ethereum Foundation created 3 of the 4 most widely used implementations, namely Geth, py-Eth, and cpp-Eth, the Parity Foundation created Parity. The Parity client involves 1/3rd of the market share, making Ethereum sufficiently decentralized. Samani said:
“Or if you think about it another way, let’s say that we could instantly destroy all Ethereum clients produced by the Ethereum Foundation, would the Ethereum network still run? Yes.”
He went on to explore the other avenues of decentralization as stated by the Srinivasan. With all significant PoW coins currently being mined by less than 20 mining pools, the requirement for decentralization was satisfied. Non-PoW coins, however, are subject to Sybil attacks.
Sybil attacks are when a reputation system on a blockchain is subverted by forging identities. Coins running on validator nodes are especially vulnerable to these kind of attacks.
Samani stated that Litecoin [LTC], Bitcoin Cash [BCH], and Ethereum Classic [ETC] were not securities due to their similarities to Bitcoin and Ethereum, which were already declared as not being securities.
On Ripple [XRP], he said that it was “almost certainly a security”, as there was only 1 implementation, and because Ripple owns 60% of all XRP tokens. The network also exists to facilitate transactions driven from Ripple’s software, and the tokens are sold on an open market. According to Samani, this qualifies Ripple as a security.
He stated that Stellar Lumens [XLM] is also a security, due to there being only 1 implementation and the Stellar Foundation holding 90% of all tokens.
He also said IOTA [MIOTA] and Tron [TRX] were securities. He assumed that Cardano [ADA] has only one implementation, and confessed to not knowing how many tokens the foundation behind it owned.
On EOS [EOS], Samani said:
“EOS – only 1 implementation. B1 [Block.one] owns 10% of tokens. B1 clearly did not launch the chain. If I were B1, I’d encourage the community to build another EOS implementation. This, combined with the fact that BPs clearly are independent businesses, could make EOS a utility quickly.”
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