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The SEC turns up the heat on cryptocurrency

This time, its sights are set on regulating Ethereum

Photo (c) rclassenlayouts - Getty Images
A new report has surfaced that regulators are taking a harder look into the possibility of regulating cryptocurrency.

The Wall Street Journal reported Tuesday that the Securities and Exchange Commission (SEC) is once again investigating the regulation of cryptocurrencies.

This time, however, it’s the digital currency Ethereum that’s the target. The digital currency’s development was "probably an illegal securities sale,” the Journal said, citing sources acquainted with the situation.

Those sources infer that regulators are assessing whether Ethereum’s developers “exert significant influence over their value, in the same way a company’s stock price depends on its managers and their strategy, performance, and investments.”

The SEC rattled its sabre earlier this year over concerns of fraudulent and manipulative trading practices. The agency views cryptocurrency the same as it views any stock or bond, and it wants exchange platforms dealing in cryptocurrency to register with the SEC as a legitimate securities exchange or prove that it’s exempt from registration.

Misleading and harmful

“Ethereum that the EtherIndex is based on is representing one of the most misleading, harmful, and questionable existing large projects in the cryptocurrency space,” wrote cryptocurrency observer Alen Lee is his comments to the SEC regarding a proposed rule change for the Listing and Trading of Shares on the EtherIndex.

“Ethereum is very likely an unregistered security who's [sic] rules were changed while profiting the foreign group in charge while damaging the properties and value proposed to the investors,” Lee commented.

Aren’t all cryptocurrencies the same?

It’s true that cryptocurrencies share many similarities, but there are several key differences. All are digital assets designed to function as an exchange medium -- like a dollar or a euro -- but they use cryptography variants to secure transactions, control the creation of additional units, and verify the transfer of assets.

At the center of the SEC’s focus is ether, the core asset of Ethereum’s blockchain, the same technology that runs Bitcoin.

“Ether is a necessary element — a fuel — for operating the distributed application software platform we are building: ethereum,” is how the Ethereum Foundation explained its purpose when Ethereum first came on the scene in 2014.

"Without the requirement of payment of ether for every computational step and storage operation within the system, infinite loops or excessive storage demands could bog down ethereum and effectively destroy it," wrote the Foundation.

The Ethereum Foundation’s initial sale hauled in more than 31,000 Bitcoin in July 2014. Ether was worth about $18.3 million at the time but it’s valued at more than $285 million now. Because investors were speculating that the launch would result in a rise in asset value, the deal looked just like a security, the Journal said.

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