Is Chainlink A Security


I hope your holiday season is going great. Things have been quite hectic lately but the dust is settling and I am happy to be back making content.

Ripple is now involved in a legal battle with the SEC and the outcome of this case will have sever ramifications for the entire crypto sector. Let’s see what is going on.

The price of XRP is down a shocking 60+% from just a few days ago. The SEC has filed suit against XRP/Ripple claiming they illegally partook in the selling of securities (XRP) without the proper regulatory oversight. 60% drops in crypto are not unheard of but that usually happens to shitcoins.

There is a lot to unpack here. Firstly, the most important thing to know is that the SEC most likely is NOT going to stop with XRP. This could be the first of many suits. We need to try and understand this situation as best as possible because it is not outside the realm of possibility that the SEC would come after one of the coins we currently own. If that were the happen, the price of said coin was drop dramatically as did XRP.

What Is a Security

“The term "security" includes an "investment contract," as well as other instruments such as stocks, bonds, and transferable shares”

This quote is directly from the SEC website. Personally, I do not find that definition to be even slightly helpful. The quote is from an article that shows the framework released by the SEC to help investors determine if they are buying a security or not. You can read the entire article here:

SEC - Digital Asset Analysis

The current test for deciding if a virtual currency is a security is called the “Howey Test”. The Howey Test refers to a 1946 case which reached the Supreme Court, SEC v. W.J. Howey Co., a lawsuit involving the Howey Company of Florida. This company was a citrus farm which operated on a large swath of land in the southern portion of the state. Avoiding the details, the case was trying to figure out if land itself could be deemed a security.

This case is what regulators are referring to when they try to determine what is a security. For a virtual currency to be deemed a security it must meet the following standards.

  1. Are You are Investing Money?

  2. Do You Expect Profits from Your Investment?

  3. Are You Investing in A Common Enterprise?

  4. Will You Profit from the Efforts of a Promoter or Third Party?

All four elements must be met in order for a token or coin to be a security.  

What Makes XRP A Security

Ripple made a few crucial mistakes in the past the I believe led to this situation.

They are as follows.

  1. In 2013 Ripple received legal advice that selling XRP may be a violation of securities law and they went forward anyway. How the SEC knows this I don’t know but they mentioned it in the suit.

  2. Secondly, Ripple raised 1.38 Billion dollars during their year long offering. They then used these proceeds to maintain secondary trading markets and develop a use for XRP.

  3. The founders of Ripple , Garlinghouse & Larsen, personally profited over $600 million dollars from these sales.

  4. Garlinghouse continues to tout how he was “long” XRP , which means he had a certain expectation of profit.

Looking at the Howey test you can see some issues. Ripple is the company which operates and manages the future of Ripple. This certainly would classify as a common enterprise managing the situation. They also sold XRP as an investment to U.S. citizens which ticks another box. Ultimately, Garlinghouse continually talking about being long XRP I believe to be the straw that broke the camels back. It is impossible to argue that there is no “expectation of profit” when the CEO is commonly seen making statements that any rationale person was assume to be talking about an investment.

Is Ethereum A Security?

Here is what a few SEC regulators had to say about Ethereum in regards to the Howey Test.

Ethereum is most likely not a security under existing United States laws, as previously said by U.S. Securities and Exchange Commission (SEC) Division of Corporate Finance head William Hinman.

"Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,” Hinman said on June 14, 2018.

Furthermore, former SEC chair Jay Clayton went on to say

“I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract. If, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.”

Essentially, Clayton is saying if there is no centralized body doing the leg work for the investment vehicle at hand, than is it not a security.

An extremely important detail to note.

It isn’t always that easy to determine if a coin is a security or utility token. In many instances, a token starts off as a security during an ICO but later evolves into a utility token. This scenario is the case for the hugely popular cryptocurrency Ethereum (ETH). In a June ruling, the SEC determined that Ethereum operated as a security initially, but today it’s a utility token. To make matters more complicated, a utility token such as ETH can have security tokens issued on its platform. Ethereum’s ERC-20 protocol is the most popular token launching protocol in the cryptospace

The SEC itself admits that Ethereum is NOT a security but previously was. So what the hell does that mean? Will the SEC be OK with coins that appear to be securities now but will eventually not be securities? They do not appear to be pursuing Ethereum even knowing it was previously a security.

The entire situation is extremely cloudy. It is basically impossible for anyone to know if they are investing in a security or not.

Utility Tokens

Utility tokens serve a use within a platform. In most cases, companies host ICOs to issue utility tokens. These tokens are essential to the functionality of their platforms. Additionally, they do not give token holders rights to the company’s future development or profits. These tokens transfer without regulations, and any company can offer utility tokens without meeting SEC regulations. The open nature of these tokens made them a favorite amongst investors and startups.

Today, utility tokens are more commonly referred to as “digital assets“.

Utility tokens are NOT securities. These tokens are issued to fund development of the platform and can later be used to redeem a service from the issuer. The fundamental difference is that you are not expecting any sort of profit. When I buy Chainlink, theoretically, I am buying it so at some later date I can call an oracle for data to be sent into my smart contract. This is where Ripple shot themselves in the foot by frequently talking about the price of XRP appreciating.

Is Chainlink A Security

I am going to focus on Chainlink here because it is the biggest position in the charity wallet and I know the most about Chainlink by far.

The SEC is a body of the United States government. During the Chainlink ICO the team very clearly stated that U.S. investors are not allowed to partake in the sale. This should mean that at the very least, the Chainlink ICO was outside SEC jurisdiction. The following is a picture from the Chainlink ICO fine print.

Furthermore, Sergey Nazarov ( Chainlink Co-Founder), has been extremely adamant about never talking about price. I have watched every single interview Sergey has done, not one single time did Sergey ever speak about the price of LINK or any type of expectation of profit. This is a key point. Sergey and Co. have never said anything that would lead anyone to believe Chainlink is an investment. Rather, the only thing someone should be buying LINK for, is to call upon an oracle for smart contract data. It just so happens that I, and many others, believe that the price for LINK will rise substantially in the future. However, there has never been any official statement talking about using LINK as an investment .

The Chainlink ICO raised $32 million dollars in funds. Compare this to the $1.38 billion that Ripple raised. This in and of itself does not eliminate LINK from being a security, but in the grand scheme of things a $32 million dollar ICO is a very different story than nearly $1.4 billion.

Furthermore, Chainlink is listed on Gemini, a New York based exchange. Gemini gets clearance for all assets listed by the NYSDFS - New York State Department of Financial Services .

Gemini would not have listed LINK if they were concerned that it would be deemed a security. They never listed XRP.

Finally, The Crypto Rating Council has gone through numerous cryptocurrencies and rated their likelihood of being deemed a security. Chainlink received a 2, the same rating as Ethereum, while XRP received a 4. 4 is the highest rating and means very likely to be a security. This council does not have any regulatory power.

Crypto Rating Council

I strongly urge you to go through their website and read their ratings. The team is made up of big names and exchanges in the cryptocurrency space. The entire point of the website is to give investors a quick rundown as to which cryptos are securities. Again, they do not have any regulatory power but they seem to be pretty objective in their ratings.

This is a short list on Chainlink related material. There is plenty more I could put on here, but as of now it seems all signs point to Chainlink NOT being a security. This could be wrong and is in no way financial or investing advice. As a disclosure, I hold LINK and will continue to do so with very little concern about SEC filings.

If, however, the SEC were to decide they want to go after Chainlink the result would be pretty dramatic. All U.S. based exchanges would drop support for LINK and the future for their operation with American companies would be in jeopardy. It is possible this happens but I do not see it as likely.

Ultimately, when you are investing in a new space such as Cryptocurrency, there is going to be regulatory risk. We are invested into a space at such a young age that the biggest regulatory boards in the country do not even know how to handle it. This leaves to door open to major risk. The flipside of that is extreme reward. Consider that just a few years ago Bitcoin and Ethereum did not even warrant the SEC’s attention. And yet here we are a few short years later and the SEC is scrambling to get a hold of the situation. It just goes to show that crypto is finally arriving on the scene and it is not going anywhere anytime soon.

Happy holidays to anyone who reads this. I wish a prosperous and successful 2021.