DevCon 2: Ethereum may not pass Howey Test in US securities law

Ethereum DevCon 2 got underway in Shanghai on 19 September, with some key themes such as scaling, state channels, storage and security all converging towards the community's vision of how the internet should be.

Taking to the stage, Ethereum core developers Dr Christian Reitwiessner, Alex Van de Sande, Martin Becze and chief scientist Vitalik Buterin, outlined points including making the Ethereum Virtual Machine (EVM) modular, working on security for smart contracts via a reboot of the Mix IDE (Remix), which in turn could be deployable on Swarm, Ethereum's file storage system.

Alex Van de Sande talked briefly abut Mist, the Ethereum wallet which he has led design on which has seen over 20 beta releases. "Our own vision of the internet where roads may be better than railroads," he said, referring to a talk he plans to give later in the week. The analogy, to show existing pathways can be put to good use, is about roads enduring over time without the need to be maintained, whereas railways become unusable.

Vitalik Buterin said in general his work has been focused on the research side, including things like proof of stake, sharding and ring signatures. The other part of Ethereum is working with the code that is out there. "The thing I am most excited about is the release of the light client. So now you can use Ethereum without synching the whole blockchain," he said and received a round of applause.

Security and smart contracts is front and centre in the minds of the Ethereum community. The DAO exploitation saw $60m siphoned from hugely overloaded $150m cash bounty of a contract on Ethereum, which resulted ultimately in a hard fork of the network.

As if to serve as reminder, a hack of the network happened just prior to the conference starting – apparently the words "Go home" were posted in German via a smart contract. This slightly delayed the start of the conference, but was quickly fixed.

One of the first presentations came from Peter Van Valkenburgh of Coin Center, a Washington DC-based non-profit that provides an interface between existing law and regulations, and the world of cryptocurrency and blockchain.

In a talk titled, Regulatory Consideration for Dapp Development, he said the Securities and Exchange Commission was surprisingly well acquainted and up to speed with the DAO debacle. He also said that regulators and the wider financial ecosystem have recognised the importance of blockchains within the world of securities, but that this must be confined to a permissioned environment, or private blockchains only. Valkenburgh said he regards this view as "immature".

He said US securities law is deliberately implemented in a broad and wide-ranging manner stretching back to the Howey Test for securities, and as such could cover the purchasing of app tokens.

But he did invoke a key finding within the letter of the securities law regarding Ethereum. The law does not class entities as securities if they have a clear utility value. Ether, which is essential to use the EVM and run contracts, is a very good example of this, he said.

"An example might be a golf course I am trying to sell interest in. If it's not built yet, then it's a security. But if it is built then I'm looking for membership and that's okay. If something is not built yet, it's more likely to be a scam," he added.

With this in mind he issued a warning to developers in the cryptocommunity, strongly suggesting the avoidance of terms that will attract the attention of securities regulators – the most obvious being initial coin offering (ICO).

"Avoid language that suggests securities issuance, profit sharing or endorsing risky ventures. Remember to consider your appetite for regulatory risk; being a promoter is largely seen as equal to being an issuer."