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CoinDesk and recent reports from Fortune indicate that the U.S. Securities and Exchange Commission (SEC) is preparing to classify Ethereum (ETH), the native token of the second-largest blockchain, as a security. This move is poised to have a significant impact on the entire crypto industry, including disrupting plans for a spot ETH ETF.
Fortune, citing several unnamed sources, reports that the SEC has summoned several U.S. companies to provide documents related to their dealings with the Ethereum Foundation. The Ethereum Foundation is a Swiss-based nonprofit organization that spearheaded the launch of the Ethereum blockchain. Apparently, the investigation began shortly after the introduction of Ethereum staking in the Merge event in 2022.
Shortly after the Ethereum PoS upgrade, SEC Chairman Gary Gensler stated that PoS chains, which pay token rewards to users for locking their tokens as part of the security model, similar to investment contracts, could be classified as securities—though he did not mention ETH specifically. However, he has filed lawsuits against several U.S. and international cryptocurrency exchanges, including Coinbase, Kraken, and Binance, alleging that they sold securities to U.S. investors without proper registration. Assets such as Cardano (ADA) and Solana (SOL) are included in these lawsuits.
In the SEC's enforcement actions, ETH has never been directly designated as a security, which crypto lawyer Ignacio Ferrer-Bonsoms finds contradictory. In a recent blog post, Ferrer-Bonsoms compared Ethereum to Cardano, arguing that if the SEC finds one party in violation of securities laws, it must consider the other in the same way. Both the Ethereum and Cardano foundations raised millions of dollars through token sales to fund network development (BTC raised $18.3 million and $62 million, respectively); both manage their networks through foundations based in Zug, Switzerland; and both distribute tokens to their founders and foundations. Additionally, both foundations are dedicated to increasing the value of their tokens. Ferrer-Bonsoms pointed out that Ethereum's burning mechanism was introduced in the EIP-1559 upgrade in August 2021, which occasionally causes deflation in the network. "This way, investors may perceive the token as an investment with appreciation expectations," he wrote.
Indeed, unlike Bitcoin (BTC), which is the only cryptocurrency explicitly classified as a commodity under U.S. law, members of the Ethereum founding team remain very active in the industry. Vitalik Buterin, despite announcing a soft retirement on his 30th birthday, continues to regularly introduce new ideas for Ethereum tools and influence the network's roadmap, while Joseph Lubin oversees the influential Ethereum incubator ConsenSys. While there is technically a Bitcoin Foundation, it has little influence and does not pay salaries to Bitcoin core developers.
The best argument against classifying ETH as a security is that, until now, it has not been one, and changing its status would have serious consequences. "It's 'you can't change your mind arbitrarily, or you'll cause tens of billions of dollars in losses to people ten years later,' and the CFTC may counterattack for the same reason," said Austin Campbell, assistant professor at Columbia Business School. Former CFTC Commissioner and current a16z Crypto Policy Head Brian Quintenz responded to this on X, stating that when the SEC approved ETH futures ETFs for trading on its regulated securities exchanges in October 2023 (a few months after the merge), "it explicitly acknowledges the non-security status of the underlying asset ETH." Quintenz added, "Given that the SEC has notified the market that ETH is not within its jurisdiction, it will be interesting to observe what justification (if any) it uses to delay or deny an ETH ETF." It is worth noting that the day before this news was released, the U.S. Securities and Exchange Commission faced unprecedented judicial sanctions for "grossly abusing its power" in its lawsuit against cryptocurrency company DEBT Box.
Brian Frye, Spears-Gilbert Law Professor at the University of Kentucky, suggests that the best reason to oppose classifying ETH as a security is that "ETH seems more like BTC than any other token." He added that the SEC has repeatedly stated that it considers Bitcoin to be a commodity, not a security...mainly due to lack of central control." Frye acknowledges that the existence of the Ethereum Foundation casts a shadow of doubt on this argument. However, it is undeniable that, apart from the founding company, Ethereum has thousands of stakeholders. In some areas, Ethereum can be considered more decentralized than Bitcoin—including the number of applications and developers running on it.
Furthermore, IntotheBlock found that as of six months ago, the number of long-term ETH holders (73.5 million) is more than twice that of Bitcoin (33.61 million). There are 5,370 addresses holding 1,000-10,000 ETH, but only 1,920 addresses holding 1,000-10,000 BTC.
Given Gensler's apparent hostility toward cryptocurrencies, as he believes the industry is rife with fraud and financial abuse, none of this may matter. Ironically, almost everyone in the cryptocurrency space hopes that Gensler spends his time prosecuting actual crimes rather than harassing legitimate businesses or attacking decentralized protocols.
Frye believes that this blatant overreach may lead to Gensler's downfall. "The SEC's practice is so extreme that it's likely to collapse. It relies on Howey, which provides an extremely broad definition of 'security,' giving the SEC very broad regulatory powers," he said, referring to one of the tests the agency uses to define an "investment contract." But the Supreme Court can change Howey. And the more the SEC tightens its regulation, the more likely cases will be submitted to the Supreme Court. Once there, the Supreme Court is likely to 'clarify' Howey by narrowing its scope. |
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Post time 12-4-2024 06:57:19