Ethereum (ETH), the second-largest cryptocurrency by market capitalization, is currently facing scrutiny from the U.S. Securities and Exchange Commission (SEC) regarding its classification as a security. Recent reports suggest that the SEC is deliberating whether to categorize ETH as a security, a decision that would have significant implications for the cryptocurrency market and the Ethereum ecosystem.
This classification debate has sparked discussions among both the crypto community and regulators. If the SEC determines that Ether is indeed a security, it could result in various outcomes that would impact the crypto market and the operations of Ethereum. These consequences may include regulatory compliance requirements, potential legal actions, market volatility, and changes in the development and usage of Ethereum.
The road ahead for Ether seems challenging. The SEC is currently debating whether to classify ETH as a security and has issued subpoenas to three organizations as part of its investigation into the Ethereum Foundation, which powers the Ethereum blockchain network. This announcement comes after the SEC’s reluctance to approve spot ETH exchange-traded funds (ETFs), leaving applicants like Hashdex and ARK 21Shares awaiting final rulings in May. While the agency approved 11 Bitcoin ETFs earlier this year, it seems that ETH ETFs will face regulatory hurdles.
On February 26, the Ethereum Foundation’s GitHub page revealed that the group had received a voluntary inquiry from a state authority, which included a requirement for confidentiality. Since the introduction of Bitcoin in 2009, there has been ongoing debate about whether cryptocurrencies like Ether should be considered currency, securities, or commodities. SEC Chair Gary Gensler, known for his tough stance on crypto regulation, has referred to the bitcoin industry as the Wild West, emphasizing the need for regulation. The SEC’s recent actions have cast doubt on the possibility of spot Ethereum ETFs.
The Ethereum blockchain network, which recently underwent a significant upgrade, is home to numerous decentralized finance (DeFi) applications, and the SEC’s decision is likely to have an impact on the crypto market.
Several digital asset lawyers have stated that the Ethereum Foundation’s voluntary inquiry is not a cause for concern, as it is a common practice for crypto companies to receive subpoenas. The removal of the Ethereum Foundation’s canary, which indicates whether a government has probed a website, was an expected move. Following ETH’s proof-of-stake update, SEC Chair Gary Gensler mentioned that proof-of-stake chains, which reward users with tokens for locking up their money as a security mechanism, could be considered securities. However, he did not specifically mention ETH.
Gensler has filed lawsuits against various U.S.-based and foreign crypto exchanges, including Coinbase, Kraken, and Binance, alleging that they sold securities to U.S. customers without the necessary registrations. These lawsuits involve assets like Cardano (ADA) and Solana (SOL).
While ETH has never been explicitly identified as a security in an SEC enforcement case, crypto attorney Ignacio Ferrer-Bonsoms finds this inconsistency puzzling. In a recent blog post, Ferrer-Bonsoms compared ETH to Cardano, arguing that if the SEC believes one to be in violation of securities rules, it should also scrutinize the other. Both the Ethereum Foundation and the Cardano Foundation raised millions of dollars through token sales to fund network development and govern their respective networks through foundations based in Zug, Switzerland. They also distribute tokens to their founders and foundations.
A U.S. federal judge recently criticized the SEC for its “gross abuse of power” and “deliberately perpetuating falsehoods” in a dispute with crypto startup DEBT Box. Furthermore, a three-judge appeals panel condemned the agency’s years-long prohibition of spot bitcoin ETFs as “arbitrary and capricious.”
In conclusion, if the SEC is trying to make a case against spot ETH ETFs by targeting the underlying asset, it must have a strong justification.