SEC Reignites Ethereum Debate Yet Again: Security or Not?

SEC’s alleged efforts to classify Ethereum as a security reignite long-standing debate over the coin’s regulatory status.

Gary Gensler wants to put Ethereum in the hot seat of fire.
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  • The SEC renews debate on Ethereumโ€™s securities status.
  • The crypto community is split on Ethereumโ€™s securities status.
  • A ruling on ETH being a security has wide-reaching implications.

The US Securities and Exchange Commission (SEC) has earned an increasingly anti-crypto reputation through enforcement actions and unclear regulatory stances. Critics argue that the agency has unfairly penalized crypto firms, including suing exchanges for failing to adhere to registration requirements while refusing to provide clear guidance on what those rules entail.

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Adding fuel to the fire, the SEC has signaled its intent to revisit Ethereum’s classification. Long considered a commodity, the regulatory watchdog is reported to be exploring whether ETH should instead be deemed a security. This renewed scrutiny has reignited a fiery debate, with Ethereum supporters vehemently opposing such a move that could have wide-ranging ramifications for the entire ecosystem.

SEC Wrong Claim Ethereum Supporters

Leading the Ethereum supporters to oppose the securities agency, Congressman Patrick McHenry argued that SEC chair Gary Gensler lacks the authority to reclassify Ethereum as a security unilaterally. McHenry contended this contradicts assessments from the Commodity Futures Trading Commission (CFTC) and the SEC’s previous position.

Coinbase’s chief legal officer, Paul Grewal, echoed these sentiments, highlighting the SEC’s longstanding position that ETH is a commodity, not a security. Grewal referenced past statements from SEC officials, including Gensler testifying before Congress in 2018, that Ethereum was not a security. Furthermore, Grewal asserted the transition to a proof-of-stake (PoS) chain in 2022 does not alter ETH’s status, as there is no ongoing investment contract tied to a business enterprise under the Howey test.

Reflexivity Research co-founder Will Clemente questioned the SEC’s chances of winning this fight given BlackRock’s recent application for an Ethereum ETF and the companyโ€™s near 100% track record in ETF approvals.

Although ETH supporters are confident the SEC cannot win this fight, others contend that Ethereum is undoubtedly a security, giving the agency a strong shout in reclassifying the token as such.

ETH Not Decentralized

In agreement with the SECโ€™s bid to reclassify Ethereum as a security, crypto lawyer Preston Byrne drew attention to a 2018 article he wrote, highlighting his concerns over the projectโ€™s 2014 token pre-sale. 

Byrne’s analysis focused not on the legality of the pre-sale itself, but on whether the Ether tokens were widely distributed or concentrated among a small group. He concluded that the distribution to a handful of buyers casts doubt on the projectโ€™s decentralized claims.

Former SEC director William Hinman cited Ethereumโ€™s purported decentralization as key to his view that the token is a commodity and not a security, per Hinmanโ€™s now infamous speech at the Yahoo Finance All Markets Summit in 2018. 

โ€œAnd putting aside the fundraising that accompanied the creation of Ether, 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,โ€ remarked Hinman.

This is the position held by the CFTC, with CFTC chair Rostin Behnam testifying โ€œWe would not have allowed the Ether futures product to be listed on a CFTC exchange if we did not feel strongly that it was a commodity assetโ€ before a Senate Agriculture Committee hearing in March 2023.

Nonetheless, Jan3 CEO Samson Mow weighed in, on the matter, bluntly stating “Ethereum will be deemed a security (it obviously is),” without further explanation. However, Mow did posit that the SEC’s renewed scrutiny stems from a desire to reject pending and future altcoin ETF applications.

Probe Reopens Debate

Community ramblings on Ethereumโ€™s securities status were triggered by reports that the agency has issued subpoenas to multiple crypto companies, demanding documents and financial records related to their dealings with the Ethereum Foundation. The subpoenas began in September 2022, shortly after Ethereum switched to a PoS chain. But sources indicate more recent demands for documentation on the matter.

Different sources concluded that Ethereumโ€™s change to a PoS chain gave the SEC impetus to attempt to reclassify ETH as security. A request to the agency for clarification was met with a statement that the agency does not comment on โ€œthe existence or nonexistence of a possible investigation.โ€

On the Flipside

  • Cryptocurrency classification as either a commodity or security only determines which regulatory body has oversight, with the SEC covering securities tokens and the CFTC overseeing commodity tokens.
  • It is not necessarily correct to assume classification as a commodity allows for more lenient regulatory oversight.
  • ETH is up 5% over the last 24 hours, suggesting the market does not consider renewed securities concerns of consequence.

Why This Matters

The outcome of renewed scrutiny over Ethereum’s security status has far-reaching implications for the entire cryptocurrency ecosystem. A ruling that deems ETH a security could subject it to more stringent regulations, hampering innovation and adoption. Moreover, it would be logical to classify all PoS tokens as securities.

Find out the latest on the SECโ€™s lawsuit against Ripple here:

SEC vs Ripple Final Dates Set: Is a Ruling Here at Last?

Crypto scammers exploit Hong Kongโ€™s e-HKD, fostering further CBDC uncertainties. Read more here:

CBDC Uncertainties Deepen as Crypto Scammers Target e-HKD

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Samuel Wan

Samuel Wan is a reporter at DailyCoin covering market affairs. Samuel's has holdings in Bitcoin and Cardano, with other minor holdings across the market.

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