Why shouldn’t the SEC classify Ethereum as a security?

The U.S. Securities and Exchange Commission is planning to classify Ethereum (ETH), the native token of the second-largest blockchain Ethereum, as a security, according to recent reports from CoinDesk and Fortune. This decision could have far-reaching consequences for the entire cryptocurrency industry, and in particular could derail plans to move forward with a spot ETH ETF.

Fortune magazine quoted several unnamed sources as reporting that The U.S. Securities and Exchange Commission has subpoenaed several U.S. companies, requiring them to provide documents related to their dealings with the Ethereum Foundation. The Ethereum Foundation is a Swiss-based non-profit organization that organized the launch of the Ethereum blockchain. Apparently, the investigation began shortly after the 2022 Merge incident that introduced Ethereum staking.

Shortly after Ethereum’s PoS upgrade, SEC Chairman Gary Gensler said that PoS chains pay users token rewards for locking their tokens as a security model, Similar to investment contracts, they can be classified as securities - although he did not mention ETH.

He has filed lawsuits against multiple U.S. and international cryptocurrency exchanges, including Coinbase, Kraken and Binance, accusing them of selling securities to U.S. investors without proper registration, including Cardano (ADA) and assets like Solana (SOL).

ETH has never been directly designated as a security in SEC enforcement actions, a fact that conflicted cryptocurrency attorney Ignacio Ferrer-Bonsoms. In a recent blog post, Ferrer-Bonsoms compared Ethereum to Cardano, arguing that if the SEC believes one violated securities laws, it must consider the other in the same way.

Both the Ethereum Foundation and the Cardano Foundation have raised millions of dollars through token sales to fund network development. The Ethereum Foundation has raised approximately $18.3 million in Bitcoin through token sales, while the Cardano Foundation has raised approximately $62 million. Both foundations are based in Zug, Switzerland, and manage the development of their respective networks. Additionally, they allocate tokens to their founders and foundations to support the development and promotion of the project. This fundraising model provides financial support for the development of these two blockchain platforms, promoting their development and innovation in the cryptocurrency field.

Additionally,

Both foundations are specifically dedicated to increasing the value of their tokens. Ferrer-Bonsoms noted that Ethereum’s burn mechanism was introduced in the August 2021 EIP-1559 upgrade, which makes the network (sometimes) deflationary. “In this way, investors may view the token as an investment with expectations of appreciation,” he wrote.

Unlike Bitcoin (BTC), Ethereum is another cryptocurrency that is clearly defined as a commodity by U.S. law. Ethereum’s founding team members still play important roles in the cryptocurrency industry. Although Vitalik Buterin announced his soft retirement on his 30th birthday, he still regularly introduces new Ethereum tool concepts and has an impact on the development path of the network. Another important figure, Joseph Lubin, leads the Ethereum incubator ConsenSys, which has considerable influence in the industry.

Although the Bitcoin Foundation technically exists, its influence is extremely limited and does not fund the salaries of Bitcoin Core developers.

Reason against classifying ETH as a security

That is to say, Not everyone agrees that Ethereum is a security. On top of that, the SEC’s smaller sister agency, the Commodity Futures Trading Commission (CFTC), has allowed ETH futures trading for years, meaning it is a commodity. And, in the CFTC’s lawsuit against Sam Bankman-Fried, the agency flatly stated that ETH is a commodity (like BTC and USDT).

In fact,

The U.S. Securities and Exchange Commission’s unilateral determination that ETH is a security will have a serious impact on U.S. companies and investors that are already involved in or dependent on Ethereum, including CME Group and Cboe Global Exchange, major exchanges that trade millions of dollars in ETH futures every day.

The best argument for ETH not being a security is that it has not become a security so far, and changing status would have serious ramifications. “It’s ‘you can’t just change your mind without risking it costing people hundreds of billions of dollars a decade later,’ and the CFTC will probably push back on the same grounds,” said Austin Campbell, an assistant professor at Columbia Business School.

Former CFTC commissioner and current a16z Crypto policy director Brian Quintenz echoed this point on When trading on its regulated stock exchange, "it expressly acknowledges that the status of the underlying asset ETH is non-security and does not fall within its jurisdiction."

Quintenz added: "Considering that the SEC has The market informed that ETH is not under its jurisdiction, and it will be interesting to see what excuses, if any, the SEC will use if it delays or rejects the ETH ETF.” Notably, the news comes one day after the U.S. The Securities and Exchange Commission has been hit with unprecedented court sanctions for its “egregious abuse of power” in its lawsuit against cryptocurrency company DEBT Box. Brian Frye, Spears-Gilbert Law Professor at the University of Kentucky, said the best argument against classifying ETH as a security is that "ETH looks more like BTC than any other token."

He added,

"The SEC has repeatedly stated that it considers Bitcoin to be a commodity rather than a security... primarily due to the lack of centralized control."

Frye admitted that the existence of the Ethereum Foundation casts a shadow of doubt on this argument. However, it is undeniable that Ethereum has thousands of stakeholders beyond the founding companies. Ethereum can even be considered more decentralized than Bitcoin in some areas – including the number of applications and developers running on it.

Additionally, IntotheBlock found that as of six months ago, the number of long-term ETH holders (73.5 million) was more than double 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.

None of this may matter given Gensler’s apparent hostility to cryptocurrencies, which he believes is rife with fraud and financial abuse. Ironically, almost everyone in the cryptocurrency space wants Gensler to spend his time prosecuting actual crimes instead of harassing legitimate businesses or attacking decentralized protocols.

Frye believes this apparent overreach could have been Gensler's undoing. "The SEC has gone too far and is likely to collapse. It relied on Howey, which provided an extremely broad definition of 'safety,' which gave the SEC very broad regulatory powers," he said, referring to the One of the tests used by institutions to define an “investment contract”.

"But the Supreme Court can change Howey. And the more stringent the SEC's regulations, the more likely the case will get to the Supreme Court. Once there, the Supreme Court will likely do so by narrowing the scope 'Clarify' Howey."

Disclaimer: The above content does not constitute any investment advice. Investment is risky, so participation must be done with caution.

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