SEC Attempts to Classify ETH as a Security: For What Reason? What are the objections?

Author: Daniel Kuhn, CoinDesk

Compiled by: Wu Shuo Blockchain

Recent reports indicate that the U.S. Securities and Exchange Commission is considering ethereum Fang is included in the scope of securities. The decision could have significant ramifications for the entire cryptocurrency market, including a potential delay in plans to launch an Ethereum ETF. Reports from CoinDesk and Fortune sparked widespread concern in the market, with many concerned whether classifying Ethereum as a security would bring more regulatory and legal challenges to the project. While the Ethereum team has been communicating with regulators, this move could change the landscape of the cryptocurrency ecosystem. According to sources, the U.S. Securities and Exchange Commission has subpoenaed several U.S. companies to submit documents related to the Ethereum Foundation. The Ethereum Foundation is a Swiss-based non-profit organization responsible for promoting the development of the Ethereum blockchain. The investigation apparently began shortly after the 2022 Merge incident that launched Ethereum staking.

Not long ago, Ethereum underwent a proof-of-stake upgrade. Gary Gensler, chairman of the U.S. Securities and Exchange Commission, noted that proof-of-stake chains pay users token rewards and use their tokens in a security model, similar to investment contracts. Although Ethereum (ETH) is not explicitly mentioned, this model may be classified as a security.

However, he has recently filed lawsuits against a number of U.S. and international cryptocurrency exchanges, including Coinbase, Kraken and Binance. He claimed the exchanges were selling securities, including digital assets like Cardano (ADA) and Solana (SOL), to U.S. investors without proper registration.

ETH has never been directly designated as a security by the SEC, a fact that leaves cryptocurrency lawyer Ignacio Ferrer-Bonsoms conflicted. In his recent blog post, he compared Ethereum and Cardano, noting that if the SEC determines that one violated securities laws, the other should be held to the same standard.

Both the Ethereum Foundation and the Cardano Foundation have raised millions of dollars through token sales to support network development, worth $18 million in Bitcoin and $62 million respectively. Both foundations are managed by a foundation based in Zug, Switzerland, and distribute tokens to their founders and foundations.

Additionally, both foundations specifically contribute work to increase the value of their tokens. Ferrer-Bonsoms pointed to Ethereum’s burn mechanism introduced in the August 2021 EIP-1559 upgrade, which makes the network (sometimes) deflationary. “In this way, investors may view tokens as investments with valuable growth expectations,” he wrote.

In fact, unlike Bitcoin, which is the only cryptocurrency that is explicitly a commodity under U.S. law, Ethereum’s founding team members are still very active in the industry. Vitalik Buterin, despite announcing a soft retirement on his 30th birthday, regularly introduces new ideas to Ethereum tools and influences the network's development path, while Joseph Lubin oversees the influential Ethereum incubator ConsenSys.

Although there is technically a Bitcoin Foundation, it has virtually no influence and does not pay salaries to Bitcoin Core developers.

Objection

Still, not everyone agrees that Ethereum is a security. On top of that, the Commodity Futures Trading Commission (CFTC), the SEC’s smaller sister agency, has allowed ETH futures trading for years, implying that it is a commodity. And, in the CFTC’s lawsuit against Sam Bankman-Fried, the agency made it clear that ETH is a commodity (like BTC and USDT).

In fact, the SEC’s unilateral determination of ETH as a security will have serious consequences for U.S. businesses and investors who already interact with or rely on Ethereum, including major exchanges that trade millions of dollars in ETH futures every day Such as CME Group and Cboe Global Exchange.

The best argument for ETH not being a security is (and so far it isn't) - changing status would have severe ramifications. That’s the equivalent of saying, “You can’t suddenly change your position a decade later and cause people to lose hundreds of billions of dollars,” and the CFTC will likely fight back, Austin Campbell, an assistant professor at Columbia Business School, told CoinDesk.

Former CFTC Commissioner Brian Quintenz, now head of Crypto policy at a16z, also echoed this point at X, saying that when the SEC approves ETH futures in October 2023 (a few months after the merger) When the ETF trades on its regulated stock exchange, "it explicitly acknowledges the status of the underlying ETH as a non-security and outside its jurisdiction."

Quintenz added: "Considering that the SEC has informed the market Notifying that ETH is not within its jurisdiction, it will be interesting to see what excuses, if any, the SEC will use if it delays or rejects the ETH ETF.” It is worth noting that the day before this news was released, U.S. Securities The Exchange Commission has been hit with unprecedented court sanctions over its “serious abuse of power” in its proceedings 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, “SEC has stated multiple times that it considers BTC to be a commodity, not a security...primarily due to the lack of centralized control."

Frye admitted that the existence of the Ethereum Foundation cast a shadow of doubt on this argument . However, it is undeniable that Ethereum’s stakeholders extend far beyond the founding companies. In some areas, Ethereum can even be considered more decentralized than Bitcoin - including the number of applications and developers running on it.

Additionally, IntotheBlock found that as of six months ago, there were more than twice as many long-term ETH holders (73.5 million) as Bitcoin holders (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 that may matter given Gensler’s apparent path of attack on the cryptocurrency industry, 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 thinks this apparent overextension could be Gensler's undoing. "The SEC is going too far and may stumble. It relies on the Howey test, which provides an extremely broad definition of 'security' and therefore gives the SEC very broad regulatory powers."

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