The Securities and Exchange Commission (SEC) is investigating whether or not to classify Ether, which is the cryptocurrency produced by the Ethereum network, as a security.
The SEC has demanded documents and financial records from companies involved in the probe regarding their dealings with the Ethereum Foundation, the Switzerland-based non-profit organization overseeing the blockchain’s governance and development.
The investigation gained serious tracing directly following the cryptocurrency’s transition to a proof-of-stake consensus model in September 2022. The SEC perceives this network change as resembling an investment contract, potentially qualifying ether as a security under the agency’s purview.
This development could indicate a setback for the crypto industry’s hopes of obtaining SEC approval for spot ether ETFs soon. However, according to a report in Forbes, several spot ether ETF applicants have indicated their willingness to accept the designation of the crypto asset as a security.
The Ethereum Foundation’s website previously disclosed that it had never been contacted by any agency anywhere in the world, but site removed the footer in late February.
Shortly after Ethereum’s proof-of-stake upgrade, SEC Chair Gary Gensler stated that proof-of-stake chains, which pay users token rewards for locking up their coins as a security model, resemble investment contracts and could be classified as securities.
He did not mention ETH by name at the time. However, he has launched lawsuits against a number of U.S.-based and international crypto exchanges, including Coinbase, Kraken, and Binance, alleging that they were selling securities to U.S. investors without the appropriate registrations. These include assets like Cardano’s (ADA) and Solana’s (SOL).
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Commodities Trading Trading Commission disagrees that Ethereum is a security
Not everyone agrees that Ethereum is a security.
Most importantly, the Commodities Futures Trading Commission (CFTC), the SEC’s smaller sister agency, has allowed ETH futures trading for years. This implies it’s a commodity. Additionally, the agency stated that ETH was a commodity during its lawsuit against Sam Bankman-Fried.
Generally, the SEC uses something called the “Howey Test” to determine whether an investment contract exists.
This test examines whether there is an investment of money in a common enterprise with an expectation of profits solely from the efforts of others. Additionally, regulatory guidance and case law further shape the interpretation of what constitutes a security, considering elements such as the manner of sale, marketing efforts, the nature of the underlying asset, and the roles of parties involved.
The SEC’s unilateral determination that ETH is a security would severely impact U.S. businesses and investors already interacting or relying on Ethereum, including major exchanges like CME Group and Cboe Global Exchange trading millions of dollars of ETH futures per day.
This isn’t the first time the SEC has gone after a cryptocurrency.
In fact, this is part of a much larger narrative where the SEC has tried to brand a cryptocurrency as a security.
Back in 2020, the SEC filed a lawsuit against Ripple Labs in December 2020, alleging that the company conducted an unregistered securities offering worth over USD$1.3 billion through the sale of its proprietary crypto, XRP.
The latest volley in this protracted tit-for-tat legal battle includes the SEC seeking USD$2 billion fines and penalties over sales of the cryptocurrency.
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