Author: Daniel Kuhn, CoinDesk; Compiler: Deng Tong, Jinse Finance
News broke yesterday that the U.S. Securities and Exchange Commission (SEC) may consider reclassifying Ethereum (ETH), Ethereum’s native token, as a security. Not everyone is convinced that this is the case, and so far the SEC has not clearly answered whether the Ethereum Foundation is conducting an investigation — much like how the agency has made it clear that ETH is or is not Ethereum.
Many digital asset lawyers say the Ethereum Foundation’s “voluntary investigation” into its Github repository is nothing to be alarmed about. Subpoenaing cryptocurrency companies is a normal course of business in the industry. The Ethereum Foundation’s canary, which indicated whether a government investigation was underway into a website — ultimately had to be taken down.
“ From the public disclosures to date, it is difficult to know the nature of the government investigation issued to the Ethereum Foundation or whether the foundation is the target of the investigation ,” said Preston Byrne, managing partner at Byrne & Storm, PC at told CoinDesk in an email.
Byrne said it was “unlikely” that the Ethereum Foundation would be a target of the investigation. However, given that the investigation is ongoing, some questions remain. For example, it’s unclear why the SEC would sue Ethereum’s creator nearly 10 years after its launch and after the network had amassed hundreds of billions of dollars.
Does this investigation involve Ethereum’s ICO and token distribution, or does it involve a shift in the staking security model? How come U.S. securities regulators have jurisdiction over an organization based in Zug, Switzerland? Will the Commodity Futures Trading Commission (CFTC), which oversees the booming ETH futures market, fight back?
As for why cryptocurrency companies were asked about their transactions with the Ethereum Foundation, Byrne offered two plausible reasons: Either the SEC was trying to classify ETH as a security to force the U.S. to take action. Spot exchanges delisting tokens could bolster their case for rejecting much-needed spot Ethereum exchange-traded funds (ETFs).
Byrne added that neither motive "necessarily requires the SEC to take enforcement action against the foundation."
But there are lawsuits. Assume that ETH is a security (although there are good reasons to say it is not). So what exactly happens? Ethereum is the second-most valuable blockchain ($414 billion at today's prices) and home to most of the digital asset industry's most commonly used instruments - classifying ETH as a security can cause confusion. With a move this big, where the boot will ultimately land is completely unpredictable.
Demerge
One of the more unlikely reactions is that Ethereum could revert to the mining model pioneered by Bitcoin, moving to a proof-of-stake algorithm that rewards users with tokens for locking them up to secure the network. This in itself was impossible - it took years for Ethereum developers inside and outside the Ethereum Foundation to switch to Staking.
Vitalik Buterin came up with the idea of Ethereum in 2013, and even then he believed that the blockchain might need to move toward Staking, a "consensus model" that was still in its infancy at the time. It wasn’t until 2020, five years after the network’s actual launch, that Ethereum staking took its first tangible step with the launch of the Beacon Chain.
Ethereum developers deployed and rebuilt many testnets in an attempt to move to staking within a few years, and "de-merging" could take just as long.
Apart from the scale and cost-effectiveness of staking, part of the problem is that mining is a purposefully energy-consuming process that developers are happy to say goodbye to. After the "merger", Etheruem's energy consumption theoretically dropped by 99% - quelling criticism of the cryptocurrency's environmental footprint.
“It’s impossible for me to see anything like what you pointed out that would lead to something like a merger,” EY blockchain leader Paul Brody told CoinDesk.
ETH PoW launch
Ethereum is Ethereum and Ethereum Classic is Ethereum Classic, even though Ethereum Classic (ETC) actually maintains the “original, unaltered” history of the blockchain. Considering the network is already running, this is certainly an easier solution than "de-merge".
Of course, Ethereum Classic has gone through multiple faith-breaking reorganizations. The same goes for Ethereum’s alternative: EthereumPoW (ETHW), a fork launched during the merger to preserve proof-of-work.
Neither ETC nor ETHW rallied significantly on news of a possible SEC investigation, suggesting they are unlikely to be adopted quickly. But it's not impossible. After all, Buterin did admit that ETC is “a very good chain.”
One significant drawback is that Etheruem's founders may hold large amounts of ETC or ETHW tokens, reflecting the state of their ETH holdings at the time of the two forks. It’s unclear whether the SEC is concerned about Ethereum’s token issuance , which distributes valuable tokens to the founding team and the Ethereum Foundation. But the agency has said in the past that such payouts resemble investment contracts.
Has XRP won?
The XRP army has been waiting for a moment like this for years. While not as obvious a conflict as Ethereum versus Solana, many in the XRP army absolutely despise Ethereum. The history here likely stems from Bill Hinman, the former head of the SEC’s Division of Corporate Finance, who declared that ETH was not a security because it was “decentralized enough.” The XRP army backing their own projects sees this interference as unfairly picking winners in the cryptocurrency market, giving one project special consideration while suppressing others that look very similar.
For years, XRP advocates, including Ripple Labs CEO Brad Garlinghouse, have argued that Ethereum is “China-controlled”; that Vitalik Buterin could be co-opted; and that the network itself was “cherry-picked” to win by the United States. Of course, Buterin didn't do himself any favors by calling XRP a "sh*tcoin" in response to these accusations.
One of the nice things about XRP is that, unlike most cryptocurrencies, the asset actually has some legal clarity after Ripple Labs fought back against the SEC in court and won some concessions from the trial judge. The judge ruled that XRP itself was not a security, nor were exchange transactions with it, although Ripple's programmatic sales to qualified buyers were investment contracts.
“What makes something an investment contract is the character of the sale or offer for sale, not necessarily which cryptocurrency it is. ETH is sold on public exchanges without advertising,” Christa Laser, a law professor at Cleveland State University, told CoinDesk. “ U.S. The committee may only aim for staking rewards, but it needs to demonstrate a core driver.
Gensler's reputation tarnished again
In fact, one possible outcome of the SEC going after ETH is another significant loss for the agency in court. As former CFTC Commissioner Brian Quintenz said yesterday, after allowing the launch of ETH futures and ETH futures ETFs in the United States, the SEC has implicitly stated that ETH is a commodity. Additionally, over the years, countless U.S. investors, businesses, and individuals have acted on the SEC’s signal that ETH is not a security.
Additionally, there is a growing recognition that the Gensler-led SEC is being unfair in its legal battles with the crypto industry. Instead of creating comprehensive regulations that truly explain the differences between decentralized protocols and traditional ways of doing business, he has filed lawsuit after lawsuit against companies that add value to the U.S. economy (as opposed to subtracting value).
This "law" didn't always work for Gensler. Just recently, a U.S. federal judge accused the SEC of "serious abuse of power" and "deliberate lies" in its dispute with cryptocurrency company DEBT Box. The move follows the unprecedented closure of a three-judge appeals panel that condemned years of denials by the agency. The volume of spot Bitcoin ETFs is “arbitrary and capricious.”
In short: If the SEC is indeed trying to build a case for rejecting a spot Ethereum ETF by going after the underlying asset, it better have a good reason.
