By Daniel Kuhn, CoinDesk
Compiled by: Wu Blockchain Blockchain
Recent reports from CoinDesk and Fortune indicate that the U.S. Securities and Exchange Commission is preparing to classify Ethereum as a security. This move will undoubtedly have serious consequences for the entire cryptocurrency industry, including derailing plans to launch a spot ETH ETF.
Citing several unnamed sources, Fortune reports that the SEC has subpoenaed several U.S. companies for documents related to the Ethereum Foundation. The Ethereum Foundation is a Swiss-based non-profit organization that organized the launch of the eponymous blockchain. Apparently, this investigation began shortly after the Merge incident in 2022 that introduced Ethereum staking.
Shortly after Ethereum’s proof-of-stake upgrade, U.S. Securities and Exchange Commission Chairman Gary Gensler said that proof-of-stake chains pay users token rewards for locking their tokens as a security model, which is similar to investment contracts and can be classified as Securities – although he did not explicitly mention ETH by name.
However, he did file lawsuits against a number of U.S. and international cryptocurrency exchanges, including Coinbase, Kraken and Binance, for selling securities to U.S. investors without proper registration. These securities include the likes of Cardano (ADA) and Solana (SOL).
ETH has never been directly designated as a security in SEC enforcement actions, a fact that leaves cryptocurrency attorney Ignacio Ferrer-Bonsoms conflicted. In a recent blog post, Ferrer-Bonsoms compared Ethereum to Cardano, arguing that if the SEC believes one violates securities laws, it must view the other the same way.
The Ethereum Foundation and the Cardano Foundation have both raised millions of dollars through token sales to fund network development ($18 million worth of Bitcoin and $62 million respectively); both through the Zug, Switzerland-based foundation manage their respective networks; and both 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 the token as an investment 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.
Opposition
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. Moreover, 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 such as CME Group and Cboe that trade millions of dollars in ETH futures every day Global Exchange.
The best argument for ETH not being a security is (and so far it isn't) - changing status would have serious ramifications. This is equivalent to saying, "You can't suddenly change your position ten years 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, expressed in an interview with CoinDesk.
Former CFTC Commissioner Brian Quintenz, now head of Crypto policy at a16z, also echoed this point at When traded on a stock exchange, "it explicitly acknowledges the status of the underlying ETH as a non-security and outside its jurisdiction."
Quintenz added: “Given that the SEC has informed the market 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 an ETH ETF.” It’s worth noting. , the news comes a day after the U.S. Securities and Exchange Commission was 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 BTC is a commodity, not a security...primarily because of the lack of centralized control.”
Frye’s admission of the existence of the Ethereum Foundation casts 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 there were 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 this 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."
