Ethereum (ETH), the second-largest cryptocurrency by market capitalization, is currently facing scrutiny from the U.S. Securities and Exchange Commission (SEC) regarding its classification as a security. Recent reports indicate that the SEC is deliberating whether to categorize ETH as a security, a decision that could have significant implications for the cryptocurrency market and Ethereum’s ecosystem.
This classification debate has sparked discussions among regulators and within the crypto community. If the SEC determines that Ether is indeed a security, it could lead to various outcomes that would impact both the crypto market and Ethereum’s operations. These consequences may include regulatory compliance requirements, potential legal actions, market volatility, and changes in Ethereum’s development and usage.
The road ahead for Ether does not appear to be smooth. The SEC is currently debating whether to classify ETH as a security and has issued subpoenas to three organizations as part of an investigation into the Ethereum Foundation, the ecosystem that powers the Ethereum blockchain network. This announcement comes after the SEC’s reluctance to approve spot ETH ETFs, leaving applicants like Hashdex and ARK 21Shares awaiting final rulings in May. While the agency has approved 11 Bitcoin ETFs earlier this year, it seems that Ethereum ETFs will face regulatory challenges.
On February 26, the Ethereum Foundation’s GitHub page revealed that the group had received a voluntary inquiry from a state authority, with a requirement for confidentiality. Since the introduction of Bitcoin in 2009, there has been ongoing debate about whether cryptocurrencies like Ether should be classified as a form of currency, security, or commodity. SEC Chair Gary Gensler, known for his tough stance on crypto regulation, has compared the bitcoin industry to the Wild West and emphasized the need for regulation. The SEC’s recent actions have raised concerns about the possibility of spot Ethereum ETFs.
The Ethereum blockchain network, which recently underwent a significant upgrade, is home to numerous decentralized finance (DeFi) applications, and the SEC’s decision could have an impact on the crypto market.
Some digital assets lawyers have stated that the Ethereum Foundation’s “voluntary inquiry” is not a cause for concern, as subpoenaing crypto companies is a common practice in this market. However, SEC Chair Gary Gensler’s statements following ETH’s proof-of-stake update suggest that proof-of-stake chains, including Ethereum, could be categorized as securities due to their token reward system. Gensler has filed lawsuits against several U.S.-based and foreign crypto exchanges, such as Coinbase, Kraken, and Binance, alleging that they sold securities to U.S. customers without the necessary registrations.
While ETH has never been explicitly identified as a security in an SEC enforcement case, crypto attorney Ignacio Ferrer-Bonsoms argues that it is inconsistent for the SEC to target Cardano as a potential violator of securities rules without scrutinizing Ethereum as well. Both the Ethereum Foundation and the Cardano Foundation raised millions of dollars through token sales to fund network development, both have foundations based in Zug, Switzerland, and both distribute tokens to their founders and foundations.
Recent criticism of the SEC’s actions by a U.S. federal judge and a three-judge appeals panel raises questions about the agency’s approach to crypto regulation. If the SEC is attempting to reject spot Ethereum ETFs by targeting the underlying asset, it must provide a strong justification for its decision.
