The United States Securities and Exchange Commission (SEC) recently concluded its investigation into whether Ether (ETH) is a security, causing a significant stir within the cryptocurrency industry. This decision marks a notable shift in the regulatory landscape for one of the most prominent cryptocurrencies.
SEC Ends Probe into Etherâs Classification
On June 19, 2024, the SEC officially ended its probe into Etherâs classification, a move that took many by surprise. According to Laura Brookover, a lawyer for Consensys, this cessation means there will be no further assertions from the SEC labeling Ether as a security.
Brookover noted that this decision was not voluntary but rather a response to pressure to lift subpoenas on Consensys, especially following the recent approval of Ether exchange-traded funds (ETFs). The approval of these ETFs implied a reclassification of ETH as a commodity rather than a security.
Despite Consensysâ claims, the SEC has not publicly confirmed this new classification. Carol Goforth, a professor specializing in business associations and securities regulation at the University of Arkansas School of Law, explained that the approval of a spot Ether ETF does not inherently mean that ETH is considered a commodity.
Source: Consensys
Goforth pointed out that the approval of an ETF is unrelated to the classification of the underlying asset, emphasizing that many ETFs are based on commodities without affecting their legal status.
This raises the question: why did the SEC decide to halt its investigation into Ethereum? Goforth believes that the SEC likely realized it would struggle to convince a court that ETH is a security under the Howey investment contract test, given the widespread ownership and market-driven nature of Ether.
She suggested that the SEC might have wanted to avoid an embarrassing defeat, especially given past statements by SEC officials suggesting that Etherâs classification should be clear.
Notably, in 2018, former SEC director William Hinman declared that Ethereum was not a security, citing the networkâs decentralization as a critical factor in this determination.
Inconsistent Guidance from the SEC
The crypto industryâs primary grievance has been the SECâs inconsistent guidance on applying the Howey test to Ethereum and similar cryptocurrencies. The SECâs decision to drop the investigation is seen as a positive development for Ethereum.
Goforth described it as a favorable move for the Ethereum network, but she cautioned that the SECâs letter only indicated a temporary halt in the investigation, not a final determination.
She emphasized that the ongoing uncertainties surrounding the classification of most crypto assets mean the industry is far from achieving regulatory clarity.
Consensys hailed the SECâs decision as a significant victory but stressed that it does not resolve the broader issues facing blockchain developers, technology providers, and other industry participants.
Source: Joseph Lubin
The company called for a clear regulatory framework that allows for compliance, accurate information for purchasers, and accountability for illicit activities. While Consensys may have won this particular battle, the war over crypto regulation in the U.S. continues.
One of the ongoing areas of contention is the scrutiny of staking, a fundamental aspect of the Ethereum ecosystem. The SEC has already reached a $30 million settlement with American crypto exchange Kraken over its staking services, which the commission alleged constituted a security.
Coinbase CEO Brian Armstrong has stated that the exchange is prepared to take the SEC to court over staking if necessary. Goforth noted that staking is a complex issue and that the SECâs stance on staking as an investment contract could persist regardless of whether the underlying crypto asset is a security.
SECâs Double Standard: Ethereum vs. Ripple
The broader struggle for a clear regulatory framework in the U.S. crypto industry remains challenging. However, recent developments have provided Ethereum advocates with a temporary respite from some of the uncertainties surrounding Etherâs classification, offering a glimmer of hope in an otherwise tumultuous regulatory landscape.
The SECâs inconsistent treatment of Ethereum and Ripple has also drawn criticism. Bill Morgan, a prominent XRP community member, and several analysts have accused the SEC of regulatory inconsistency.
Morgan argued that the SECâs leniency towards Ethereum, particularly with the nearing approval of a spot ETF, exemplifies a double standard.
If you're wondering why the SEC concluded its investigation into #Ethereum relatively quickly compared to #Ripple and decided not to classify ETH as a security, but rather as a commodity, here's the explanation.This outcome was influenced by powerful interests and investments⊠pic.twitter.com/V3PmImmA0r
â Vandell | Black Swan Capitalist (@vandell33) June 19, 2024
The XRP communityâs frustration is rooted in what it perceives as biased treatment, with Morgan highlighting that the SECâs recent letter to Consensys, clarifying Ethereumâs status, contradicts its aggressive stance against Ripple. He contended that the criteria for classifying tokens remain ambiguously applied, leading to regulatory uncertainty and uneven enforcement.
The swift resolution of Ethereumâs status contrasts sharply with the prolonged investigation into Ripple, prompting scrutiny over regulatory consistency and potential underlying influences.
The SECâs regulatory approach remains under critical examination as the crypto industry continues to navigate the complexities of compliance and classification.
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