Pundits Throw Down: SEC’s Alleged Plan of Classifying Ethereum a Security Is Off Base

March 21, 2024

Industry pundits are stepping up to challenge the SEC’s latest gambit—a plan rumored to classify Ethereum as a security. 

A report that the U.S. Securities and Exchange Commission (SEC) has issued several subpoenas to companies viewed as an attempt to label Ethereum, the world’s second-largest crypto asset by market capitalization, as a security surfaced on Wednesday, raised concerns among investors and experts.

While some viewed the move as the SEC’s way of denying the spot Ethereum ETF proposals of several Wall Street giants, others think that the move by the commission is not only “illegal” but is also causing “confusion and harming the public.”

In a compelling critique of the SEC’s recent actions, Brian Quintenz, a former commissioner of the Commodity Futures Trading Commission (CFTC) and the current global head of policy of the venture capital fund a16z crypto has pointed out a significant regulatory paradox. 

According to the ex-commissioner, the SEC’s decision to permit the trading of Ethereum (ETH) Futures Exchange-Traded Funds (ETFs) on its regulated exchanges in October 2023 effectively served as an implicit acknowledgment that Ethereum, especially in its Proof of Stake (PoS) form adopted in September 2022, is not considered a security and thus falls outside of SEC’s regulatory purview.

This approval speaks volumes, according to Quintenz, as it indicates that as of October 2023, the SEC recognized the current iteration of Ethereum as non-securitized, casting aside any doubts regarding its regulatory stance toward ETH. “Importantly, this ETF approval decision in October 2023 occurred well after Ethereum changed to PoS in Sept of 2022; meaning that to the SEC, ETH, in its present state as of Oct 2023, was not a security,” the ex-commissioner added.

The ex-commissioner’s analysis doesn’t stop there. It raises a provocative question about the future, pondering the potential justifications the SEC might employ should it opt to delay or deny approval for an Ethereum ETF, given its prior indications that Ethereum falls outside its jurisdictional boundaries. Moreover, Quintenz underlined, “The SEC’s conduct in refusing to acknowledge these facts is causing confusion and actively harming the public.”

Quintenz is not alone in this stance though.

In a forceful statement addressing the ongoing debate over Ethereum’s classification, Coinbase’s Chief Legal Officer, Paul Grewal, has vocally criticized the SEC’s attempts to label Ethereum as a security. With the financial world on edge awaiting the SEC’s verdict on Ethereum Exchange-Traded Products (ETPs), Grewal laid down a compelling argument, supported by years of regulatory consensus and legal precedents, affirming Ethereum’s status as a commodity rather than a security.

Highlighting the widespread adoption of ETH among millions of Americans since its inception in 2015, Grewal underscored the pivotal role Ethereum has played in the cryptocurrency landscape. He pointed to explicit acknowledgments by senior SEC officials, including a notable statement from the then-Director of Corporation Finance, William Hinman, and testimony before Congress by Gary Gensler, prior to his tenure as SEC Chair, both indicating that Ethereum does not meet the criteria of a security.

Furthermore, Grewal brought attention to the CFTC’s treatment of ETH as a commodity, a stance supported by the launch of ETH futures contracts on regulated futures exchanges in 2021. He also referenced judicial decisions that have consistently aligned with this classification.

Addressing the legal framework surrounding securities, specifically the Howey test—a criterion used to determine what constitutes an investment contract—Grewal argued that Ethereum, by its nature, fails to meet these qualifications. “Even if we were to apply Howey, ETH utterly fails that test, and nothing about the merge changes that conclusion.”

In his critique, Grewal cautioned against the SEC’s potential overreach in denying ETH ETP applications without a valid rationale, pointing out that such actions would contradict the regulatory body’s previous endorsements of Ethereum’s status. He advocated for adherence to established legal principles and called for the SEC to respect the regulatory clarity that market participants deserve, highlighting the broader implications for American investors and the integrity of the legal system.

In a recent statement, finance lawyer Scott Johnson shared his expert analysis of the SEC’s current predicament concerning Ethereum (ETH) and its classification, an issue intertwined with broader enforcement actions against cryptocurrency exchanges such as Coinbase and Binance. Johnson suggests that the SEC’s stance has placed the regulator in a challenging position, caught between continuing its ambiguous approach to Ethereum’s status or opting for a decisive, potentially drastic strategy.

He posits two possible scenarios. Firstly, the SEC might be aiming to extend the existing ambiguity surrounding Ethereum. This approach would allow the regulator more time to adapt to the rapidly changing landscape of digital currencies without committing to a rigid stance that could later prove restrictive or outdated.

Alternatively, the finance lawyer suggests the SEC could be considering what he terms the “nuclear option.” This strategy would involve a more aggressive assertion of regulatory authority over the cryptocurrency market, potentially classifying major assets like Ethereum as securities and thereby subjecting them to a more stringent regulatory framework. 

Read More

Leave a Reply

Your email address will not be published.