It may not have been as strong as it seemed for the United States Securities and Exchange Commission (SEC) to show Ether is a security. When the SEC formally concluded its inquiry into whether Ether is a security on June 19, 2024, it took the cryptocurrency industry by surprise. Laura Brookover, the attorney for Consensys, stated that the SEC will “never again protest that Ether is a security.” The SEC didn’t voluntarily choose to end the probe, according to Brookover.
She said it was a reaction to being pushed to “lift the subpoenas on Consensys given their recent ETH [exchange-traded fund] rule change approvals predicated on ETH being a commodity.”
Consensys’ letter claims that the SEC “updated its position to classify ETH as a commodity and not a security” in response to the approval of spot Ether exchange-traded funds (ETFs). Consensys’ premise has not been publicly validated by the SEC.
Carol Goforth, a professor at the University of Arkansas School of Law who specializes in business associations and securities regulation, told Cointelegraph that the SEC’s approval of a spot Ether ETF does not mean ETH is a commodity.
Goforth said that the “approval of an ETF has nothing to do with whether the underlying asset is a security.”
She added that there are already ETFs with commodities as the underlying asset.
“Approval of an ETF has nothing to do with the appropriate classification of the underlying assets in which the fund invests.”
How come the SEC stopped looking into ETH if the approval of the spot Ether ETF doesn’t require it to prove that ETH is a security?
Goforth believes the SEC’s retreat is a “pretty good indication that the agency does not believe it can convince a court that ETH is a security.”
Because of the extent to which the asset is owned and exchanged, as well as the degree to which market forces determine profitability, she believes the SEC “concluded that it would be difficult to prove that ETH is a security under the Howey investment contract test.” According to her, the SEC might have wished to prevent an embarrassing loss.
“Previous statements made by SEC officials about the likely classification of Ether might have been embarrassing to an agency that claims classification is ‘clear.’”
Ethereum was not a security, according to former SEC director William Hinman’s 2018 statement. He stated in his address that this decision is greatly influenced by decentralization. Due to the network’s adequate decentralization, investors were no longer expecting a single organization to handle most administrative tasks.
The crypto community may be happy that the SEC dropped its investigation.
Goforth said that it’s a “really positive development for the Ethereum network that the SEC is not currently trying to asses that ETH is a security.”
However, she said that the letter from the SEC only states that “at this time,” the SEC will not be continuing its investigation and that “this is not a final determination.”
Goforth believes “it is too early to say the industry is ‘winning’ given the lingering uncertainties over the appropriate classification of most crypto assets.”
Consensys highlighted that despite this “momentous” victory, it’s not a “cure-all for the many blockchain developers, technology providers, and industry participants who have suffered under SEC’s unlawful and aggressive crypto enforcement regime.”
Goforth asserted that in order for buyers to obtain accurate information and for industry participants to be held accountable for illegal activity, there must be a “clear regulatory framework with which it is reasonably possible to comply.”
Though the conflict has been won by Consensys, it is far from over. Another important component of the Ethereum ecosystem that the SEC is examining is staking. The US cryptocurrency exchange Kraken has previously reached a $30 million settlement with the SEC. Following the commission’s accusation that the exchange’s staking-as-a-service offering was a security, the exchange ceased to provide staking services. Even more, Coinbase CEO Brian Armstrong has stated that if needed, the exchange will sue the SEC for staking.
Goforth said that staking is “definitely a more complex” topic where “the SEC has alleged that staking itself involves an investment contract.”
She remarked that the SEC’s “position can be taken regardless of whether the underlying crypto asset is itself a security.”
It’s still difficult to establish a clear regulatory framework for the cryptocurrency market in the United States.Recent changes, however, may provide supporters of Ethereum with a little reprieve from some of the ambiguities around Ether’s classification, providing a ray of light in an otherwise turbulent regulatory environment.