The United States Securities and Exchange Commission’s (SEC) case regarding the classification of Ether (ETH) as a security may not have been as strong as initially believed. On June 19, 2024, the SEC surprised the crypto industry by officially closing its investigation into Ether’s status as a security.
According to Laura Brookover, a lawyer from Consensys, there will be no further claims from the SEC that Ether is a security. Brookover asserts that the SEC’s decision to drop the investigation was not voluntary but rather a response to pressure on lifting subpoenas on Consensys due to recent approvals of Ether exchange-traded fund (ETF) rule changes based on Ether being classified as a commodity.
Consensys provided a letter to the SEC stating that the approval of spot Ether ETFs indicated a change in the SEC’s position, classifying Ether as a commodity rather than a security. However, the SEC has not publicly confirmed Consensys’ claim.
Carol Goforth, a professor at the University of Arkansas School of Law, cautions that the approval of an ETF does not necessarily mean that the underlying asset is a commodity. Goforth explains that there are already ETFs with commodities as underlying assets. Therefore, the approval of a spot Ether ETF does not require the SEC to demonstrate that Ether is a security.
The reason behind the SEC’s decision to halt the investigation into Ethereum remains unclear. Goforth suggests that it indicates the SEC’s lack of confidence in convincing a court that Ether is a security. She believes the SEC may have concluded that proving Ether’s security status under the Howey investment contract test would be challenging due to the widespread ownership and trading of the asset, as well as the influence of market forces on profitability.
Former SEC director William Hinman previously stated in 2018 that Ethereum was not a security. He emphasized the role of decentralization in determining its status, noting that the network and its operations were sufficiently decentralized, eliminating the expectation of significant administrative efforts from a single entity.
The crypto industry has criticized the SEC for its inconsistent guidance on how the Howey test applies to Ethereum and other similar cryptocurrencies.
While the crypto community may be pleased with the SEC’s decision to drop the investigation, Goforth believes it is premature to consider it a victory. She notes that the SEC’s letter states that the investigation will not continue “at this time” and that it is not a final determination. Goforth emphasizes the need for a clear regulatory framework that allows compliance, access to accurate information for purchasers, and accountability for illicit activities.
Consensys, despite celebrating its victory, acknowledges that it is not a solution for all the challenges faced by blockchain developers, technology providers, and industry participants affected by the SEC’s crypto enforcement regime.
The SEC is also examining staking, a vital component of the Ethereum ecosystem. Kraken, an American crypto exchange, has already settled with the SEC for $30 million over allegations that its staking-as-a-service offering constituted a security. Coinbase CEO Brian Armstrong has expressed readiness to take the SEC to court over staking if necessary.
Goforth highlights the complexity of staking and the SEC’s claim that it involves an investment contract, regardless of whether the underlying crypto asset is a security or not.
The struggle for a clear regulatory framework in the U.S. crypto industry remains challenging. However, recent developments offer a temporary respite and a glimmer of hope for Ethereum supporters amidst the ongoing uncertainties surrounding Ether’s classification in the regulatory landscape.