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On June 19, 2024, the United States Securities and Exchange Commission (SEC) unexpectedly closed its investigation into whether Ether (ETH) is a security, causing a stir in the cryptocurrency industry. This move suggests that the SEC’s case against Ethereum might not have been as robust as initially portrayed.
Consensys attorney Laura Brookover announced that the SEC would no longer assert that Ether is a security. According to Brookover, the decision wasn’t voluntary but a response to pressures related to recent regulatory changes. Specifically, the SEC’s approval of Ether exchange-traded funds (ETFs) implied that it now considers ETH a commodity.
A letter from Consensys argued that the SEC’s approval of spot Ether ETFs indicated an updated position classifying ETH as a commodity. However, the SEC has not officially confirmed this stance.
Carol Goforth, a professor specializing in securities regulation at the University of Arkansas School of Law, cautioned against assuming that the approval of a spot Ether ETF equates to classifying ETH as a commodity. She emphasized that ETF approval does not determine the nature of the underlying asset. According to Goforth, this distinction means the SEC’s halt in the investigation likely reflects a strategic move rather than a definitive statement on Ether’s classification.
Goforth suggested that the SEC’s decision to drop the case likely stems from doubts about successfully proving ETH as a security under the Howey Test. The decentralized nature of Ethereum and its widespread market influence make it challenging to argue that ETH fits the criteria of a security. The SEC, therefore, might have opted to avoid a potentially embarrassing legal defeat.
Former SEC director William Hinman had previously stated that Ethereum was not a security, citing its decentralization as a critical factor. This view has contrasted with the SEC’s more recent scrutiny under current leadership, leaving the crypto industry frustrated with inconsistent guidance on regulatory classifications.
While the crypto community may view the SEC’s decision as a victory for Ethereum, Goforth noted that this is not a final determination. The SEC’s letter indicates that the investigation is paused, not concluded, leaving the door open for future regulatory actions.
Consensys acknowledged the victory but stressed the need for a clear regulatory framework to ensure compliance and accountability in the crypto industry. The SEC’s aggressive stance on crypto enforcement remains a concern, particularly in areas like staking.
Staking, a core component of the Ethereum ecosystem, is also under SEC examination. American crypto exchange Kraken recently settled with the SEC for $30 million and ceased offering staking services. Coinbase CEO Brian Armstrong has indicated a willingness to challenge the SEC in court over staking issues.
Goforth described staking as a complex issue, with the SEC arguing that staking services might constitute an investment contract, regardless of whether the underlying crypto asset is a security.
The SEC’s decision to drop its Ethereum investigation offers temporary relief for Ethereum advocates but underscores the ongoing uncertainties in crypto regulation. The crypto industry continues to seek clear guidelines, while recent developments provide a glimmer of hope amidst regulatory challenges. The battle for comprehensive and coherent crypto regulation in the U.S. is far from over, with many questions still unanswered.