Why shouldn’t the SEC classify Ethereum as a security?

Author: Daniel Kuhn, CoinDesk; Compiled by: Deng Tong, Golden Finance

Recent reports from CoinDesk and Fortune indicate that the U.S. Securities and Exchange Commission is preparing to list Ethereum, the second largest blockchain, The native token Ethereum (ETH) is classified as a security. The move will undoubtedly have serious ramifications for the entire crypto industry, including plans to disrupt spot ETH exchange-traded funds.

Fortune, citing several unnamed sources, reported that The U.S. Securities and Exchange Commission has Several U.S. companies were subpoenaed, requiring them to provide documents related to their dealings with the Ethereum Foundation. The Ethereum Foundation is a Swiss-based non-profit organization that organized the launch of the eponymous blockchain. Apparently, the investigation began shortly after the 2022 Merge incident that introduced Ethereum staking.

Shortly after Ethereum’s proof-of-stake upgrade, SEC Chairman Gary Gensler said,Proof-of-stake chains pay users token rewards for locking up their tokens as a security model, similar to investment contracts, which could be classified as securities - although he did not mention ETH.

However, he has filed lawsuits against several U.S. and international cryptocurrency exchanges, including Coinbase, Kraken, and Binance, for allegedly selling their products to the U.S. without proper registration. Investors sell securities. These include assets such as Cardano (ADA) and Solana (SOL).

ETH has never been directly designated as a security in SEC enforcement actions, a fact that conflicted cryptocurrency attorney Ignacio Ferrer-Bonsoms. In a recent blog post, Ferrer-Bonsoms compared Ethereum to Cardano and argued that if the SEC believes that one of the parties violated securities laws, then it must consider the other party in the same way.

Both the Ethereum Foundation and the Cardano Foundation are selling tokens Raised millions of dollars to fund network development ($18.3 million and $62 million respectively for Bitcoin); both manage their respective networks through foundations based in Zug, Switzerland; both donate money to their founders and foundations Tokens are allocated.

In addition, Both foundations are dedicated to increasing their tokens the value of. Ferrer-Bonsoms pointed out that Ethereum’s burn mechanism was introduced in the EIP-1559 upgrade in August 2021, which makes the network (sometimes) deflationary. “In this way, investors may view the token as an investment with expectations of appreciation,” he wrote.

In fact, unlike Bitcoin (BTC), the only cryptocurrency that is explicitly a commodity under U.S. law, members of the Ethereum founding team are still very active in the industry. Vitalik Buterin, despite announcing a soft retirement on his 30th birthday, continues to regularly push out new ideas for Ethereum tools and influence the network's roadmap, while Joseph Lubin oversees the influential Ethereum incubator ConsenSys.

While there is technically a Bitcoin Foundation, it has little influence and does not pay salaries to Bitcoin Core developers.

Case Against Classification

In other words, Not everyone agrees that Ethereum is a security. On top of that, the SEC’s smaller sister agency, the Commodity Futures Trading Commission (CFTC), has allowed ETH futures trading for years, meaning it is a commodity. And, in the CFTC’s lawsuit against Sam Bankman-Fried, the agency flatly stated that ETH is a commodity (like BTC and USDT).

In fact, The U.S. Securities and Exchange Commission unilaterally determined that ETH is a security that will Ethereum has had a serious impact on U.S. businesses and investors, including major exchanges such as CME Group and Cboe Global Exchange that trade millions of dollars in ETH futures every day.

The best argument for ETH not being a security is that it has not become a security so far, and changing status would have serious ramifications. “The whole ‘you can’t just change your mind and it’s going to cost people hundreds of billions of dollars in ten years’ time,’ and the CFTC will probably push back,” said Austin Campbell, an assistant professor at Columbia Business School.  

Former CFTC commissioner and current a16z Crypto policy director Brian Quintenz echoed this on X, saying, < strong>When the SEC approved the ETH futures ETF for trading on its regulated stock exchanges in October 2023 (just months after the merger), “it expressly acknowledged the status of the underlying asset ETH as a non-security and outside its jurisdiction.” ."

Quintenz added: "Given that the SEC has informed the market that ETH is not within its jurisdiction, if the SEC delays or rejects the ETH ETF, then watch what it will use. The excuses, if any, will be interesting.” Notably, this news comes a day after the SEC was criticized for “egregious abuse of power” in its lawsuit against cryptocurrency company DEBT Box. Unprecedented court sanctions.

Brian Frye, Spears-Gilbert Professor of Law at the University of Kentucky, said, The best argument against classifying ETH as a security is “ETH looks more like BTC than any other coin.” He added, “The SEC has repeatedly stated that it considers Bitcoin to be a commodity. rather than a security...primarily because of the lack of centralized control." Frye admitted that the existence of the Ethereum Foundation casts a layer of doubt on this argument. shadow. However, it is undeniable that Ethereum has thousands of stakeholders beyond the founding companies. Ethereum can even be considered more decentralized than Bitcoin in some areas – including the number of applications and developers running on it.

Additionally, IntotheBlock found that as of six months ago, the number of long-term ETH holders (73.5 million) was more than double that of Bitcoin (33.61 million). There are 5,370 addresses holding 1,000-10,000 ETH, but only 1,920 addresses holding 1,000-10,000 BTC.

None of this may matter, given Gensler’s apparent hostility to cryptocurrencies, which he believes is rife with fraud and financial abuse. Ironically, almost everyone in the cryptocurrency space wants Gensler to spend his time prosecuting actual crimes instead of harassing legitimate businesses or attacking decentralized protocols.

Frye believes that this apparent overreach could lead to Gensler 's undoing. "The SEC has gone too far and is likely to collapse. It relied on Howey, which provided an extremely broad definition of 'safety,' which gave the SEC very broad regulatory powers," he said, referring to the One of the tests used by institutions to define an “investment contract”.

“But the Supreme Court can change Howey. And the more stringent the SEC regulations, the more likely the case will get to the Supreme Court. Once there, the Supreme Court will likely pass a narrower Come 'clarify' Howey."