The Securities and Exchange Commission (SEC) currently appears to be engaged in a campaign to classify Ether as a security, according to information reported by Fortune today. What does this eventuality mean, and should we fear a possible rejection of spot ETH ETFs?
The SEC is officially crusading against Ether
According to a Fortune article published today, the Securities and Exchange Commission (SEC) is currently campaigning to classify Ether as a security.
The information was reported by 3 sources who asked to remain anonymous for fear of reprisals from the SEC. These sources all work in companies that have been linked to the Ethereum Foundation, a non-profit organization dedicated to the development of the Ethereum blockchain.
The companies in question were contacted by Gary Gensler’s organization, which sent them subpoenas, in addition to requesting documents and financial records in order to clarify their links with the Ethereum Foundation.
According to one of the sources, the SEC has been conducting its investigation since September 2022, i.e. since Ethereum’s transition from proof-of-work to proof-of-stake. Other companies, however, have only recently been contacted.
The possibility of an SEC investigation is confirmed by a recent change in the foundation’s GitHub code, indicated by the following message: “This commitment removes a section from the footer because we received a voluntary inquiry from a state authority that included a confidentiality requirement.”
The text located in the footer of the site, which indicated that the foundation had never been contacted by an agency, has indeed been removed.
Ethereum spot ETFs in danger
This attack by the SEC, in addition to sowing uncertainty in the crypto market, comes just a few months before the possible arrival of spot Ethereum ETFs on the US stock exchange. And ETF approval does indeed depend on the SEC, which operates under the aegis of Gary Gensler, an explicitly anti-crypto figure.
Indeed, when the Bitcoin spot ETFs were approved, Gensler was quick to point out how exceptional Bitcoin is compared to other cryptocurrencies.
It is important to note that today’s action by the Commission concerns ETPs holding a commodity and not a security, Bitcoin. This should in no way indicate the Commission’s willingness to approve listing standards for crypto asset securities. […] As I have said in the past, and without prejudging any crypto asset, the vast majority of crypto assets are investment contracts and are therefore subject to federal securities laws.
Gary Gensler, press release dated January 10, 2024
The status of Ether, unlike other cryptocurrencies explicitly qualified as securities by the SEC, has been debated for a long time by the regulator. Indeed, Gary Gensler refused to rule on ETH when questioned by the House Financial Services Committee.
For his part, Rostin Behnam, Chairman of the Commodity Futures Trading Commission (CFTC), has stated several times in the past that Ether is indeed a commodity, and therefore legally dependent on his organization. Moreover, as the CFTC approved Ethereum Futures ETFs last October, a possible change of status for ETH would call into question the existence of these investment products in the United States.
According to Fox Business reporter Eleanor Terrett, the SEC could also try to unearth information from Ethereum’s Initial Coin Offering (ICO). Laetitia James, the Attorney General of the State of New York, declared that Ether was a security precisely because of its ICO in the case against the crypto exchange KuCoin.
As a counterpoint, Eleanor Terrett points out that the SEC had met with Vitalik Buterin (co-founder of Ethereum) in 2018 to clarify the role of the Ethereum Foundation. At the time, SEC Department of Corporation Finance Chief Bill Hinman stated that “Bitcoin (BTC) and Ethereum (ETH) were outside the agency’s regulatory scope” following that meeting.
If @FortuneMagazine‘s reporting is correct and the @SECGov is indeed on a campaign to classify $ETH as a security, besides scrutinizing its proof-of-stake model, the regulator may also be looking into the ICO, which the @SECGov itself “put aside” when it said $ETH was not a…
– Eleanor Terrett (@EleanorTerrett) March 20, 2024
For financial lawyer Scott Johnsson, today’s revelations highlight the SEC’s desire to short-circuit the authorization of spot Ethereum ETFs. A possibility to be set against the regulator’s recent actions against Coinbase, the largest crypto exchange in the US, and Binance.
According to recent forecasts by Bloomberg ETF analysts James Seyffart and Eric Balchunas, spot ETH ETFs already had only a 30% chance of approval in May, as we recently reported. A classification of Ether as a security would further reduce these chances to 0%.
Coincidence or not, the SEC has unsurprisingly postponed the various applications for spot Ethereum ETFs, one of whose deadlines fell this week. The price of Ether has not been affected by this news, and has even risen by 1% over the last 24 hours.
