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

Original title: Why the SEC Shouldn't Classify ETH as a Security

Original author: Daniel Kuhn, CoinDesk

Original compilation: Deng Tong, Golden Finance

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

Fortune magazine, citing several unnamed sources, reported that theU.S. Securities and Exchange Commission has subpoenaed several U.S. companies to demand that they Provide relevant documentation for dealing with the Ethereum Foundation. The Ethereum Foundation is a Swiss-based non-profit organization that organized the launch of the Ethereum blockchain. Apparently, the investigation began shortly after the 2022 Merge incident that introduced Ethereum staking.

Shortly after Ethereum’s PoS upgrade, SEC Chairman Gary Gensler said thatPoS chains pay token rewards to users , locking up their tokens as a security model, similar to investment contracts, can 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 operating without proper registration. Sale of securities to U.S. investors. 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, arguing that if the SEC believes one violated securities laws, it must consider the other in the same way.

Both the Ethereum Foundation and Cardano Foundation have raised millions of dollars through token sales to fund network development (raising of BTC ($18.3 million and $62 million respectively); both manage their respective networks through foundations based in Zug, Switzerland; both distribute tokens to their founders and foundations.

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

In fact, unlike Bitcoin (BTC), Bitcoin is the only cryptocurrency that is clearly a commodity under U.S. law. Members remain 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.

Reasons against classifying ETH as a security

In other words, and 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, theU.S. Securities and Exchange Commission unilaterally determined that ETH is a security, which will have serious consequences for U.S. companies and investors who are already involved in or rely on Ethereum. The impact has been severeincluding 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 consequences. Austin Campbell, an assistant professor at Columbia Business School, said, "This is 'You can't change your mind at will or it will cost people hundreds of billions of dollars in ten years,' and the CFTC will probably fight back on the same grounds."  

Former CFTC commissioner and current a16z Crypto policy director Brian Quintenz echoed this on When the ETH futures ETF was approved for trading on its regulated stock exchange in March (months after the merger), "it expressly acknowledged the status of the underlying asset ETH as a non-security and outside its jurisdiction." p>

Quintenz added: “Given that the SEC has notified the market that ETH is not within its jurisdiction, if the SEC delays or rejects the ETH ETF, it will be interesting to see what excuses it will use (if any). It will be interesting.” Notably, this news comes a day after the SEC was hit with unprecedented court sanctions for its “egregious abuse of power” in its lawsuit against cryptocurrency company DEBT Box. .

Brian Frye, Spears-Gilbert Professor of Law at the University of Kentucky, said thebest argument against classifying ETH as a security is that “ETH looks better than any other Tokens are all more like BTC".  He added,“The SEC has repeatedly stated that it considers Bitcoin to be a commodity rather than a security... primarily due to the lack of centralized control.”

Frye admitted that the existence of the Ethereum Foundation casts a shadow of doubt on this argument. 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 clear overreach could lead to Gensler 's destruction. "The SEC has gone too far and is likely to collapse. It relies on Howey, which provides an extremely broad definition of 'safety,' which gives the SEC very broad regulatory powers," he said, referring to the SEC's 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 are, the more likely it is that the case will go to the Supreme Court. Once it gets there There, the Supreme Court will likely 'clarify' Howey by narrowing the scope."

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