Gary Gensler, Chairman of the US Securities and Exchange Commission Dragoons – Getty Images
The Securities and Exchange Commission is waging an aggressive legal push to classify Ethereum, the second most popular cryptocurrency, as a security, according to US companies that have received subpoenas related to the investigation. This news deals another blow to the hopes of the cryptocurrency industry, as the agency will approve applications from BlackRock and others for an ETF after the SEC approved a series of Bitcoin exchange-traded funds in January.
The SEC's investigation into Ethereum includes requiring companies to provide any documents and financial records they may have related to their dealings with the Ethereum Foundation, a nonprofit group that oversees the governance and development of the blockchain of the same name.
According to a person at the company who recently received a subpoena, the SEC's investigation into the Swiss-based Ethereum Foundation began shortly after the blockchain switched to a new governance model known as “proof of stake” in September of 2022.
This proof-of-stake event moved blockchain away from the energy-intensive model used by Bitcoin in favor of one based on a trusted network of validators — and provided the SEC with a new pretext to try to define Ethereum as a security. According to people at three different companies familiar with the subpoenas. People asked luck Their identities or companies were not revealed for fear of retaliation by the agency's head, Gary Gensler, whom one described as “vindictive.”
An investigation into the Ethereum Foundation was reported on Wednesday by CoinDeskwhich pointed to an update to the group's Github code repository that reportedly provided evidence of an investigation by an unknown government agency.
“The SEC does not comment on the presence or absence of a potential investigation,” the agency said in response to a request for comment. luck.
A push to call Ethereum a security
News of the subpoenas comes as the SEC and the Biden administration pursue an aggressive campaign to curtail the cryptocurrency industry, which they describe as lawless. However, this push has been frustrated at times by the ambiguous legal status of cryptocurrencies, leading to a series of court battles over whether the SEC has jurisdiction over the industry.
This crucial question of jurisdiction arises when a particular cryptocurrency serves as a security, an issue that has not been definitively addressed by the courts. While there is consensus that bitcoin is instead a commodity under the oversight of the CFTC, Gensler noted that his agency considers the vast majority of other cryptocurrencies to be securities that must be registered with the SEC.
The SEC has made this issue in recent court cases, except when it comes to Ethereum, whose legal status is more ambiguous. The security status of ether has long been a point of contention for the agency. Speaking at a conference in 2018, the company's then CFO, William Hinman, said that Ethereum was unlike securities. Emails published as part of the Ripple trial revealed that SEC staff deliberated over the clarity of the assertion and that one official wanted to say that the agency “does not… see a need to regulate Ethereum.”
That changed under Gensler, who took over the agency in 2021, and after Ethereum switched to proof of stake in late 2022.
At the time, Gensler said that any crypto assets produced by blockchains that use a proof-of-stake model could resemble investment contracts and thus be classified as securities, although he was not talking about any specific currency. In March 2023, he again suggested that proof-of-stake tokens could be regulated as securities, although he has since declined to comment specifically on Ethereum, including at SEC oversight hearings in the House Financial Services Committee.
The issue became more complex in October 2023 after the Securities and Exchange Commission approved nine ETFs tracking the Ethereum futures market, which are overseen by the Commodity Futures Trading Commission, signaling the view that Ethereum is a commodity. CFTC Chairman Rustin Behnam has said on several occasions that his agency views ether as a commodity.
But last month, controversial cryptocurrency company Prometheum, which has received approval to operate as a special-purpose broker and dealer, announced its intention to offer custody services for Ethereum as securities under the supervision of the Securities and Exchange Commission, again adding uncertainty to Ethereum's regulatory status. One recipient of the recent subpoena speculated that Gensler sought to use Promethium as a Trojan horse to classify Ethereum as a security.
The recent race by major financial firms including Fidelity and BlackRock to gain approval for a spot ETF has highlighted the issue, with all signs pointing to the SEC rejecting applications at the May deadline. Bloomberg analysts noted that agency staff did not consult with issuers on details about the possibility, as they did with Bitcoin exchange-traded funds, which were approved in January.
The potential announcement that Ethereum is a security could bring further doubt into the process, especially as it could raise questions about the CFTC's oversight of Ethereum futures markets.
