Dan Burgin
This round of cryptocurrency regulation could change the way the cryptocurrency industry operates
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What is happening
The Securities and Exchange Commission is ramping up its efforts to classify Ethereum as a security, issuing subpoenas to companies involved in the Ethereum Foundation. The move casts doubt on the approval of Ethereum ETFs, following the SEC's recent approval of Bitcoin ETFs.
If Ethereum is classified as a security, it may face strict trading regulations. This may entail increased paperwork and restrictions on buying and selling Ethereum to US retailers. Additionally, companies participating in Ethereum may need to adhere to regulations similar to those governing stocks and bonds, which could complicate their operations.
Ethereum's shift to a proof-of-stake model in 2022 has drawn SEC scrutiny, despite previous statements pointing to Ethereum's commodity-like status. The outcome of the investigation could impact Ethereum's regulatory status and the approval process for Ethereum ETFs, adding uncertainty to the cryptocurrency industry.
The SEC's investigation into Ethereum includes subpoenaing companies to provide documents and financial records related to their interactions with the Ethereum Foundation, which is responsible for managing and developing the Ethereum blockchain.
The investigation gained momentum after Ethereum moved to a “proof of stake” governance model in September 2022, prompting the SEC to reconsider classifying Ethereum as a security. This shift away from Bitcoin's energy-intensive model has provided a new pretext for SEC scrutiny.
The position of the Securities and Exchange Commission
Under the leadership of Gary Gensler, the SEC has signaled a broader regulatory approach toward cryptocurrencies, especially those using proof-of-stake models. However, Ethereum's approval of ETFs tracking Ethereum futures by the Commodity and Futures Trading Commission (CFTC) has added complexity to its regulatory situation.
Although the CFTC views Ethereum as a commodity, the SEC's investigation into Ethereum's security status has led to speculation and uncertainty within the cryptocurrency industry. The potential declaration of Ethereum as a security could further complicate the approval process for Ethereum ETFs and raise questions about the CFTC's oversight of Ethereum futures markets.
Gensler suggested that Ethereum's move to a “proof of stake” mechanism, where coin holders earn rewards by staking their assets, could subject Ethereum to securities regulations. This change from the previous “proof of work” method used by Ethereum represents a major shift in how blockchain works.
why does it matter
While Ethereum's legal status has long been murky, recent developments point to a push by the SEC to classify it as a security. This contradicts previous statements suggesting that Ethereum is similar to commodities rather than securities. On March 22, the SEC extended the deadline to May 30 for its decision on Grayscale's Ethereum Futures Trust ETF.
If Ethereum is classified as a security, it could face stricter trading regulations, posing challenges for investors and exchanges. The deletion of Ethereum from exchanges and the impact on projects built on its blockchain are major concerns. Using registered securities for everyday transactions, such as paying gas fees, would be impractical.
RFID crypto industry reacts
Ripple CEO Brad Garlinghouse is confident the SEC will lose the case:
Coinbase CLO's Paul Grewal noted that ETH's status as a commodity has been long established:
About the author
Dan Burgin
