SEC’s Move To Classify ETH As A Security An Excuse To Scuttle ETF

Table of Contents

• SEC Looking For An Excuse To Not Approve ETF 
• The SEC Investigation 
• An Excuse To Define Ethereum As A Security
• A Challenge For The CFTC 

The United States Securities and Exchange Commission is attempting to classify ETH, the world’s second-largest cryptocurrency, as a security. 

The move to classify ETH as a security is being seen as an attempt to scuttle the approval of a spot Ethereum ETF, something the SEC is reluctant to give the green light for. 

SEC Looking For An Excuse To Not Approve ETF 

The United States Securities and Exchange Commission is running an energetic legal campaign to classify Ethereum as a security, according to the companies that have received subpoenas related to an ongoing investigation. According to reports, at least three companies have received subpoenas seeking information about the Ethereum Foundation. The Ethereum Foundation is a Swiss-based nonprofit entity that plays a key role in developing and promoting the Ethereum blockchain. 

The news comes as a major blow to the crypto industry’s hopes of securing approval of spot Ethereum ETF applications filed by the likes of BlackRock. The companies filed for a spot Ethereum ETF after the SEC approved a batch of spot Bitcoin ETFs in January. 

The SEC Investigation 

The SEC’s investigation into Ethereum demands that companies submit documents and financial records they may have about their dealings with the Ethereum Foundation. The investigation began shortly after Ethereum’s shift to a Proof-of-Stake mechanism. One company member who received a subpoena described it as “narrow and focused on the Ethereum Foundation.” 

An Excuse To Define Ethereum As A Security

Ethereum’s move to Proof-of-Stake gave the SEC an excuse to define Ethereum as a security, according to individuals at companies that received subpoenas. The sources asked for them or their firms to be identified, stating they feared retaliation by the SEC Chair, Gary Gensler, who one individual described as vindictive. The subpoenas come as the SEC and the Biden administration lead a campaign to clip the wings of the crypto space, which they view as a lawless Wild West. 

However, some attorneys believe that the Securities and Exchange Commission’s attempts at classifying ETH as a security would have little real-world impact unless US courts backed it. Crypto attorney Gabriel Shapiro stated, 

“The only thing that would matter is if they get a final, binding judgement from a court of competent jurisdiction, and even then I believe they would have a very hard time enforcing that in any practical way, beyond just charging the Ethereum Foundation a fine. But it could give them an excuse to not approve an ETH ETF, which is likely their biggest objective here.”

SEC Chair Gary Gensler has repeatedly stated that he believes Bitcoin is a commodity like Gold or wheat. However, he has remained non-committal when asked if ETH should be classified as a commodity or a security. The SEC’s actions on Wednesday suggest the SEC Chair has made up his mind regarding ETH. Matt McGuire, former senior prosecutor for the attorney general of Virginia and general counsel at Violet, stated, 

“[The] SEC has been pretty transparent that it informally thinks ETH is a security. It’s not surprising to me to read that they’re issuing a lot of subpoenas gathering information, but doesn’t tell us exactly what they’ll do with that information.”

A Challenge For The CFTC 

According to journalist Eleanor Terrett, the Securities and Exchange Commission’s attempts to legally classify Ethereum as a security could also directly challenge the Commodity Futures Trading Commission’s stance on Ethereum being a commodity. 

“Bringing this back as we talk about the @SECGov’s potential plans for the status of $ETH today. It’s worth noting that the @CFTC has operated under the notion that $ETH is a commodity for years and has registrants that list ether futures contacts. If the SEC classifies $ETH as a security, it would essentially be saying screw you to its sister agency, ignoring the “consequences” that @CFTCbehnam mentions. Behnam says the two agencies are working together, but what will the outcome be?”

Terrett also stated that if the reports are accurate, they explain the SEC’s lethargy regarding spot Ethereum ETFs, speculating that the commission might be waiting for investigations to conclude before making a decision. 

“If this is true, then it explains why the [SEC] has been so mum with the ETH spot ETF issuers. The [SEC] staff may be waiting for any lingering investigations to wrap before Gary Gensler gives them direction.”

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.