What Happens if the SEC Declares ETH a Security?
The current status of Ethereum (ETH) as a decentralized cryptocurrency could change if the U.S. Securities and Exchange Commission (SEC) determines it to be a security. While ETH is currently not considered a security by the SEC, regulatory agencies are closely monitoring the cryptocurrency space, and new rulings or sudden changes may occur in the future.
Reports have emerged that several U.S.-based companies have received subpoenas attempting to label ETH as a security. However, many experts believe it is highly unlikely that the SEC will classify Ethereum as a security. Kenzi Wang, the co-founder and general partner at Symbolic Capital, argues that such a classification would contradict the Commodity Futures Trading Commission’s (CFTC) view of ETH as a commodity. The CFTC has explicitly stated its belief that ETH is a commodity in filings regarding the FTX/Alameda investigation.
The SEC’s approval of ETH futures trading on regulated exchanges in 2023 further supports the stance that Ethereum is seen as a commodity, not a security. Wang suggests that any misalignment between the SEC and the CFTC would not only harm the public but also serve as a significant obstacle to the SEC’s classification of ETH as a security.
The potential reclassification of ETH as a security would have implications for Ethereum exchange-traded fund (ETF) applications. Several applications for an Ethereum ETF have been submitted to the SEC, and the decision on their approval or denial has been postponed, in line with analyst expectations. The SEC has until May 23 to decide on VanEck’s ETF application for an Ethereum ETF.
Hector McNeil, founder and co-CEO of HANetf, believes that the SEC will use the review of ETH as a security to delay its decision on approving ETH ETFs. If the SEC were to reclassify ETH as a security, it would effectively terminate any current SEC applications for ETH ETFs, according to Laurent Kssis, head of CEC Capital. This is because changing an asset from a commodity to a security overnight is not feasible, given the existing regulatory framework.
A security token represents ownership or rights to an asset or a company and is created through tokenization on a blockchain. Security tokens are considered securities when they meet the criteria set by the Howey test, which includes elements such as an investment of money, a common enterprise, and a reasonable expectation of profit through the efforts of others. While ETH is primarily a cryptocurrency used for transaction fees in the Ethereum network, it is also treated as a security token by investors due to its traded value. If the SEC were to classify ETH as a security, it would trigger the delisting of the token.
In conclusion, while the possibility of the SEC branding ETH as a security cannot be ruled out, it is currently unlikely according to experts. The potential reclassification would have implications for Ethereum ETF applications and could impact the trading of ETH. However, the SEC’s alignment with the CFTC’s view and the existing regulatory framework make such a classification doubtful.