SEC drops Ethereum investigation to avoid ‘embarrassing’ court case

Daniel Ramirez-Escudero36 minutes agoSEC drops Ethereum investigation to avoid ‘embarrassing’ court caseGary Gensler’s SEC has halted its investigation into whether Ether is a security. What could have motivated the SEC withdrawal, and is the fight over?389 Total viewsListen to article 0:00Follow upOwn this piece of crypto historyCollect this article as NFTJoin us on social networksThe United States Securities and Exchange Commission’s (SEC) case to prove Ether is a security may not have been as strong as it let on.

On June 19, 2024, the SEC surprised the crypto industry when it officiallyclosed its investigation into whether Ether (ETH) is a security.

Consensys lawyer Laura Brookover said there will be “no more protestations from the SEC that Ether is a security.”

Brookover claimed that the SEC didn’t willingly decide todrop the investigation.

She said it was a reaction to being pushed to “lift the subpoenas on Consensys given their recent ETH [exchange-traded fund] rule change approvals predicated on ETH being a commodity.”Consensys letter to the SEC. Source: Consensys 

The letter from Consensys states that the SEC’s approval of spot Ether exchange-traded funds (ETFs) indicated that it had “updated its position to classify ETH as a commodity and not a security.” 

The SEC has not publicly confirmed Consensys’ thesis.ETF is no guarantee that Ether is a commodity

Carol Goforth, a professor at the University of Arkansas School of Law who specializes in business associations and securities regulation, told Cointelegraph that the SEC’s approval of a spot Ether ETF does not mean ETH is a commodity.

Goforth said that the “approval of an ETF has nothing to do with whether the underlying asset is a security.”

She added that there are already ETFs with commodities as the underlying asset:“Approval of an ETF has nothing to do with the appropriate classification of the underlying assets in which the fund invests.”

If the spot Ether ETF approval doesn’t necessarily force the SEC to demonstrate that ETH is a security, why did the SEC halt its investigation?Why did the SEC drop the investigation into Ethereum?

Goforth believes the SEC’s retreat is a “pretty good indication that the agency does not believe it can convince a court that ETH is a security.”

She suspects the SEC “concluded that it would be difficult to prove that ETH is a security under theHowey investment contract test because of how widely the asset is held and traded, and how much market forces dictate profitability.” She said that the SEC may have wanted to avoid a discomfiting defeat:“Previous statements made by SEC officials about the likely classification of Ether might have been embarrassing to an agency that claims classification is ‘clear.’”

In 2018, former SEC director William Hinmanstated that Ethereum was not a security.

In hisspeech, he mentioned that decentralization plays a key role in this determination. The network and its operations were sufficiently decentralized, meaning investors no longer expected a single entity to perform significant administrative efforts​.

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The speech suggested that Ethereum’s status as a non-security was clear, contrasting with the SEC’s ongoing scrutiny under Gensler.

The crypto industry’s main complaint is that theSEC has not consistently provided guidance on how the Howey test applies to Ethereum or other similar cryptocurrencies.The battle for U.S. crypto regulation is far from over

The crypto community may be happy that the SEC dropped its investigation.

Goforth said that it’s a “really positive development for the Ethereum network that the SEC is not currently trying to asses that ETH is a security.”

However, she said that the letter from the SEC only states that “at this time,” the SEC will not be continuing its investigation and that “this is not a final determination.”

Goforth believes “it is too early to say the industry is ‘winning’ given the lingering uncertainties over the appropriate classification of most crypto assets.”

Consensyshighlighted that despite this “momentous” victory, it’s not a “cure-all for the many blockchain developers, technology providers, and industry participants who have suffered under SEC’s unlawful and aggressive crypto enforcement regime.”Source: Joseph Lubin

Goforth claimed that the industry needs a “clear regulatory framework with which it is reasonably possible to comply” where purchasers can access accurate information, and industry participants can be held accountable for illicit activities.Source: Consensys

Consensys may have won the battle, but the war continues. The SEC is also scrutinizing staking, a core element of the Ethereum ecosystem.

American crypto exchange Kraken has already settled with the SEC for $30 million. The exchange stopped offering staking services after the commission alleged that its staking-as-a-service offering constituted a security.

Coinbase CEO Brian Armstrong has even said that the exchange will take the SEC to court over staking if necessary.

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Goforth said that staking is “definitely a more complex” topic where “the SEC has alleged that staking itself involves an investment contract.”

She remarked that the SEC’s “position can be taken regardless of whether the underlying crypto asset is itself a security.”

The ongoing struggle for a clear regulatory framework in the U.S. crypto industry continues to be challenging.

However, recent developments might offer Ethereum advocates a momentary respite from some of the uncertainties surrounding Ether’s classification, offering a glimmer of hope in an otherwise tumultuous regulatory landscape.# Government# Security# Ethereum# SEC# US Government# United States# Regulation# Ethereum ETF# ETFAdd reaction