Are US Securities and Exchange Commission Regulators Preparing to Take Ethereum Down? Given the saber-rattling from officials — including SEC Chairman Gary Gensler — it seems entirely possible.
The agency went on a crypto regulation spree in September. First, officials at their annual The SEC Speaks conference pledged to continue taking enforcement action and urged market participants to come in and register their products and services. Gensler even suggested crypto intermediaries should split into separate legal entities and register each of their functions — exchange, broker-dealer, custodian, etc. — to mitigate conflicts of interest and improve investor protection.
Next, there was an announcement that the SEC’s Division of Corporation Finance plans to add an Office of Crypto Assets and an Office of Industrial Applications and Services to its Disclosure Review Program this fall to help with the registration of crypto market participants. Then there were testimonies before various Senate committees on proposed legislation to overhaul crypto regulation, in which Gensler reiterated his belief that nearly all digital assets are securities, and implicitly endorsed his view that such digital assets and relevant intermediaries should register with the SEC.
But perhaps the most jarring shots came as the SEC took aim at Ethereum, potentially reversing a years-long détente that began when a former SEC official declared that ether (ETH) along with bitcoin (BTC) was not a security. In his testimony before the Senate Banking Committee, Gensler suggested that Ethereum’s transition to Proof-of-Stake (PoS) could have brought Ethereum under the purview of the SEC because by staking coins, “the investing public [is] Expectation of gains based on the efforts of others.”
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Later, in a complaint against a token promoter, the SEC suggested that since there are more nodes of Ethereum in the US than in any other country, all transactions taking place on the Ethereum blockchain could fall under the SEC’s jurisdiction. These latest positions on Ethereum appear to be clear exaggeration by the SEC and another saber-rattling set to prompt the industry to register.
First, back in 2018, then-SEC Director of Corporate Finance William Hinman stated that Bitcoin and Ether are not securities in the eyes of the SEC. This seemed to be rooted both in the fact that Ethereum was sufficiently decentralized and in the difference between cryptocurrencies – substitutes for sovereign currencies – and digital tokens – assets revolving around a specific company.
But Ethereum’s merger into PoS may have muddied those waters, as the SEC suggests Ether could now be a security under the Howey test (an asset is a security if it’s 1), a cash investment; 2) in a joint enterprise; 3) with a reasonable expectation of profit; and 4) derived from the efforts of others). It is unclear how the merger could have materially changed the decentralized nature and purpose of Ethereum to now make it a security (it still more closely resembles Bitcoin than a digital token).
However, it is arguably better to meet the Howey factors, especially with more cryptolending-like attributes that the SEC has already claimed can turn a product into a security (see BlockFi action). However, PoS is still quite different from crypto lending platforms, where tokens are staked and interest is earned by what the lending company does rather than the collective efforts of the stakers. So it still seems far-fetched to consider ether as collateral when viewed in the context of what the Ethereum blockchain is primarily used for – smart contracts – and how its coins are mined.
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Second, the SEC’s assertion that transactions occurring on the Ethereum blockchain are subject to US jurisdiction because more nodes of Ethereum are located in the US than in any other country would extend the SEC’s reach well beyond the United States extend. Based on this line of reasoning, the SEC could assert jurisdiction over an Ethereum-based token developed, offered and sold in Germany, since the accumulation of Ethereum nodes in the US means that the transactions actually took place in the United States . It seems highly unlikely that such a result would stand up to legal scrutiny.
Does all this SEC aggressiveness mean an enforcement action against Ethereum (who would they even sue?) or lawsuits against foreign actors for foreign conduct on Ethereum? More likely, this is a bargaining tactic designed to get the industry to voluntarily submit to SEC jurisdiction. “Come in and talk to us – and register,” essentially. Because if Ethereum runs the risk of being considered a security/stock exchange – Ethereum! – then surely all the other tokens and decentralized finance platforms in the industry are too – except presumably Bitcoin (for now).
Adam Pollet is a partner in Eversheds Sutherland’s Securities Enforcement and Litigation practice, where he defends financial institutions, broker-dealers, investment advisers and individuals in regulatory investigations and enforcement matters involving the US Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA ) involved. and state securities regulators.
Andrea Gordon is Counsel at Eversheds Sutherland and advises clients on commercial, compliance, SEC and FINRA matters. She has extensive experience conducting internal investigations, evaluating and developing corporate compliance programs, and representing corporate and private clients in governmental investigations, administrative proceedings and complex commercial disputes.
This article is for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.