The Securities and Exchange Commission is preparing to pass judgment on Ethereum that extends far beyond the boundaries of the United States.
SEC’s Crypto Regulation Spree
The Securities and Exchange Commission of the United States regulators is preparing to pass judgment on Ethereum. Officials, notably SEC Chairman Gary Gensler, have threatened to proclaim Ether as an unregistered security. In September, the SEC started a spree of crypto regulation.
At SEC Speaks conference, officials pledged to keep taking enforcement proceedings and invited market participants to come in and register their goods and services. To reduce conflicts of interest and improve investor protection, Gensler even recommended that cryptocurrency intermediaries separate into independent legal entities and register each of their roles, such as exchange, broker-dealer, custodial duties, etc.
SEC’s Announcement
The Division of Corporation Finance of the SEC disclosed that they would add an Office of Crypto Assets and an Office of Industrial Applications and Services to its Disclosure Review Program this fall to help register crypto market participants. Then, in testimony before several Senate Committees, Gensler reaffirmed his conviction that all digital assets are securities, implicitly endorsing his stance that these digital assets and pertinent intermediaries should register with the SEC.
SEC’s Statement on Ethereum PoS
The SEC’s campaign against Ethereum delivered a seismic blow, radically changing a détente that had existed for years. Whereas, in the past, the SEC had declared that Ether and Bitcoin were not securities. Gensler pointed out that Ethereum switching from proof-of-work to proof-of-stake (PoS) could bring Ethereum under the SEC’s jurisdiction because implementing a staking protocol leads the investing public to anticipate gains based on the efforts of others.
Later, the SEC suggested in a complaint filed against a token promoter that because a higher number of Ethereum nodes are in the U.S. than in any other country, all transactions taking place on the Ethereum blockchain may be subject to SEC regulation. These SEC views on Ethereum seem to some as a blatant overreach on the part of the SEC. While others may welcome U.S. leadership for a cryptocurrency regulation frame
A History of SEC & ETH
Starting in 2018, William Hinman, the SEC’s Director of Corporation Finance, declared that Bitcoin and Ether were not securities from the agency’s perspective. This had its roots in Ethereum’s decentralization and the distinction between digital tokens and cryptocurrencies, which serve as substitutes for traditional currencies and assets revolving around ventures.
The SEC has suggested that Ether may now be considered a security under the Howey Test if it is an investment of money involved in a joint enterprise with a reasonable expectation of profits obtained through the efforts of others. However, Ethereum’s Merge to PoS has potentially muddied the waters in this regard. It’s unclear how the Merge may have significantly altered Ethereum’s decentralized structure and goals to transform it into security (it still resembles Bitcoin more than digital tokens).
Second, the SEC’s claim that transactions on the Ethereum blockchain are subject to U.S. jurisdiction because more of that cryptocurrency’s nodes are situated there than anywhere else would significantly extend the SEC’s jurisdiction beyond the country. According to that logic, the SEC may claim jurisdiction over an Ethereum-based token created in Germany and offered and sold there exclusively to Germans because the U.S.’s cluster of Ethereum nodes makes it appear that the transactions occurred there. Such a result would seem very unlikely to meet legal requirements.
Conclusion
All of the SEC’s belligerent acts foreshadow legal action against Ethereum and foreign entities for their efforts on cryptocurrency. This, “Come in and talk to us—and register,” is a negotiation ploy designed to intimidate the industry into willingly submitting to the SEC’s jurisdiction. Because if Ethereum is in danger of being classified as a security or exchange, then all other decentralized finance platforms in the market must be, too, except Bitcoin (for now).
