Gary Gensler is the Chairman of the Securities and Exchange Commission. Al Drago—Getty Images
The Securities and Exchange Commission is conducting an aggressive legal campaign to classify Ethereum, the second most popular cryptocurrency, as a security, according to a US company that received a subpoena related to the investigation. . The news follows the SEC's approval of a series of Bitcoin ETFs in January, and is another blow to the crypto industry's hopes that the agency will approve applications from BlackRock and others for an Ethereum ETF.
The SEC's Ethereum investigation is seeking documents and financial records that companies may have regarding their transactions with the Ethereum Foundation, a nonprofit organization that oversees the governance and development of the blockchain of the same name.
The SEC's investigation into the Swiss-based Ethereum Foundation could potentially lead to a new governance model known as “proof-of-stake” for blockchain in September 2022, according to a company official who recently received a subpoena request. It is said that it started immediately after the transition to . Another company that received a subpoena described the subpoena as narrow in scope and focused on the Ethereum Foundation, and said it had received the subpoena in recent weeks.
This proof-of-stake event moves blockchain away from the energy-intensive model used by Bitcoin to one that relies on a network of trusted validators, prompting the SEC to define Ethereum as a security. It gave me a new excuse to try. According to officials at the three companies with knowledge of the subpoena.people asked luck He declined to identify them or their companies for fear of retaliation from the agency's director, Gary Gensler, who one person described as “vengeful.”
The existence of an investigation into the Ethereum Foundation was reported on Wednesday. coin deskcited updates to the group's Github code repository that allegedly provided evidence of an investigation by an unknown state agency.
“The SEC does not comment on the possibility of an investigation,” the agency said in response to a request for comment. luck.
Promotion of classifying Ethereum as a security
News of the subpoena comes as the SEC and the Biden administration pursue an aggressive campaign to curtail the cryptocurrency industry, which they view as lawless. However, this campaign has at times suffered setbacks due to the ambiguous legal status of cryptocurrencies, leading to a series of legal battles over whether the SEC has jurisdiction over the industry.
This important question of jurisdiction focuses on whether a particular cryptocurrency is a security, an issue that has not been clearly addressed by courts. While there is consensus that Bitcoin is a commodity supervised by the Commodity Futures Trading Commission, Gensler considers most other cryptocurrencies to be securities that must be registered with the SEC. suggested to the authorities.
The SEC has made this argument in recent court cases, with the exception of Ethereum, whose legal status is more murky. The security status of Ether has been a point of contention for the agency for years. Speaking at the 2018 conference, William Hinman, then head of corporate finance, said ether is not like a security. In emails released as part of the Ripple trial, SEC staff weighs how clear to make this claim, with one official saying the SEC “doesn't see a need to regulate Ether.” It became clear what I wanted to say.
Things changed under Gensler, who took over the agency in 2021, and with Ethereum switching to proof-of-stake the following year.
At the time, Gensler did not mention specific coins, but said cryptoassets generated by blockchains that use a proof-of-stake model can be similar to investment contracts, so they could be used as securities. He said it could be classified. In March 2023, he once again suggested that proof-of-stake tokens could be regulated as securities, but since then, there has been no discussion on Ethereum, including at an SEC oversight hearing in the House Financial Services Committee. He declined to comment specifically.
The issue was further complicated in October when the SEC approved nine ETFs that track the CFTC-supervised Ether futures market, suggesting that Ether is a commodity. CFTC Chairman Rostin Behnam has stated several times that the CFTC Commission considers Ether to be a commodity.
But last month, controversial cryptocurrency company Promethium (licensed to operate as a special purpose broker-dealer) announced its intention to offer custody services for Ethereum as a security under SEC oversight, and to regulate Ethereum. There was once again uncertainty at the top. One of the recipients of the recent subpoena speculated that Gensler was trying to use Promethium as a Trojan horse to classify Ethereum as a security.
The recent race to gain approval for the Spot Ether ETF by major financial firms such as Fidelity and BlackRock has drawn attention to the issue, and all indications are that the SEC will reject the application by the May deadline. Can be seen. Bloomberg analysts noted that agency staff has not communicated with issuers about the details of the possibility, as was the case with the Spot Bitcoin ETF, which was approved in January.
If Ether could be declared a security, that could throw further questions into the process, especially since it would raise questions about the CFTC's oversight of the Ether futures market.
