Fears of Ethereum being labeled a security were revived when US senator Cynthia Lummis (R-Wyo.) said on Wednesday that Bitcoin is the only cryptocurrency that can be considered a commodity now that Ethereum has passed the Merger.
“It’s starting to look more and more like bitcoin is the only thing that can be a commodity,” said Lummis (R-Wyo.), a longtime bitcoin holder and advocate.
During an appearance on CoinDesk TV’s “All About Bitcoin” program on December 7, he said that Ether can be considered a security “because of the way it works.” [it] moved from proof-of-work to proof-of-stake” earlier this year. “The inability to (unstake tokens) is now vulnerable to (perceived) security,” he added.
This categorization could change, Lummis said, because it’s possible that Ether will become “decentralized enough that it can later be considered a commodity.”
For those who don’t know, Lummis, a member of the Senate Banking Committee, along with Sen. Kirsten Gillibrand (DN.Y.), sponsored the Responsible Financial Innovation Act, which, if passed, would give the Commodity Futures Trading Commission (CFTC). the main power to set regulatory standards for crypto. The bill aims to clearly define what can be considered a security or a commodity.
Currently, the question of whether Ethereum is a security or not remains a complex one. On the one hand, Ethereum is a decentralized platform that runs smart contracts, which means that it is not subject to the control of a central authority. And on the other hand, Ethereum has its native currency, Ether, which is used to pay gas fees and transactions on the network. This has led some to argue that Ethereum is a security, while others maintain that it is not. But what do the regulators have to say about it?
Ethereum has declared a commodity?
The nature of Ethereum may be in question, and as of 2018, the former Director of Corporate Finance at the US Securities and Exchange Commission (SEC), William Hinman, said that: “… creating Ether, based on an understanding of the current state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.
Here, Hinman refers to the launch of Ethereum. Before its release in July 2015, the network sold native ETH tokens through an initial coin offering (ICO) in exchange for Bitcoin. During the ICO, approximately 50 million ETH were sold, which made the Ethereum Foundation more than $18 million.
Hillman stated that at that time, the Ethereum network was sufficiently decentralized to the point where the token, ETH, could no longer be considered a security and, if regulated otherwise, would add “little value” to investors or regulators.
However, it’s not just Hinman. Former SEC chairman Jay Clayton also made it clear in 2019 that he did not consider Ether a security.
Interestingly, most recently, the financial regulator in Belgium announced that Bitcoin and Ethereum should not be classified as securities.
According to a document released by the Financial Services and Markets Authority (FSMA) of Belgium, cryptocurrencies without an issuer are not securities. BTC and ETH are specifically exempted from operating as securities in the financial system of EU countries.
“If there is no issuer, as in the case where the instrument is created by computer code, and this does not end in the execution of the agreement between the issuer and the investor, for example, bitcoin or ether, then in principle Prospectus Regulation, Prospectus. Laws and rules the MiFID act does not apply,” the document said.
However, if the instruments have a payment or exchange function, additional rules may apply to them, according to Belgian regulators.
For instruments that can be transferred with the issuer, the EU-based MiFID rules say that they will be securities. So, in addition to BTC and ETH, other cryptocurrencies will be defined as centralized issuers, and therefore must produce an honest information prospectus You had to comply with the MiFID rules of the European Union, which requires financiers to avoid conflicts of interest. .
The inclusion of Ethereum in the exemption from securities laws by the FSMA sets a precedent in the development of a regulatory framework for crypto assets around the world.
Join has Reigned Fear
While comments from Hinman allayed fears of Ethereum being labeled as a security, the debate in the US was reignited with Merger.
The merger moved the Ethereum network from a PoW consensus algorithm to a cheaper, faster, and energy-efficient PoS, which now has significant implications.
It took years for the Ethereum network to get here, but watching Ethereum’s decentralization progress alongside Merge has been fascinating. Now that we’ve joined, we expect to see increased security as we rely on more validators.
But in addition to technological progress, Merge caused some serious problems for Ethereum. Based on Hinman’s assessment, it is unlikely that the SEC will retroactively classify Ethereum as a security. However, shortly after the merger, SEC Chairman Gary Gensler said cryptos with a proven history of staking could be eligible to be considered as securities.
Gensler, who is the former chairman of the Commodity Futures Trading Commission (CFTC), previously also said that Ethereum meets the Howey test. The Howey test is a criterion that guides whether an asset is classified as a security under US law.
In traditional markets, stocks and bonds are classified as securities. And in order for crypto to be considered a security, it must meet certain criteria. First, it should be an investment of money. Second, there must be an expectation of profit from the investment. Third, the investment must be in a public company. Finally, there must be a reasonable level of risk involved in the investment.
Cryptos that meet these criteria are usually considered securities. When it comes to Ethereum, it is decentralized and not controlled by a single entity. This means that no large party can be held responsible for performance or security.
Finally, Ethereum is not marketed as an investment or a way to make money. However, it is intended to be used as a platform for building decentralized applications, which makes it more akin to utility tokens than security.
For validators, they deposit ETH in a smart contract to validate transactions and keep the blockchain secure, which does not have to “invest money.” For these reasons, it is unlikely that Ethereum will be considered a security.
Ethereum Under Scrutiny, But What About Bitcoin?
While Ethereum’s status as a security is still debated, Bitcoin is confirmed not to be a security. Unlike Ethereum, Bitcoin’s regulators and supporters point to the cryptocurrency’s unique characteristics that stand out as a decentralized digital asset without a specific founder or underlying body.
Created by the pseudonymous Satoshi Nakomoto in 2009, Bitcoin’s supply is limited to 21 million coins, while Ethereum is unlimited. There is no centralized entity that issues BTC, nor is there a joint venture that can profit from the inflow of capital from institutional and retail investors.
However, U.S. regulators and bitcoin maximalists argue that Ethereum is a security, citing the existence of co-founder Vitalik Buterin and a centralized body called the Ethereum Foundation. Additionally, they claim that since issuance can be controlled through updates to the underlying code, Ether should be considered a security.
SEC Chairman Gensler also said during his 2018 MIT lecture that compared to bitcoin, “Ethereum is a little more centralized and has more leadership.”
The Ethereum Foundation, however, states on its website that it is a non-profit organization. “Its role is not to control or lead Ethereum” but to support the network and related technologies.
But some argue that Ethereum holders can apply the asset according to the new PoS validator method and return the result in the form of Ether.
SEC head Gelser has also said several times that crypto assets allow staking, so they are a security. This is because “the investing public expects profits based on the efforts of others.”
“Many of these tokens … the investing public expects a return like when they invest in other financial assets called securities. Many of these financial assets, crypto financial assets, have key attributes of security,” said Gensler.
Gensler, however, is not only after Ethereum but the entire cryptocurrency industry. Just this week, he said the SEC needs more money to hire more staff and increase its investigative powers. He also believes that the agency should be given more authority to pursue cases involving overseas entities. He believes this will allow the SEC to better protect investors and ensure that companies comply with US law.
“If the SEC has the authority that Mr. Gensler claims, why did they fail to uncover the largest crypto Ponzi scheme in US history?” wrote Rep. Ritchie Torres (DN.Y.) in a letter to the Government Accountability Office requesting a review of the SEC’s role with the FTX crypto exchange collapse. “One cannot have it both ways, asserting authority while avoiding responsibility.”
Gensler also believes that there is no need for customized crypto rules, which crypto market participants say is due to the decentralized nature of crypto. “The rules are there,” Gensler said. “Law firms know how to advise their clients to comply.”
This is not the first time that Gensler has spoken about the need for more regulation in the cryptocurrency space. It’s clear that Gensler believes the SEC needs more power to regulate the cryptocurrency space. Click here if you want to know how Bitcoin works.
What does this mean for the Crypto Ecosystem?
There is no doubt that Ethereum’s “The Merge” upgrade has caused quite a stir in the cryptocurrency community. Some are even calling it a “reversion to security” for the Ethereum network. While it is true that The Merge has brought some much-needed security updates to Ethereum, it has also raised regulatory scrutiny.
The SEC is actually locked in a legal battle with another crypto project, Ripple, over the issuance of the digital currency XRP, which the agency claims is an “unregistered securities offering.” In the case of SEC vs. Ripple’s defense team stated that Ripple believes XRP, along with bitcoin and Ether, are not securities.
The SEC has yet to issue an official ruling on Ethereum. While in 2018, he stated that he believed that Ethereum was not a security, the SEC also said that he may reconsider his position in Ethereum in the future.
So, for now, it seems that Ethereum is not a security, but this may change in the future, as the regulator’s comments show.
But if Ethereum is actually classified as a security, as opposed to a commodity, then Ethereum may be subject to stricter requirements regarding registration, disclosure, and accreditation for investors by the SEC.
It will also have some implications for the plethora of tokens built on top of the Ethereum network. For one, it means that the tokens will also be considered as securities and will be subject to all related regulations. This could have a huge impact on how these tokens are traded and used, as well as how the Ethereum network is run. It could have a big impact on the price of Ethereum, as increased regulation could lead to a decrease in demand for the currency.
In addition, it could put users’ funds at risk and put many major players, including issuers and exchanges, in hot water. For example, to be considered a security, websites that offer trading in Ether must obtain a license from a federal regulatory agency. And in this case, cryptocurrency exchanges must register with the US commodity regulator, because they will be considered trading securities and face penalties if not.
Regulators’ comments about Ethereum as a security in the past have been confusing, to say the least. Some have said it is security, while others have said no. This confusion may be due to the fact that Ethereum is a decentralized platform and, as such, does not fall within the traditional definition of security. However, the attitude of the regulator in Ethereum remains unclear, and this confusion cannot be resolved in the short term.
