The United States Commodity Futures Trading Commission (CFTC) filed a lawsuit against Binance on March 27 for violations of the Commodity Exchange Act and CFTC regulations. Those violations included transactions with Ether (ETH), according to the lawsuit. This claim, on its face, struck a notable point of contention between the CFTC and the Securities and Exchange Commission (SEC).
The CFTC claimed in its lawsuit that Binance engaged in transactions with “commodity digital assets, including Bitcoin (BTC), Ether (ETH), and Litecoin (LTC) for persons in the United States.” That was not a new position for the agency. The CFTC claimed that ETH was a commodity in its lawsuit against FTX in December and Chairman Rostin Behnam expressed his view that ETH and stablecoins were commodities on March 8 in a Senate hearing.
The CFTC’s position on ETH was not controversial before the Ethereum merger; after Ethereum moved to a proof-of-stake consensus mechanism, SEC Chairman Gary Gensler commented on coin staking that “From a coin perspective […] That is another indication that, according to the Howey test, the investing public anticipates gains based on the efforts of others.”
Gensler’s comment sparked a slow wave of reactions. In February, for example, Ethereum co-founder and crypto entrepreneur Joseph Lubin told Cointelegraph: “Gambling is not a security,” and it would be a “terrible path for the US.” doing so. He added that he thought the US courts would agree with him and that “there would be a tremendous outcry not only from the crypto community but also from different politicians and certain regulators” if ETH were to be classified as a security.
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However, the CFTC’s case against Binance is based less on the nature of ETH than on the nature of Binance products, which limits its applicability to the broader argument.
“In this particular case, ETH is being treated as a ‘commodity’ rather than a ‘security,’” Timothy Cradle, director of regulatory affairs at Blockchain Intelligence Group, told Cointelegraph. “The complaint refers to the securities in regards to swaps.” Cradle added:
“The economics of an offering that includes ETH could still change the definition applied to the token. For example, participation in ETH could still be construed as an investment contract and as such security.”
Some transactions, such as mixed swaps involving ETH, could be subject to regulation by both the SEC and CFTC, Cradle said, but that “would not necessarily define ETH itself as a security, as mixed swaps also include raw materials and currencies.
This more complex approach to regulation would not necessarily imply cooperation between the two agencies. Yankun Guo, a partner at law firm Ice Miller, said of the situation in a statement to Cointelegraph:
“It shows that both the multifaceted nature of how tokens work and how they are used can cause them to fall under the jurisdiction of multiple agencies; […] I wouldn’t be surprised to see a similar lawsuit by the SEC naming all the same tokens except BTC as securities.”
Silver lining
CFTC’s lawsuit against Binance states that ETH is a commodity
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— sassal.eth (@sassal0x) March 27, 2023
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