The US Securities and Exchange Commission (SEC) filed a lawsuit against Binance today in a move that has rocked the cryptocurrency industry.
He complaint notably, it includes language in which the SEC makes it clear that it considers many of the tokens trading on Binance to be unregistered securities and makes its case against several it considers notable infringers. The SEC identifies these “crypto-asset securities” which include (but are not limited to) Solana, Cardano, Polygon, Filecoin, Cosmos, The Sandbox, Decentraland, Algorand, Axie Infinity, and Coti.
Today’s filing contains some of the SEC’s most explicit language to date to clarify its judgment, but once again it avoids taking on the big question: Is Ethereum a security or not? If so, why is the SEC silent about it? And if not, what is it?
“Crypto Asset Securities”
The SEC’s argument for designating these tokens as “crypto-asset securities” is fully described in Section VIII of the complaint (pages 85-123). Notable patterns emerge from the presentation: the initial coin offering (ICO) process, token granting, core team allocations, and promoting profit generation through token ownership are all recurring themes. .
But Ethereum is not listed among these. Gensler has always remained vague on the question of whether Ethereum and its namesake coin count as securities. ETH is commonly held as an investment, which suggests it could be classified as a security, but it is also widely used on a day-to-day basis as a medium of exchange across protocols, making its function more similar to cash or ACH settlement.
Gensler has previously suggested that “everything but Bitcoin” in the crypto space could be seen as a security, but has notably refused to clearly state as much about Ethereum. When pressed into the words “I think Ethereum is a security,” the Hon. chair alone I won’t do it. Gensler’s reluctance to classify Ether is curious when his SEC is so eager to claim so much for others. Because?
The Ethereum problem
It could be a simple matter of intragovernmental dispute. Ethereum could potentially fall under the purview of the Commodity Futures Trading Commission (CFTC), which views Bitcoin, Ethereum, and Tether as commodities, not securities. Not only do the two categories differ wildly from one another, but this overlap could create a regulatory tug-of-war that would affect Gensler’s public stance on Ethereum as he tries to avoid the appearance of infighting within the federal government.
Another analysis of proteaargues that Gensler’s dodge on the matter may be a consequence of earlier SEC inaction after the infamous dao cheat, which saw the blockchain fork at Ethereum Classic and put the entire ecosystem at risk. At the time, however, the SEC did nothing, and Gensler now finds himself in the unenviable position of making up for the oversights of his predecessors. Now that the Ethereum ecosystem has spent years recovering and building credibility, retroactively declaring it an unregistered security would have unforeseen, but undoubtedly disastrous consequences for investors.
In other words, protecting investors in this case would mean protecting them from the protector.
However, perhaps another reason could be behind Gensler’s reluctance to clearly classify Ethereum: he may not know.
Cryptocurrencies and their underlying technologies are innovative and novel. They represent a fundamental shift in the way we understand finance and asset ownership and, in the case of decentralized ecosystems like Ethereum, introduce entirely new paradigms.
If this is true, it’s not unreasonable to suspect that most people, even those deeply involved in space, may not fully understand the implications of these innovations just yet. Anything that is fundamentally new will resist categorization, and Ethereum does: this lack of a concrete “concept” that defines Ethereum but fits previous understandings is the central problem around its regulation.
This regulatory ambiguity presents a complex challenge for Ethereum, but it does not diminish the urgency of addressing it. The advancement of the crypto industry depends on obtaining clear legal definitions for Layer 1 (L1) tokens, such as Ethereum, which function simultaneously as means of daily exchange and investment vehicles within their respective ecosystems. Ambiguity in their status poses a significant obstacle, halting progress and fostering uncertainty in a space that is ripe for growth and innovation.
The dichotomy of the roles of these tokens blurs the line between conventional asset classes, forcing us to confront the inadequacies in existing legal structures. To boost the crypto industry, regulators need to recognize and address this nuanced reality. Until a refined framework emerges that accurately captures the dual functionality of these L1 tokens, regulatory ambiguity will continue to engulf the industry, stifling its full potential and deterring widespread adoption. This unique cryptographic space requires equally unique rules, which can encapsulate its dynamism and complexity.
making significant progress
The path to comprehensive crypto regulation is clouded by two major obstacles, which must be urgently addressed for the responsible advancement of the sector.
First, the US Securities and Exchange Commission (SEC) must take a formal position on Ethereum. Given the SEC’s historical inaction to restrict Ethereum’s growth when opportunities presented themselves, it has inadvertently fostered an environment where investors are left in regulatory limbo. The SEC, as protector of investors, has a duty to provide some form of regulatory guidance, even if it turns out to be temporary, to offer a fundamental starting point and eliminate the current state of speculation. The lack of clear regulation is not simply a drawback; it is a failure to provide the necessary protections for participants in an increasingly important market.
Second, authentic and open discussions about the nature of digital assets are crucial. This means engaging in conversations devoid of preconceived notions, biases, ideological stances, or empty rhetoric. We often talk about making space to “have the conversation,” but acknowledging that the conversation needs to take place and actually having one are two very different exercises. Perhaps everyone in the industry, as well as those who oversee it, would benefit from practicing the latter.
