Federal regulators are preparing to pass judgment on Ethereum

Are U.S. Securities and Exchange Commission regulators preparing to bring down Ethereum? It seems likely, given the saber-rattling of officials, including Gary Gensler, SEC Chairman.

In September, the agency embarked on a crypto regulatory spree. First, the agency’s annual The SEC Speaks conference featured officials promising to continue to bring enforcement actions and encouraging market participants to register their products or services. Gensler suggested that crypto intermediaries be broken up into separate legal entities to register all their functions (exchange, broker-dealer and custodial). — to reduce conflicts of interest and increase investor protection.

The announcement by the SEC’s Division of Corporation Finance that it will add an Office of Crypto Assets and a Office of Industrial Applications and Services into its Disclosure Review Program in this fall was followed by an announcement about how they plan to help with crypto market participant registrations. Next, Gensler testified before several Senate Committees about proposed legislation to overhaul crypto regulations. He reiterated his belief in the securities nature of almost all digital assets, implicitly indicating that such assets and any intermediaries should be registered with the SEC.

The SEC’s attack on Ethereum was perhaps the most significant. This could reverse a long-standing detente that started when an SEC official said that Ether (ETH) and Bitcoin (BTC) were not security. Gensler testified before the Senate Banking Committee that Ethereum’s transition from proof-of work to proof-ofstake (PoS), could have made Ethereum subject to the SEC. This is because the “investing public” anticipates profits based upon the efforts of others.

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In a later complaint against a token motor, the SEC suggested that transactions on the Ethereum blockchain could be subject to the SEC’s control because there are more nodes in the U.S. than in any other country. These positions on Ethereum are clear evidence of SEC overreach, and more saber-rattling to encourage the industry to register.

First, in 2018, William Hinman, then-SEC Director for Corporation Finance, declared that Ether and Bitcoin were not securities. This was rooted in Ethereum’s sufficiently decentralized nature and the distinction between digital tokens and cryptocurrencies, which are both replacements for sovereign currency and assets that revolve around a particular venture.

The SEC suggested that Ethereum could be considered a security due to the Merge to PoS. This means that Ether may now be subject to the Howey Test. An asset is an investment of money, 2) in a common enterprise, 3) with a reasonable expectation for profits, and 4) derived through the efforts of others. The Merge to PoS could have changed Ethereum’s decentralized nature and purpose to make it a security. However, it’s more similar to Bitcoin than digital tokens.

It is possible to argue that it meets the Howey criteria, particularly with more crypto-lending-like attributes, which the SEC has already claimed can make a product a security. (See BlockFi action). PoS is, however, distinct from crypto-lending platforms, where tokens can be staked and interest generated by the lending company, rather than the combined efforts the stakers. It is still a farfetched idea to consider Ether a security, especially when you consider what the Ethereum blockchain is used for: smart contracts and how it is mined.

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The SEC’s claim that transactions on the Ethereum blockchain are subjected to U.S. jurisdiction, as more Ethereum nodes are located within the United States than in any other country, would second expand the SEC’s reach beyond the United States. The reasoning behind this is that the SEC could claim jurisdiction over an Ethereum-based token that was developed in Germany and offered and sold only to Germans by using the U.S. cluster of Ethereum nodes. This means that transactions actually took place in the United States. This outcome is unlikely to be legal.

Is all the SEC’s aggressive rhetoric a sign of an enforcement action against Ethereum? (Who would they sue anyway?) or actions against foreign actors who have engaged in foreign conduct on Ethereum. This is more likely a negotiating tactic to intimidate the industry into accepting the SEC’s jurisdiction. “Come in to talk with us — and register,” basically. Ethereum could be deemed a security/exchange, and that is why it’s here! It is likely that all other tokens and decentralized financial platforms in the industry are at risk of being deemed security/exchanges — Ethereum!

Adam Pollett, a partner in Eversheds Sutherland’s Securities Enforcement and Litigation practice, defends financial institutions and broker-dealers as well as investment advisers and individuals in regulatory inquiries and enforcement matters involving the US Securities and Exchange Commission, the Financial Industry Regulatory Authority, and state securities regulators. Andrea Gordon, Eversheds Sutherland counsel, advises clients on compliance, SEC and FINRA matters. She is an experienced investigator, who can evaluate and develop compliance programs for corporations. She also represents individuals and corporate clients in administrative proceedings, complex commercial litigation, and regulatory inquiries.

This article is intended for informational purposes only and should not be construed as investment or legal advice. These views, thoughts and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.

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Eileen Wilson

Eileen Wilson –Technology and Energy My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.

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