Ethereum: Here's why the SEC has no interest in classifying ether as a security

In recent hours, Ethereum users have been rubbing their hands a little. Ether (ETH) has recovered. Its valuation climbed nearly 7% in 24 hours to around $3,650. Very good news which does not hide a major concern which recently leaked. Namely possible attempts by the Securities and Exchange Commission (SEC) to classify ETH as a security. If such a prospect materializes, the negative consequences would be significant for Ethereum and the crypto ecosystem in general. But the SEC might also not get away with it. In this article, we'll see why this SEC plan is actually no one's business.

The context of regulatory attempts against Ethereum

The latest news is that the SEC is actively preparing to qualify ether as a security. According to currently unofficial sources, the financial regulator has summoned various companies to appear. The objective is to obtain from them documents of their interactions with the Ethereum Foundation, the non-profit organization based in Switzerland behind the creation of Ethereum. It seems that these investigations are not recent. Indeed, according to sources cited by Fortune, the investigation concerning ether apparently began in 2022. This following the implementation of The merge establishing the Ethereum staking system.

Gary Gensler, the chairman of the SEC, has already raised the possibility of considering blockchains focused on “proof-of-stake”, including Ethereum as securities. He justifies this option by relying on the structure that rewards users for staking their assets. However, until now Ethereum has never been worried, which is not to the taste of some like Ignacio Ferrer-Bonsoms.

For this lawyer specializing in cryptos, the SEC would have implemented an inconsistent policy from this point of view. While the institution classified several assets as securities, including Cardano's ADA and Solana's SOL, the expert raised the unfairness of the latter. According to him, the regulator cannot classify Cardano's ADA as a security and abandon ether. This is because, in his opinion, there are similarities in their functioning. He cites as proof the fact that the Ethereum Foundation has raised substantial funds through the sale of tokens to finance the development of the network.

Like the Cardano Foundation, it has awarded tokens to its promoters. Not to mention that both entities actively contribute to initiatives aimed at increasing the value of tokens, the Ethereum burning mechanism being an example. Added to this is the influence that the Ethereum founding team, notably Vitalik Buterin and Joseph Lubin, continues to exert, thus contributing to the platform's strategy. Unlike bitcoin, whose founders have largely withdrawn from the active life of the network. As we will have understood, there are supporters of the classification of ether as a security. Just as many are against such a classification.

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A regulatory option that is not unanimously supported

I have to say that the classification of ether as a security is very controversial. While the SEC considers it as such, the CFTC considers it a commodity, which allows crypto futures trading. This mismatch poses the risk of disruption to various U.S. entities, including major exchanges like CME Group and Cboe Global Exchange.

But experts oppose classifying ether as a security. They invoke several arguments for this purpose, including the status acquired by crypto over the years and the potential negative effects of such a possibility. Brian Quintenz, a CFTC alumnus, points to the SEC’s approval of ETH futures ETFs as evidence of this status.

Comparing ether to bitcoin, Brian Frye highlights its decentralization and widespread ownership, despite the influence of the Ethereum Foundation. Decentralization supported by the platform’s broader stakeholder base and community of developers. Furthermore, data from IntotheBlock shows that long-term holders of ether outnumber bitcoin holders. Which, according to the expert, demonstrates the confidence that investors have in Ethereum.

That said, Brian Frye warns of the potential repercussions of the SEC's aggressive regulatory approach against Ethereum. He believes it could lead to intervention by the Supreme Court and a redefinition of the concept of “security” described in the Howey test. The regulator could then see its field of competence considerably limited. But other consequences are highlighted.

What would happen if Ethereum crypto became a security

If the potential classification of ether as a security raises so much speculation and concern within the crypto community, it is not for nothing. This is because such a prospect could have significant consequences for Ethereum developers, investors and the crypto sector as a whole.

One of the main concerns with this possible classification is the uncertainty it would introduce into the Ethereum ecosystem. As a reminder, Ethereum is currently the second largest blockchain on the market in terms of market capitalization, with a value of over $400 billion. Due to its position, any change in its regulatory status could affect network operations and impact its users.

Thus, if ether were classified as a security, it would result in a series of regulatory requirements and compliance measures for Ethereum developers and users. Restrictions on trading and investment activities, as well as increased oversight from regulatory authorities, could emerge. Which would undoubtedly have a hindering effect on the growth and development of the Ethereum ecosystem, stifling innovation and investment in the platform.

Additionally, classifying ether as a security could harm DeFi. Indeed, Ethereum is not only a leading blockchain platform. It is also a fundamental component of many decentralized financial applications and smart contract protocols. In other words, any disruption to Ethereum could ripple across the entire DeFi ecosystem, affecting other digital assets and projects built on this platform.

Another consequence with this potential classification could be increased legal and regulatory risks for Ethereum developers and users. Developers could face legal challenges and potential lawsuits related to the issuance and distribution of ether. While users might face difficulties in accessing crypto and trading it on different crypto exchanges.

Additionally, classifying Ether as a title could tarnish its overall aura. Investors and market participants may adopt a less risk-based approach when investing in projects with unclear regulatory status. This excess of caution could lead to increased volatility and uncertainty in the crypto market. Of course, the extent of these consequences remains uncertain. But it is clear that any changes to Ethereum's regulatory status will have a profound effect on its developers, users, and the future of DeFi. Not to mention that the SEC could find itself facing a new legal debacle linked to the abuse of power it displays vis-à-vis the crypto industry.

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