Ethereum ETFs May Have Ended the SEC’s War on Crypto

that of May Ethereum spot ETF approval by the United States Securities and Exchange Commission (SEC) was the final blow to what can only be described as a record month for crypto policy – ​​and the move could seriously jeopardize the The SEC’s Ongoing Crypto Crackdown.

As the deadline for approval of Ethereum ETFs approached, a bipartisan group of members of the House of Representatives sent a letter to SEC Chairman Gary Gensler urging the Commission to not only approve the funds, but also consider approving “other” digital asset ETFs in the future. And finally, the SEC finally went public late on that fateful Thursday and announced the approval of eight one-time Ethereum ETF applications.

According to Paul Grewal, Coinbase’s chief legal officer, the SEC’s approval of spot ETFs effectively considers Ethereum (ETH) to be a commodity. If Grewal is right his assessmentthen an ETH commodity would fall under the oversight of the Commodity Futures Trading Commission (CFTC), as opposed to the SEC, which is responsible for regulating securities.

This is a key distinction for ETH because the SEC’s mandate is to police securities and protect investors. Rather, the CFTC regulates commodities such as raw materials and agricultural products, with a focus on preventing market manipulation and fraud. The CFTC’s regulatory framework for commodities is therefore generally less strict than the SEC’s treatment of securities.

As digital assets continue to see mass adoption, there remains an ongoing debate over which federal agency should have jurisdiction over the regulation and enforcement of this new and innovative technology.

In 2021, former CFTC Commissioner Dawn Stump Gave a speech on the now infamous Case of XRP SEC enforcement measuresand noted that she was “closely monitoring the outcome of this case as it would help establish the scope of the SEC’s authority in the area of ​​digital assets.”

Commissioner Stump added:

Regulatory enforcement of digital assets, like the assets themselves, is evolving every day. This is exciting, but also frustrating for those seeking more certainty. But the incredible transformation of this space requires adaptation and creative thinking, and, let’s be honest, that’s not a regulator’s natural inclination. …This is where the regulatory state of digital assets currently stands: we need to enable innovators to think creatively so that the story can evolve, we need to recognize that there will be divergences in opinion as to the usefulness and potential of different products, and we should expect some storms to arise. It is these considerations that should guide us, as regulators, in exercising the powers necessary to fulfill our mission so that the market can develop and reach its full potential.

Perhaps the approval of the Ethereum ETF brings exactly the kind of regulatory clarity this industry has been looking for. If ETH and other similar cryptocurrencies are not securities, the SEC does not have jurisdiction to regulate these assets under the Securities Act of 1933 and the Securities Exchange Act of 1934.

This means that the SEC can no longer assert that these tokens are investment contracts under the Howey test. If ETH and similar tokens are commodities, then crypto lawyers could argue in court that these cryptocurrencies are not investment contracts that come with an “expectation of profits from the efforts of others” – critical elements that the SEC must prove under the Howey test.

Importantly, by tacitly acknowledging that Ethereum is a commodity, the SEC may have just undermined its own legal arguments raised in several ongoing crypto enforcement court cases.

If the courts are receptive to ETH and potentially other cryptocurrencies being commodities, then that could turn the tide of the SEC’s ongoing lawsuits against major crypto trading platforms like Coinbase and Kraken. These lawsuits rely on the SEC’s argument that certain tokens traded on these platforms are securities. But if Ethereum and similarly situated tokens are instead commodities, then that could green light a new motion to dismiss the SEC’s lawsuits against Coinbase and Kraken.

If the federal judges in these cases agreed with this argument, it would essentially weaken the SEC’s claims that Coinbase and Kraken both offer trading in unregistered securities.

Such a move would deal a devastating blow to SEC Chairman Gary Gensler, who is already facing intense scrutiny from critics who say his aggressive approach to enforcement regulation is stifling the industry’s growth. of digital asset technology in the United States and drives innovation. abroad to more favorable jurisdictions.

As noted in Grewal’s recent article Post to Twitter (aka X)Now that the SEC has effectively stated that “sales of ETH cannot be securities because Ethereum ETFs can be registered by funds with an S-1”, the SEC has essentially agreed that ETH no longer has “ecosystem” than Bitcoin.

The SEC’s recent approval of Ethereum ETFs has profound potential implications for ongoing and future legal battles in the digital assets sector. By suggesting that ETH and other similarly situated tokens are commodities, the SEC may have significantly limited its power to aggressively police the crypto industry.

The Ethereum ETF’s decision could therefore further encourage players in the digital asset industry to resist overzealous enforcement, leading to fewer settlements and more court battles.

Getting long-awaited clarity on whether ETH is a security or commodity could also narrow the SEC’s jurisdiction over Ethereum and other similarly situated cryptocurrencies. This in turn could lead to a dramatic narrowing of the SEC’s regulatory reach in the digital assets sector. Crypto lawyers will no doubt use the ETF decision to aggressively push back against ongoing SEC enforcement actions and lawsuits, and argue that the agency has overstepped its mandate.

If more digital assets are treated as commodities similar to what the Ethereum ETF decision suggests, then lawmakers could finally pass laws to significantly reduce the SEC’s reach over these assets. As a result, these tokens could be subject to potentially less strict regulation under the CFTC. Such a change in agency oversight would create fewer regulatory hurdles for crypto startups and foster a new wave of innovation in this sector.

Crypto lawyers will likely leverage the ETF decision to reshape existing strategies with respect to how they advise clients in the digital asset space. These strategies may include advising crypto clients to place greater emphasis on the tradable nature of their tokens and platforms, in an effort to better protect them from SEC reach.

If Coinbase and Kraken’s legal defense teams succeed in dismissing pending SEC lawsuits based on the Ethereum ETF decision, then this could generate very favorable legal precedents that would influence future regulation of the crypto industry. digital assets and would pave the way for a new wave of blockchain innovation. in the USA

A new era of clarity regarding digital asset laws would also benefit investigators and attorneys employed within the SEC and CFTC, creating a potentially more predictable and stable regulatory environment. This would result in a more efficient use of agency resources, as opposed to the legally ambiguous environment in which we currently operate. Regulatory clarity would also bring much-needed consistency to judges presiding over digital asset cases and generate more consistent and predictable outcomes.

I strongly believe that crypto lawyers are the gatekeepers of blockchain and play a vital role in the continued growth and adoption of crypto technology in the United States. The recent Ethereum ETF decision will only allow crypto lawyers to better advise and guide clients in the digital assets sector – and I’m excited to see how they creatively use this opportunity to do just that.

Edited by Andrew Hayward

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