Ethereum taken down, Ripple still in the SEC’s crosshairs?

The United States Securities and Exchange Commission (SEC) recently concluded its investigation into whether Ether (ETH) is a security, causing significant excitement within the cryptocurrency industry. The move marks a notable change in the regulatory landscape for one of the most important cryptocurrencies.

SEC ends investigation into Ether classification

On June 19, 2024, the The SEC has officially ended its investigation into the classification of Ether, a decision that surprised many. According to Consensys attorney Laura Brookover, this cessation means there will be no more SEC assertions calling Ether a security.

Brookover noted that this move was not voluntary but rather a response to pressure to lift subpoenas against Consensys, particularly following the recent approval of Ether exchange-traded funds (ETFs). The approval of these ETFs involved a reclassification of ETH as a commodity rather than a security.

Despite Consensys’ claims, the SEC has not publicly confirmed this new classification. Carol Goforth, a professor specializing in trade associations and securities regulation at the University of Arkansas School of Law, explained that the approval of a spot Ether ETF does not in itself mean that ETH is considered a commodity.

Source: Consensys

Goforth stressed that the approval of an ETF is not linked to the classification of the underlying asset, pointing out that many ETFs are based on commodities without affecting their legal status.

This begs the question: why did the SEC decide to discontinue its investigation into Ethereum? Goforth believes the SEC likely realized it would have difficulty convincing a court that ETH is a security under the Howey Investment Contract Test, given the widespread ownership and market-driven nature of Ether.

She suggested that the SEC might have wanted to avoid an embarrassing defeat, especially given previous statements from SEC officials suggesting that Ether’s classification should be clear.

Notably, in 2018, former SEC Director William Hinman stated that Ethereum was not a security, citing the network’s decentralization as a critical factor in this determination.

Inconsistent SEC Guidance

The crypto industry’s main grievance has been the SEC’s inconsistent guidance on applying the Howey test to Ethereum and similar cryptocurrencies. The SEC’s decision to drop the investigation is seen as a positive development for Ethereum.

Goforth described it as a favorable decision for the Ethereum networkbut she cautioned that the SEC’s letter indicated only a temporary halt to the investigation, not a final decision.

She highlighted that continued uncertainties surrounding the classification of most crypto assets mean the sector is far from achieving regulatory clarity.

Consensys hailed the SEC’s decision as a significant victory, but stressed that it does not address the broader issues facing blockchain developers, technology providers and others in the industry.

Source: Joseph Lubin

The company called for a clear regulatory framework that enables compliance, accurate information for buyers and accountability for illicit activities. Although Consensys may have won this particular battle, the war for crypto regulation in the United States continues.

One of the ongoing areas of contention is the scrutiny of staking, a fundamental aspect of the Ethereum ecosystem. The SEC has already reached a $30 million settlement with US crypto exchange Kraken over its staking services, which the commission said constituted a security.

Coinbase CEO Brian Armstrong said the exchange was prepared to take the SEC to court over staking if necessary. Goforth noted that staking is a complex issue and that the SEC’s position on staking as an investment contract could persist regardless of whether the underlying crypto asset is a security.

The SEC Double Standard: Ethereum vs. Ripple

The broader fight for a clear regulatory framework in the US crypto industry remains a challenge. However, recent developments have offered Ethereum supporters a temporary reprieve from some of the uncertainties surrounding Ether’s classification, providing a glimmer of hope in an otherwise tumultuous regulatory landscape.

The SEC’s inconsistent treatment of Ethereum and Ripple has also drawn criticism. Bill Morgan, a prominent member of the XRP community, and several analysts have accused the SEC of regulatory inconsistency.

Morgan argued that the SEC’s leniency toward Ethereum, especially with the impending approval of a spot ETF, illustrates a double standard.

The XRP community’s frustration is rooted in what it perceives as biased treatment, with Morgan pointing out that the SEC’s recent letter to Consensys, clarifying the status of Ethereum, contradicts its aggressive stance against Ripple.

He argued that token classification criteria remain ambiguously applied, leading to regulatory uncertainty and uneven enforcement.

The rapid resolution of Ethereum’s status stands in stark contrast to the protracted investigation into Ripple, prompting scrutiny of regulatory consistency and potential underlying influences.

The SEC’s regulatory approach remains under critical scrutiny as the crypto industry continues to navigate the complexities of compliance and classification.

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