Last week, the SEC announced that it was officially investigating Ethereum for being an unregistered security. Panicking, many investors sold their stakes, while others stayed invested but began to spread panic across social media platforms. This caused the price of Ethereum to drop rapidly.
So, what does the SEC have against Ethereum? And are they going to win? We’ve got some of the answers in this article, so keep reading.
Why the SEC is Investigating Ethereum
In the United States, there are two regulatory bodies that oversee the exchange of goods and services, they are the SEC, which oversees the trading of securities, and the CFTC, which oversees the trading of commodities.
The reason there are two divisions overseeing each type of stock is that securities and commodities function differently in the market, requiring different oversight. That being said, there is some gray area between the two, and this is where most cryptocurrencies tend to operate.
Recently, the SEC has changed its mind on Ethereum, stating it is a security instead of a commodity, and as such, has launched an investigation, which could be bad news for the blockchain.
What’s the Difference Between a Security and a Commodity?
Commodities are physical goods. The most common commodities are oil, gold, wheat, soybeans, and corn. Bitcoin, because of the way it functions and acts as a sort of digital gold, is considered to be a commodity.
A security, on the other hand, is an investment product that isn’t always tangible. The biggest example is stocks and bonds, as the individual buying them doesn’t physically own anything, but rather, they have a vested/established interest in the company.
Think of it this way, you can head to the store with a commodity, but you’ll have a hard time shopping with securities.
Why Does it Matter if Ethereum is a Security?
While it may not seem like a big deal, it is, because securities are heavily regulated in the United States. If Ethereum is successfully labeled as a security, it will change where, when, and how it can be sold.
Establishing Ethereum as a security won’t make it illegal, it will just change the exchanges and brokers who are able to sell it. If this happens, it could be detrimental for many DeFi platforms which currently state that trading ETH is 20% of their daily volume.
How is an Asset Labeled as a Security?
It’s a bit complicated, because there is so much gray area, but the SEC uses something called the Howey test to determine if something is a commodity or security. The Howey test is a scale, rather than a right or wrong quiz, and this makes it even more challenging to use.
One aspect of the Howey test is the ‘expectation of returns.’ If you buy or sell gold, there is no expectation that you will make money, just that you will have some gold in the meantime. However, Ethereum, which recently changed to a staking protocol that basically guarantees returns as long as a staker is involved, suddenly has some expectation of returns; thus, it checks this requirement on the Howey test.
Not only that, but Ethereum has a creator behind it, who is still involved (and making money) off the platform, causing it to check another part of the Howey test.
Despite this, users can still buy items with ETH, such as NFTs, and in-game upgrades, so this is a box it does NOT check on the Howey test.
Related: The Ethereum 2.0 Protocol Basics Explained
Is This Case Bad for Ethereum?
If you haven’t come to your own conclusion, being labeled as a security could be very bad for Ethereum. Not only would it throw a wrench in the platform's growth plans, but it could also cause some issues with current holders of ETH, as certain exchanges will no longer be allowed to trade it.
Don’t panic just yet, though, because Ethereum users can likely adapt to it being a security, and it would still be legal to trade it—just much more regulated than it currently is. But there is a chance that it could be declared illegal in the United States.
Additionally, it’s important to note that Ethereum is used for most NFT transactions, some of which occur on platforms with thousands of users, such as Axie Infinity and Sandbox. These users could wake up one day to find they can no longer use their favorite platform, some of which are sellers who could see hundreds of dollars of profit evaporate overnight.
What Should You Do?
If you are a holder or user of ETH, it’s important to know that you don’t have to panic yet. The court case between the SEC and Ethereum will be long and drawn out, probably taking most of 2024 and some of 2025. Not only that, but this isn’t quite a slam dunk for the SEC, and they will have to create a stronger case than they currently have to hold any hope of a win.
That being said, this case could jeopardize the future of Ethereum, and we recommend treading with caution. You’ll want to watch the news regularly and avoid any large new investments on the platform—at least until there is a hint of which direction this case could go. You should also move all your ETH into a cold wallet if it isn’t there already.
Of course, if you are outside of the United States, then there is no need to worry, and you can continue on as you were before.
In the meantime, know that the rumors of Ethereum ETFs, which came after the Bitcoin ETF approval, are dead for now.
Overall, anytime the SEC decides to attack anything in the crypto world, it can be scary for those investing in and operating in the space. But know that neither side has a slam-dunk case, meaning there isn’t a reason to panic just yet.
If anything, these recent attacks by the SEC have shown us that cryptocurrency needs its own overseeing body and set of rules in the US. But until that happens, we suspect the SEC will attack popular cryptocurrencies from time to time, but we know they won’t win them all.
You May Also Enjoy: The SEC Case Against Ripple
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