What Happens if the SEC Classifies ETH a Security? (Wrong Answers Only)

It
came
to
light
yesterday
that
the
U.S.
Securities
and
Exchange
Commission
(SEC)
is
likely
looking
to
reclassify
Ethereum’s
native
token,
ether

(ETH),
as
a
security.
Not
everyone
believes
this
to
be
the
case,
and
so
far
the
SEC
has
deferred
answering
definitively
on
whether
there
is
an

ongoing
probe
of
the
Ethereum
Foundation
—
just
like
how
the
agency
has
punted
the
can
on
saying
definitively
that
ETH
is
or
isn’t
a
security.

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is
an
excerpt
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A
number
of
digital
asset
lawyers
have
said
the
“voluntary
inquiry”
the
Ethereum
Foundation
copped
to
in
its
Github
repository
is
no
cause
for
alarm.
Subpoenaing
crypto
companies
is
a
normal
course
of
business
in
this
industry.
And
the
Ethereum
Foundation’s
canary
—
a
reference
to
“canaries
in
coal
mines,”
which
indicates
whether
a
government
has
probed
a
website
—
had
to
come
down
eventually.

“It
is
very
difficult
to
know,
from
what
has
been
publicly
disclosed
thus
far,
the
nature
of
the
government
inquiry
that
has
been
sent
to
the
Ethereum
Foundation
or
whether
the
Foundation
is
the
target
of
that
investigation,”
Preston
Byrne,
managing
partner
of
Byrne
&
Storm,
P.C.,
told
CoinDesk
in
an
email.

Byrne
said
that
it
is
“unlikely”
that
the
Ethereum
Foundation
“is
the
target
of
the
investigation.”
However,
taking
it
as
a
given
that
there
is
an
ongoing
probe,
a
few
questions
remain.
For
instance,
it’s
not
yet
clear
why
exactly
the
SEC
would
sue
the
creators
of
Ethereum
nearly
10
years
after
its
launch
and
after

hundreds
of
billions
of
dollars
have
accrued
to
the
network.

Does
the
investigation
pertain
to
Ethereum’s
initial
coin
offering
and
token
distribution
or
its
switch
to
the
staking
security
model?
How
is
it
that
a
U.S.
securities
regulator
has
jurisdiction
over
an
organization
based
in
Zug,
Switzerland?
Will
the
Commodities
Futures
Trading
Commission
(CFTC),
which
oversees

a
booming
ETH
futures
market,
push
back?

As
to
why
crypto
companies
are
being
asked
about
their
dealings
with
the
Ethereum
Foundation,
Byrne
offered
two
plausible
causes:
either
the
SEC
is
trying
to
classify
ETH
as
a
security
to
force
the
hand
of
U.S.
spot
exchanges
to
de-list
the
token
or
to
support
its
case
for
denying

much-demanded
spot
ether
exchange
traded
funds
(ETFs).

Neither
motivation
would
“necessarily
also
require
the
SEC
to
bring
an
enforcement
action
against
the
foundation,”
Byrne
added.

See
also:



Why
the
SEC
Shouldn’t
Classify
ETH
as
a
Security


|
Opinion

But
say
there
is
a
lawsuit.
Say
ETH
is
a
security
(despite
good
reasons
saying
no).
What
exactly
happens
then?
Ethereum
is
the
second-largest
blockchain
by
value
($414
billion
at
today’s
prices),
and
the
home
of
most
of
the
digital
asset
industry’s
most
used
tools
—
classifying
ETH
as
a
security
would
likely
cause
chaos.
With
a
move
this
big,
it
is
entirely
unpredictable
where
the
cards
will
ultimately
fall.

One
of
the
more
unlikely
responses
is
that
Ethereum,
which

switched
to
a
proof-of-stake
algorithm
that
rewards
tokens
to
users
who
lock
up
their
tokens

to
secure
the
network,
could
revert
back
to
the
mining
model
pioneered
by
Bitcoin.
This
in
itself
is
unlikely;
it
took
Ethereum
developers
at
and
outside
of
the
Ethereum
Foundation
years
to
switch
to
staking.

Vitalik
Buterin
came
up
with
the
idea
for
Ethereum
in
2013,
and,

even
back
then,
he
figured
the
blockchain
would
likely
need
to
switch
to
staking,
a
“consensus
model”
that
was
at
the
time
in
its
infancy.
It
was
only
in
2020,
five
years
after
the
network
actually
launched,
that
the
first
tangible
step
towards
Ethereum
staking
was
taken
with
the
launch
of
the

Beacon
chain.

Ethereum
developers
deployed
and
refigured
a
number
of
testnets
to
experiment
with
switching
to
staking
over
several
years,
and
a
“de-merge”
would
likely
take
as
long.

Part
of
the
issue,
apart
from
the
scaling
and
cost
benefits
of
staking
is
that
mining
is
a
purposefully
energy-intensive
process,
and
one
that
developers
were
happy
to
say
goodbye
to.
After
“the
Merge,”
it
is
theorized
that
Etheruem’s

energy
consumption
declined
99%
—
shutting
down
critics
of
crypto’s
environmental
footprint.

“It’s
impossible
for
me
to
see
any
outcome
as
you
point
out
that
would
result
in
something
like
a
merge,”
Paul
Brody,
head
of
blockchain
at
EY,
told
CoinDesk.

Ethereum
is
Ethereum
and
Ethereum
Classic
is
Ethereum
Classic,
even
if
Ethereum
Classic

(ETC)
actually

maintains
the
“original,
unaltered”
history
of
the
blockchain.
But
what
if
Ethereum
Classic,
from
which
Ethereum
was
forked,
becomes
the
conical
chain?
This
would
certainly
be
an
easier
solution
than
the
“Demerge,”
considering
the
network
is
already
running.

Sure,
Ethereum
Classic
has
experienced
a
number
of
faith-busting
re-orgs,
but
readopting
Ethereum’s
lovelorn
sibling
could
answer
SEC
Chairman
Gary
Gensler’s
apparent
concerns
over
staking.
So
would
the
alternative
to
the
alternative
Ethereum:
EthereumPoW
(ETHW),
the
fork
that

launched
during
the
Merge
to
retain
proof-of-work.

Neither

ETC
nor

ETHW
has
rallied
much
on
news
of
the
SEC’s
potential
investigation,
indicating
their
rapid
adoption
is
unlikely.
But
it’s
not
impossible.
Afterall,
Buterin
did
admit
that
ETC
was

“a
totally
fine
chain.”

One
notable
downside
of
this,
among
many,
is
that
Etheruem’s
founders
would
likely
maintain
massive
stakes
of
ETC
or
ETHW
tokens,
mirroring

the
state
of
their
ETH
holdings
at
the
time
of
the
two
forks.
It’s
not
clear
whether
or
not
the
SEC
is
concerned
about
Ethereum’s
token
issuance,
which
distributed
valuable
tokens
to
the
founding
team
and
the
Ethereum
Foundation.
But
the
agency
has
said
in
the
past
such
disbursements

resemble
investment
contracts.

The
XRP
Army
has
been
waiting
for
a
moment
like
this
for
years.
Although
not
as
visible
a
conflict
as
Ethereum
versus
Solana
or
Bitcoin
versus
Everyone,
many
XRP
stans
absolutely
despise
Ethereum.
The
history
here
likely
stems
from
Bill
Hinman,
the
former
head
of
the
SEC’s
division
of
corporation
finance,
declaring
that
ETH
was

not
a
security
because
it
was
“sufficiently
decentralized.”
The
XRP
Army,
backing
its
own
project,
has
seen
that
intervention
as
unfairly
picking
winners
in
the
crypto
market,
privileging
one
project
for
special
consideration
while
downing
others
that
look
quite
similar.

Over
the
years,
XRP
champions,

including
Ripple
Labs
CEO
Brad
Garlinghouse,
have
argued
that
Ethereum
is
“Chinese
controlled”;
that
Vitalik
Buterin
could
be
co-opted
by
the
Chinese
Communist
Party;
and
that
the
network
itself
was
“cherry-picked”
to
win
by
U.S.
authorities.
Of
course,
Buterin
didn’t
win
himself
any
favors
when
responding
to
these
accusations
by

calling
XRP
a
“sh*tcoin.”

See
also:



Why
the
XRP
Army
Keeps
Fighting

One
thing
XRP
has
going
for
it
is
that,
unlike
most
cryptocurrencies,
there
is
actually
a
little
legal
clarity
surrounding
that
asset
after
Ripple
Labs
fought
back
in
court
against
the
SEC,
and

won
a
few
concessions
from
the
presiding
judge.
XRP
itself
is
not
a
security,
and
exchange
trades
with
it
are
not
securities
transactions,
though
Ripple’s
programmatic
sales
to
qualified
buyers
were
investment
contracts,
the
judge
ruled.

“It
is
the
characteristics
of
the
sale
or
offer
for
sale
that
make
something
an
investment
contract,
not
necessarily
which
cryptocurrency
it
is.
ETH
is
sold
on
public
exchanges
without
advertising,”
Christa
Laser,
a
law
professor
at
Cleveland
State
University,
told
CoinDesk.
“The
SEC
is
likely
targeting
only
staking
rewards,
but
it
will
need
to
show
that
there
is
a
central
promoter.

In
fact,
one
possible
outcome
of
the
SEC
going
after
ETH
is
another
major
loss
for
the
agency
in
court.
As
former
CFTC
Commissioner
Brian
Quintenz
said
yesterday,
the
SEC
already
implicitly
said
ETH
was
a
commodity
after
it
allowed
the
launch
of
ETH
futures
and
ETH
futures
ETFs
in
the
U.S.
Further,
countless
U.S.
investors,
businesses
and
individuals
have
acted
on
the
SEC’s
signals
over
the
years
that
ETH
is
not
a
security.

Add
to
this
that
there
is
a
growing
acknowledgment
that
Gensler’s
SEC
has
been

unfair
in
its
legal
fight
with
the
crypto
industry.
Instead
of
devising
comprehensive
regulations
that
actually
account
for
the
differences
between
decentralized
protocols
and
traditional
ways
of
doing
business,
he
has
launched
lawsuit
after
lawsuit
against
companies
that
add
—
rather
than
detract
value
—
from
the
U.S.
economy.

This
“lawfare”
hasn’t
always
worked
out
for
Gensler.
Just
recently,
a
U.S.
federal
judge
called
out
the

SEC’s
“gross
abuse
of
the
power”
for
“deliberately
perpetuating
falsehoods”
in
its
dispute
with
crypto
firm
DEBT
Box.
This
is
on
top
of
the
unprecedented
shutdown
by
a
three-judge
appeals
panel
that
called
out
the
agency’s
yearslong
denial
of
spot
bitcoin
ETFs

“arbitrary
and
capricious.”

In
short:
If
it’s
true
the
SEC
is
trying
to
build
a
case
for
denying
spot
ETH
ETFs
by
going
after
the
underlying
asset,
it
better
have
a
good
justification.