Why is the SEC, who has clearly classified more than ten types of tokens as securities, continuously avoiding ETH?
Why does the SEC keep avoiding ETH despite clearly classifying over ten types of tokens as securities?
Author: Jacob Oliver, CryptoSlate; Translation: Baize Research Institute
The US Securities and Exchange Commission (SEC) recently filed a lawsuit against Binance, shocking the cryptocurrency industry.
Binance is facing 13 different charges, including mixing customer assets with its own assets, allowing US customers to use Binance Globe, and intentionally inflating the platform trading volume of Binance.US using virtual trades.
Complaint: https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf
Binance has responded to the lawsuit: https://www.binance.com/en/blog/ecosystem/sec-complaint-aims-to-unilaterally-define-crypto-market-structure-8707489117122437402
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It is worth noting that the SEC clearly stated in the lawsuit that it believes that many of the tokens listed on Binance are “unregistered securities”, including but not limited to Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), Algorand (ALGO), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Axie Infinity (AXS), and Decentraland (MANA).
Although this is the most clear statement the SEC has made to date in clarifying its judgment on “unregistered securities”, it once again avoids answering an important question: Is Ethereum (ETH) a security? If so, why is the SEC silent about it? If not, then what is Ethereum?
From Cryptocurrency to “Cryptocurrency Securities”
The SEC’s argument that the above tokens are “cryptocurrency securities” is analyzed in turn in the eighth section (pages 85 to 123) of the complaint, and it is obvious that they have similar patterns: the process of the initial token issuance (1C0), token ownership, core team allocation, and the promotion of profit generation by owning these tokens.
However, Ethereum, which also has the above pattern, is not included. SEC Chairman Gensler has been vague on whether Ethereum and its anchor tokens (such as WETH) are securities. ETH is often held as an investment, indicating that it can be classified as a security, but it is also widely used as a daily cross-protocol exchange medium, making its function more similar to cash.
Gensler previously stated that “every cryptocurrency that’s not Bitcoin” could be considered a security, but he refused to specify Ethereum. When asked “whether Ethereum is a security,” Gensler usually does not answer.
It is curious that the SEC is so eager to make the same demands for other tokens, but is reluctant to classify ETH explicitly. Why is that?
Is Ethereum a security in the eyes of the SEC?
This could be a matter of internal debate within the US government.
Ethereum may fall under the jurisdiction of the US Commodity Futures Trading Commission (CFTC), which has classified BTC, ETH, and USDT as commodities, not securities. These two categories are not only completely different from each other, but this overlap could trigger a regulatory tug-of-war, so Gensler is trying to avoid internal government infighting by taking a more public stance on Ethereum.
Crypto media Protos once published an over-analyzed view that Gensler’s avoidance of Ethereum may be the result of the SEC’s inaction after the notorious “The DAO hack,” which led to a fork in the Ethereum network and put the entire ecosystem at risk, leaving many investors in hot water. However, the SEC did nothing at the time, choosing silence and inaction. Now Gensler finds himself in an awkward position of making up for his predecessor’s negligence. Since the Ethereum ecosystem has spent years restoring its reputation, retroactively declaring it an unregistered security would have disastrous consequences for investors.
In other words, protecting investors in this situation means protecting them from their protectors.
Another reason why Gensler may be hesitant to classify Ethereum explicitly is that he may not know.
Cryptocurrencies and their underlying blockchain technology are innovative and novel. They represent a fundamental shift in how we understand finance and asset ownership, and in the development of ecosystems like Ethereum, they introduce many brand new use cases.
Anything new is inconvenient to classify, and that’s what Ethereum does – it’s both “decentralized” enough and in line with the “concept” of securities (investors, profit promises), which is the core of what makes it difficult to regulate.
The regulatory ambiguity poses complex challenges for Ethereum, as the progress of the cryptocurrency industry relies on the clear legal definition of Layer-1 tokens (such as Ethereum) that serve as both a means of daily transactions and investment tools within their respective ecosystems. Regulatory ambiguity constitutes a significant barrier that stifles potential, hinders mainstream adoption, and fuels uncertainty in the growing and innovative cryptocurrency industry.
The binary classification of cryptocurrency (whether it is a security or not) blurs the boundaries between different types of tokens and forces us to confront the shortcomings of existing legal structures. To drive the cryptocurrency industry forward, regulatory agencies must address this delicate issue. The unique cryptocurrency industry requires equally unique rules.
The cryptocurrency industry needs meaningful regulatory progress.
Currently, the path to comprehensive cryptocurrency regulation is blocked by two major obstacles that must be urgently addressed to promote responsible development in the industry.
First, the US SEC must establish a formal position on Ethereum. Given that the SEC failed to act when it had the opportunity to limit Ethereum, it inadvertently created a situation that puts investors in regulatory limbo. As protectors of investors, the SEC has a responsibility to provide some form of regulatory guidance—as a starting point, even if it is temporary. The lack of clear regulation not only brings inconvenience, but also lacks the necessary protection for the increasing number of participants in the cryptocurrency market.
Second, open discussions about the nature of cryptocurrency are crucial—to have a conversation without preconceptions, biases, or hollow rhetoric. We often say that we need to “make space for conversations,” but have to admit that the need for conversation and actual conversation are two completely different things. Perhaps everyone in the industry—and those who care about it—would benefit from practicing the latter.
