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The Classification of Ethereum by the U.S. Securities and Exchange Commission
The recent decline in the price of Ethereum has sparked conversation and speculation within the crypto community, following reports that the U.S. Securities and Exchange Commission (SEC) has been discreetly considering Ethereum as a security for over a year. As a consequence of this revelation, Ethereum is currently being traded at a weekly low of approximately $3,050, marking a 3.9% decrease in value for the day, according to data sourced from CoinGecko. Traders have exchanged approximately $15 billion worth of Ethereum within the past 24 hours, with the cryptocurrency now trading 15% lower than it was a month ago.
The Lawsuit and the SEC
News of the SEC’s confidential classification of Ethereum surfaced following the release of previously undisclosed sections of a lawsuit filed by Consensys against the regulatory body. The lawsuit highlighted an internal Formal Order issued by the SEC in March 2023, which explicitly mentioned the investigation of “certain securities, including, but not limited to ETH.”
This internal order contradicted the SEC’s public stance on the matter, as SEC Chair Gary Gensler has consistently avoided making a definitive statement regarding Ethereum’s security status. Even during a House Financial Services Committee oversight hearing in October 2023, Gensler refrained from clarifying the SEC’s position on the matter.
Evolving Perspectives and Regulatory Impact
Gensler’s current stance on Ethereum diverges from his previous beliefs. In 2018, before assuming his role at the SEC, Gensler asserted that Ethereum was not classified as a security according to the SEC’s standards. This assertion aligned with a viewpoint expressed by William Hinman, the SEC’s former Director of Corporate Finance, who described Ethereum as “sufficiently decentralized” to escape a security classification in a 2018 speech.
However, the landscape changed with Ethereum’s transition to a proof-of-stake model during the 2022 “Merge.” Gensler’s subsequent comments indicated that cryptocurrencies operating on proof-of-stake protocols could potentially be considered securities, a sentiment he has reiterated since then. The SEC’s internal order from March 2023 specifically targeted an investigation into “Ethereum 2.0,” the designation commonly used for the network post-Merge.
Implications for Ethereum ETF Approval
The SEC’s ambiguity surrounding Ethereum’s classification raises significant implications, particularly in the context of pending applications for spot Ethereum ETFs. Asset management firms like Grayscale, BlackRock, and Franklin Templeton have submitted ETF applications to the SEC, which are currently under evaluation. With a critical deadline approaching in late May, industry experts express skepticism about the approval likelihood, with JP Morgan assigning even odds to both approval and rejection outcomes.
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