SEC’s reported move to brand Ether a security called an ‘excuse to not approve’ ETF

The US Securities and Exchange Commission is attempting to classify Ether, the world’s second-largest cryptocurrency, as a security, according to a media report published Wednesday.

Citing unnamed sources who said they feared reprisal from the SEC, Fortune said at least three companies have received subpoenas seeking information related to the Ethereum Foundation, the Swiss-based nonprofit that contributes to the development and promotion of the Ethereum blockchain.

But attorneys who spoke to DL News said the SEC’s classification of Ether as a security would have little real-world impact unless it was backed up by US courts.

“The only thing that would matter is if they get a final, binding judgement from a court of competent jurisdiction, and even then I believe they would have a very hard time enforcing that in any practical way, beyond just charging the Ethereum Foundation a fine,” crypto attorney Gabriel Shapiro told DL News.

“But it could give them an excuse to not approve an ETH ETF, which is likely their biggest objective here.”

‘Voluntary enquiry’

The news that the SEC is investigating the Ethereum Foundation was preceded by reports from CoinDesk and The Block that said the Foundation had received a “voluntary enquiry” from an unnamed “state authority.”

SEC Chair Gary Gensler has repeatedly said he believes Bitcoin, the original cryptocurrency, is a commodity like gold or wheat.

But he has remained noncommittal when asked whether Ether should be classified as a commodity or as a security, which is subject to more stringent and costly oversight.

Wednesday’s reports suggest he has made up his mind.

The SEC has requested documents and financial records that detail the companies’ dealings with the Ethereum Foundation, according to Fortune.

Ether was down 0.5% over the last 24 hours in late afternoon trading UK time on Wednesday, according to CoinGecko.

“[The] SEC has been pretty transparent that it informally thinks ETH is a security,” said Matt McGuire, a former senior prosecutor for the attorney general of Virginia and general counsel at Violet, a crypto identity platform.

“It’s not surprising to me to read that they’re issuing a lot of subpoenas gathering information, but doesn’t tell us exactly what they’ll do with that information.”

Lightning rod

The investigation began shortly after Ethereum’s transition to a Proof of Stake “consensus mechanism” to tend its blockchain network, according to one source cited by Fortune.

Cryptocurrencies issued by blockchains that rely on Proof of Stake, or PoS, technology to confirm and order transactions could be classified as securities, Gensler has previously said on several occasions.

Since taking the helm of the SEC in 2021, Gensler has become a lightning rod for criticism in the industry after the commission sued players large and small for alleged violation of securities laws.

Most notably, the SEC sued three of the world’s largest crypto exchanges: Binance, Coinbase, and Kraken.

The SEC accused them of selling unregistered securities such as Solana’s SOL, Polygon’s MATIC, Cardano’s ADA, and several other tokens.

The industry has treated the crackdown as something of an existential crisis, arguing that applying 90-year-old securities laws to cryptocurrencies would amount to a death sentence given their unique features and the cost of complying with government regulations.

Ether ETF in the balance

The news comes as traditional financial institutions seek the SEC’s approval of a spot Ether ETF in the wake of the release of Bitcoin ETFs in January.

But hopes for its approval have been dwindling: Bloomberg Intelligence analysts this month lowered their odds of a May approval to just 35%.

Those odds fell from 25% to 14% Wednesday on crypto prediction market Polymarket.

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can contact him at aleks@dlnews.com.