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May’s approval of spot Ethereum ETFs by the United States Securities and Exchange Commission (SEC) was the chef’s kiss on what can only be described as a banner month for crypto policy—and the move could severely undermine the SEC’s ongoing crypto crackdown.
As the deadline to approve the Ethereum ETFs loomed, a bipartisan group of House of Representatives members sent a letter to SEC Chair Gary Gensler urging the Commission to not only approve the funds, but to also consider approval of “other” digital asset ETFs in the future. And finally, the SEC finally went public late on that fateful Thursday and announced approval of eight spot Ethereum ETF applications.
According to Coinbase’s Chief Legal Officer, Paul Grewal, the SEC’s approval of spot ETFs effectively deems Ethereum (ETH) to be a commodity. If Grewal is correct in his assessment, then an ETH commodity would fall under the oversight of the Commodity Futures Trading Commission (CFTC) as opposed to the SEC, which is tasked with regulating securities.
This is a key distinction for ETH, because the SEC’s mandate is to police securities and protect investors. The CFTC instead regulates commodities such as raw materials and agricultural goods, with a focus on preventing market manipulation and fraud. The CFTC’s regulatory framework over commodities is therefore generally less stringent compared to the SEC’s treatment of securities.
This week, this day, has been a rollercoaster unlike any other I’ve seen. ETH is effectively deemed a Commodity as we’ve always known it to be. I’m proud to be on team @Coinbase, the trusted partner and custodian for many of the issuers who had 19b-4’s approved tonight. pic.twitter.com/nz1HHFbBSQ
— paulgrewal.eth (@iampaulgrewal) May 23, 2024
As digital assets continue to gain mass adoption, there remains an ongoing debate over which federal agency should have jurisdiction over the regulation and enforcement of this new and innovative technology.
Back in 2021, former CFTC Commissioner Dawn Stump gave a speech on the now-infamous XRP SEC enforcement action case, and noted that she was “watching the outcome of this case closely because it will help to establish the scope of the SEC’s authority in the digital assets space.”
Commissioner Stump added:
The regulatory application to digital assets, much like the assets themselves, is evolving every day. It is exciting, yet also frustrating to those who seek more certainty. But the incredible transformation in this space requires adaptation and creative thinking, and let’s be honest, neither are among a regulator’s natural tendencies. … That is where the regulatory state of digital assets currently sits: We must enable innovators to think creatively such that the story can evolve, we must acknowledge there will be differences of opinion as to the utility and potential of various products, and we must expect some storms to arise. These are the considerations that should guide us as regulators in exercising the authorities to fulfill our mission such that the market can develop and meet its full potential.
Perhaps the Ethereum ETF approval brings just the sort of regulatory clarity this sector has been looking for. If ETH and other similar cryptocurrencies are not securities, then the SEC lacks jurisdiction to regulate these assets under the Securities Act of 1933 and the Securities Exchange Act of 1934.
That means that the SEC can no longer argue that these tokens are investment contracts under the Howey Test. If ETH and similarly situated tokens are commodities, then crypto lawyers could argue in court that these cryptocurrencies are not investment contracts that come with an “expectation of profits from the efforts of others”—critical elements that the SEC must prove under the Howey Test.
Crucially, by tacitly acknowledging that Ethereum is a commodity, the SEC may have just undercut its own legal arguments raised in several pending crypto enforcement court cases.
If courts are receptive to ETH and potentially other cryptocurrencies being commodities, then this could turn the tide on pending SEC lawsuits against major crypto trading platforms like Coinbase and Kraken. These lawsuits hinge on the SEC’s argument that selected tokens traded on these platforms are securities. But if Ethereum and similarly situated tokens are instead commodities, then this could green light a renewed motion to dismiss the SEC lawsuits against both Coinbase and Kraken.
If the federal judges in these cases agree with this argument, then this would essentially gut the SEC’s claims that both Coinbase and Kraken offer trading of unregistered securities.
Such a ruling would deal a devastating blow to SEC Chair Gary Gensler, who is already under intense scrutiny from critics who believe his aggressive approach to regulation by enforcement actions is stifling the growth of the digital asset technology sector in the United States—and pushing innovation overseas to more favorable jurisdictions.
As noted in Grewal’s recent Twitter (aka X) post, now that the SEC has effectively said that “ETH sales can’t be securities because Ethereum ETFs may be registered by funds with an S-1,” the SEC has essentially agreed that ETH has no more of an “‘ecosystem’ any more than does Bitcoin.”
The SEC’s recent approval of Ethereum ETFs has profound potential implications for both pending and future legal battles in the digital asset sector. By suggesting that ETH, and other similarly situated tokens are commodities, the SEC may have dramatically limited its power to aggressively police the crypto sector.
The Ethereum ETF decision may therefore further embolden players in the digital asset sector to push back against overzealous enforcement actions, resulting in fewer settlements and more court battles.
Getting long-awaited clarity on whether ETH is a security or commodity may also curtail the SEC’s jurisdiction over Ethereum and other similarly situated cryptocurrencies. This could in turn lead to a dramatic narrowing of the SEC’s regulatory reach in the digital asset sector. Crypto lawyers will no doubt use the ETF decision to aggressively push back against pending SEC enforcement actions and lawsuits, and argue that the agency has overstepped its mandate.
If more digital assets are treated as commodities similar to what the Ethereum ETF decision suggests, then legislators may finally pass laws to vastly curtail the SEC’s reach over these assets. As a result, these tokens could be subject to potentially less stringent regulation under the CFTC. Such a shift in agency oversight would create fewer regulatory hurdles for crypto startups, and foster a new wave of innovation in this sector.
Crypto lawyers will likely leverage the ETF decision to reshape existing strategies with respect to how they advise clients in the digital asset space. These strategies may include advising crypto sector clients to place greater emphasis on the commodity nature of their tokens and platforms, in an effort to better insulate them from the SEC’s reach.
If the Coinbase and Kraken legal defense teams are successful in dismissing pending SEC lawsuits based on the Ethereum ETF decision, then this could generate highly favorable legal precedents that would influence future regulation of the digital asset sector—and usher in a fresh wave of blockchain innovation in the U.S.
A new era of clarity with respect to digital asset laws would also benefit investigators and lawyers employed within both the SEC and the CFTC, by creating a potentially more predictable and stable regulatory environment. This would result in a more efficient use of agency resources, as opposed to the legally ambiguous environment we currently operate under. Regulatory clarity would also bring much-needed consistency for the judges who preside over digital asset cases, and generate more consistent and predictable outcomes.
It’s my firm belief that crypto lawyers are the guardians of the blockchain, and play a vital role in the continued growth and adoption of crypto technology in the United States. The recent Ethereum ETF decision will only further empower crypto lawyers to better advise and navigate clients in the digital asset sector—and I’m excited to see how they creatively use this opportunity to do just that.
Edited by Andrew Hayward