ETH Accused of Being Both a Commodity and Security

1. Former CFTC Commissioner accuses ETH of being both a Security and a Commodity.
2. He goes on to explain that this definition is due to conflicting views over the asset.
3. The CFTC sees ETH as a Commodity while the SEC may see it as a Security.

In the most recent episode of Unchained, Dan Berkovitz, a former commissioner of the Commodity Futures Trading Commission (CFTC), made a statement that came off as contradictory. Berkovitz claimed that Ethereum’s native asset, ETH, can be classified as both a commodity and a security.

This statement may come as a surprise to many observers, as commodities and securities are generally considered distinct categories. However, Berkovitz explained that the confusion arises from the potentially overlapping jurisdiction of two U.S. regulatory bodies: the CFTC and the Securities and Exchange Commission (SEC).

The discussion revolved around two conflicting statements from key figures in the regulatory landscape. CFTC Chair Rostin Behnam has asserted that ETH is a commodity, while SEC Chair Gary Gensler has suggested, although not officially declared, that everything except Bitcoin (BTC) should be treated as a security. When directly asked whether ETH is a security, Gensler did not provide a clear response.

Berkovitz argued that this apparent contradiction can be fixed by understanding that the legal definitions of “commodity” and “security” can overlap. He explained that, according to the Commodity Exchange Act, a commodity is not limited to physical goods but can also encompass anything that can be the subject of a futures contract.

On the other hand, the definition of a security, as outlined in the Securities Act and the Exchange Act, includes various financial instruments such as notes, evidence of indebtedness, and investment contracts determined by the Howey Test. Therefore, if an asset falls under both definitions, it could potentially be subject to regulatory jurisdiction from both the CFTC and the SEC.

Berkovitz, who also served as general counsel at the SEC, added further nuance to this understanding. He clarified that the CFTC has enforcement jurisdiction to address fraud and manipulation related to commodities. This enforcement authority extends beyond the futures contract and applies to the underlying commodity itself.

Many industry participants find it perplexing that every cryptocurrency asset except Bitcoin would be classified as a security. Some argue that a string of digits operating on a blockchain should not immediately be labeled a security. They believe that the classification of an asset as a security should depend on whether it is being sold as part of a securities transaction, rather than its underlying nature.

While the debate surrounding the classification of digital assets continues, it is clear that the jurisdictional boundaries between the CFTC and the SEC can create complexities and challenges. As the regulatory landscape evolves, it will be crucial to establish clear guidelines and definitions to ensure the effective and consistent oversight of cryptocurrencies and their associated assets.