When spot Ethereum ETFs were approved, it was a significant step for crypto policy. However, the SEC might have done themselves a counter favor since this move could undermine the SEC’s ongoing crypto crackdown.
Approval of Ethereum ETFs
As the deadline to approve Ethereum ETFs approached, a bipartisan group of House Representatives were in a hurry. They urged SEC Chair Gary Gensler to approve the funds and consider other digital asset ETFs in the future. Finally, the SEC announced approval of eight spot Ethereum ETF applications.
Implications for Ethereum and Regulation
According to Coinbase’s Chief Legal Officer, Paul Grewal, the SEC’s approval means that Ethereum (ETH) is a commodity. If correct, ETH would fall under the Commodity Futures Trading Commission (CFTC) oversight, not the SEC, which regulates securities.
This distinction is crucial. The SEC focuses on policing securities and protecting investors. The CFTC regulates commodities like raw materials, focusing on preventing market manipulation and fraud. The CFTC’s regulatory framework is generally less stringent strict than the SEC’s.
Ongoing Jurisdiction Debate
As digital assets gain mass adoption, there’s an ongoing debate over which federal agency should regulate them. In 2021, former CFTC Commissioner Dawn Stump highlighted this issue in the XRP SEC enforcement action case. The Ethereum ETF approval might bring the regulatory clarity the sector needs. If ETH and similar cryptocurrencies are not securities, the SEC lacks jurisdiction under the Securities Act of 1933 and the Securities Exchange Act of 1934.
This means the SEC can no longer argue that these tokens are investment contracts under the Howey Test. If ETH and similar tokens are commodities, crypto lawyers could argue they aren’t investment contracts with an “expectation of profits from the efforts of others”—a critical element the SEC must prove under the Howey Test.
Potential Impact on Pending Cases
By acknowledging Ethereum as a commodity, the SEC may have undermined its legal arguments in pending crypto enforcement cases. If courts agree that ETH and similar cryptocurrencies are commodities, this could affect lawsuits against major crypto platforms like Coinbase and Kraken. These lawsuits hinge on the SEC’s argument that certain tokens traded on these platforms are securities. If they are commodities, it could lead to dismissals of SEC lawsuits against Coinbase and Kraken.
Broader Implications
A favorable court ruling could weaken SEC Chair Gary Gensler’s regulatory approach, which critics argue suppresses digital asset innovation in the U.S. and pushes it overseas. As Paul Grewal noted, the SEC’s approval suggests that ETH sales aren’t securities because Ethereum ETFs can be registered with an S-1, much like Bitcoin.
The SEC’s approval of Ethereum ETFs could limit its power to police the crypto sector aggressively. This decision might embolden players in the digital asset sector to push back against enforcement actions, leading to more court battles and fewer settlements.
Long-Term Effects
Clarity on whether ETH is a security or commodity could reduce the SEC’s jurisdiction over Ethereum and similar cryptocurrencies. This could narrow the SEC’s regulatory reach in the digital asset sector. Crypto lawyers will likely use the ETF decision to challenge pending SEC actions, arguing the agency has overstepped its mandate.
If more digital assets are treated as commodities, Congress might pass laws to limit the SEC’s reach. This could subject these tokens to less stringent regulation under the CFTC, creating fewer regulatory hurdles for crypto startups and fostering innovation.
Legal and Regulatory Clarity
The ETF decision might lead to new strategies for advising clients in the digital asset space. Lawyers might emphasize the commodity nature of tokens to shield clients from SEC oversight.
Successful dismissals of SEC lawsuits against Coinbase and Kraken based on the ETF decision could set favorable legal precedents. This would influence future digital asset regulation and promote blockchain innovation in the U.S.
A clear regulatory environment benefits investigators and lawyers in both the SEC and CFTC by providing a stable framework. This would lead to more efficient use of resources and more consistent outcomes in digital asset cases.
Crypto lawyers play a vital role in the growth and adoption of crypto technology in the U.S. The Ethereum ETF decision empowers them to better advise and navigate clients in the digital asset sector, fostering further innovation.
