SEC Reportedly Probes Ethereum Foundation but Would Struggle to Backtrack on ETH’s Commodity Status

The SEC is allegedly probing the Ethereum Foundation as part of a legal effort to classify ETH as a security. The investigation apparently emerged in the wake of the Ethereum network’s shift from a proof-of-work (PoW) consensus to Proof-of-Stake (PoS) in September 2022, which may have increased ETH’s degree of centralization in the commission’s eyes. Prior to his ongoing tenure as SEC Chair, Gary Gensler stated that he viewed the initial presale of ETH tokens in 2014 as a securities offering, but noted that, by 2018, the US securities regulator had considered it a commodity due to it becoming sufficiently decentralized. The SEC has previously asserted its authority to regulate ETH in court proceedings, claiming that the concentration of Ethereum nodes within the US means that transactions should be considered to have occurred within the commission’s jurisdiction.

The SEC has had opportunities to explicitly label ETH as a security in recent lawsuits against multiple crypto exchanges, but it has not done so. Additionally, the CFTC approved trading of commodity futures contracts based on the price of ETH years ago, which have now become the basis for SEC-approved ETFs backed by ETH futures. This raises questions regarding just how broad the SEC’s reported inquiry into the Ethereum Foundation is and how significantly it will impact applications for spot-backed ETH ETFs from a slate of major asset managers.

Related ETF & Assets: ProShares Ether Strategy ETF (EETH), Ethereum (ETH-USD)

Last week, it was reported that the Ethereum Foundation – a constant overseer of the Ethereum (ETH) network’s development since its earliest days and headed up by a board of executives that includes Ethereum co-founder Vitalik Buterin – had been subject to an inquiry by an undisclosed “state authority”. This speculation was the result of an amendment to a critical disclosure on the nonprofit’s website which previously stated it had “never been contacted by any agency anywhere in the world in a way which… falls outside the scope of regular business operations.” This significant change was followed up by further reporting from Fortune Magazine, which alleged the US Securities and Exchange Commission (SEC) was “waging an energetic legal campaign to classify Ethereum, the second-most popular cryptocurrency, as a security.” The Ethereum Foundation is headquartered in Switzerland and CoinDesk has highlighted the possibility that a Swiss regulator may be working with the SEC to acquire information from the foundation.

SEC’s Goals in ETH Probe May Face Hurdles with New Precedent

This conflicts with several SEC statements and regulatory decisions in the past, particularly a 2018 speech in which the director of the Commission’s Division of Corporation Finance at the time, William Hinman, referred to ETH as a commodity. This ultimately played a role in derailing a significant portion of the SEC’s case against Ripple Labs, the issuer of the cryptocurrency XRP. The SEC has claimed that XRP is a security and, therefore, an unregistered one since the company has never registered XRP sales with the commission despite offering the token as a potential investment contract to the general investor public. The commission brought suit over Ripple’s sale of more than $1.4 billion worth of the XRP digital tokens.

Ripple claimed it understood Hinman’s remarks to indicate that the SEC “would permit present-day sales of virtual currencies given the current market conditions for XRP.” The SEC struggled to communicate their views about Hinman’s speech to the court. Initially, the Commission claimed Hinman was making the speech in a personal capacity. However, it would later come to claim that he had received guidance and insight from the regulator’s legal team. The Commission’s defense also tried to block Ripple’s access to documents written by Hinman while he worked for the SEC, but it was eventually ordered to turn them over for the upcoming trial. Those proceedings will only concern a small amount of the XRP token sales originally at issue, as Southern District of New York Judge Analisa Torres dismissed claims against blind bid sales, as well as claims related to $600 million in XRP that current CEO Brad Garlinghouse and former CEO Christian Larsen sold on exchanges as personal sales. Blind sales of XRP that Ripple made on exchanges did not qualify as a securities offering or an investment contract as the buyers “could not have known if their payments of money went to Ripple, or any other seller of XRP”, concluded Judge Torres.

Understanding this precedent is critical, as it could potentially cover the millions of ETH transactions that occur on the network every day. As such, Fortune’s reporting characterized the probe into the Ethereum Foundation as…