Carlo D’Angelo is a lawyer, former law professor, and cryptocurrency and NFT enthusiast. Carlo’s practice focuses on advising clients in all areas of blockchain technology law. Carlo is also the host of Lex Line, a weekly cryptocurrency and blockchain law podcast.
The views expressed here are his own and do not necessarily represent his views. decryption.
In May Spot Ethereum ETF approved The U.S. Securities and Exchange Commission (SEC) announced what can only be described as a banner month for cryptocurrency policy: Chef’s Kiss. SEC’s ongoing crackdown on cryptocurrencies.
As the deadline for approval of an Ethereum ETF approaches, a bipartisan group of House of Representatives A letter was sent to SEC Chairman Gary Gensler. It urged the committee to not only approve the fund but also consider approving “other” digital asset ETFs in the future. And finally, late that fateful Thursday, the SEC finally went public and announced the approval of applications for eight spot Ethereum ETFs.
According to Paul Grewal, Coinbase’s Chief Legal Officer, the SEC’s approval of a spot ETF is effectively considered to be: Ethereum (ETH) becomes a commodity. If Grewal is right his evaluationETH products would then be regulated by the Commodity Futures Trading Commission (CFTC) rather than the SEC, which is responsible for securities regulation.
This is a key difference for ETH because the SEC’s mission is to monitor securities and protect investors. Instead, the CFTC regulates commodities such as raw materials and agricultural products, focusing on preventing market manipulation and fraud. Therefore, the CFTC’s regulatory framework for commodities is generally less stringent than the SEC’s treatment of securities.
This week, today was a roller coaster unlike any day I’ve ever seen. ETH is effectively considered a commodity, as we have always known it. I’m proud to be on the team @CoinbaseWe are a trusted partner and custodian for many of the issuers who approved 19b-4 tonight. pic.twitter.com/nz1HHFbBSQ
As digital assets continue to see mass adoption, there remains an ongoing debate about which federal agency should have jurisdiction over the regulation and enforcement of this new and innovative technology.
In 2021, former CFTC Commissioner Dawn Stump gave a speech now infamous XRP SEC Enforcement Action Case StudyShe noted that she is “watching the outcome of this case closely as it will help establish the scope of the SEC’s authority in the digital assets space.”
Commissioner Stump added:
Like the assets themselves, regulatory enforcement of digital assets is evolving every day. This is both interesting and disappointing for those seeking more certainty. But the extraordinary changes in this sector require adaptation and creative thinking, and frankly, so do the natural tendencies of regulators. … This is the current regulatory status of digital assets. We need to enable innovators to think creatively to help their stories evolve, and acknowledge that there may be differences of opinion about the usefulness and potential of different products. There will be some storms. These are considerations that must guide us as regulators as we exercise our powers to carry out our mandate to enable markets to develop and reach their full potential.
Perhaps the approval of an Ethereum ETF will provide the kind of regulatory clarity the sector has been seeking. If ETH and other similar cryptocurrencies are not securities, the SEC does not have jurisdiction to regulate these assets under the Securities Act of 1933 and the Securities Exchange Act of 1934.
This means that the SEC can no longer claim that these tokens are investment contracts under the Howey Test. If similarly positioned tokens like ETH are commodities, cryptocurrency lawyers can argue in court that these cryptocurrencies are not investment contracts involving “an expectation of profit from the efforts of others.” This is an important factor that the SEC must prove under the Howey test.
Crucially, the SEC may have undermined its own legal arguments raised in several pending cryptocurrency enforcement court cases by tacitly acknowledging that Ethereum is a commodity.
If courts accept ETH and potentially other cryptocurrencies as commodities, this could turn the tide in pending SEC lawsuits against major cryptocurrency trading platforms such as Coinbase and Kraken. These lawsuits hinge on the SEC’s assertion that some tokens traded on these platforms are securities. But if a similarly positioned token like Ethereum were instead a commodity, it could grant a new motion to dismiss the SEC lawsuit against Coinbase and Kraken.
If the federal judge in the case agrees with this argument, it would fundamentally destroy the SEC’s argument that both Coinbase and Kraken offer unregistered securities trading.
Such a ruling would be a huge blow for SEC Chairman Gary Gensler, who is already under intense scrutiny from critics who believe his aggressive approach to regulation through enforcement actions is stifling the growth and driving innovation of the U.S. digital asset technology sector. It will take a toll. To more favorable jurisdictions abroad.
As noted in Grewal’s recent report: Twitter (aka X) postsNow that the SEC has effectively stated that “ETH sales cannot be securities because an Ethereum ETF can be registered with a fund through an S-1,” the SEC has essentially agreed that ETH no longer has an “ecosystem” . “Better than Bitcoin.”
The SEC’s recent approval of an Ethereum ETF has significant potential implications for both ongoing and future legal battles in the digital asset sector. By suggesting that ETH and other similarly positioned tokens are commodities, the SEC may have dramatically limited its power to aggressively crack down on the cryptocurrency sector.
The Ethereum ETF decision could therefore further embolden players in the digital asset sector to confront overzealous enforcement actions, which could result in fewer settlements and more court battles.
Getting long-awaited clarity on whether ETH is a security or a commodity could also reduce the SEC’s jurisdiction over Ethereum and other similar cryptocurrencies. This could result in a significant reduction in the SEC’s regulatory scope in the digital asset sector. Crypto lawyers will use the ETF decision to aggressively push back against pending SEC enforcement actions and lawsuits and argue that the agency exceeded its authority.
If more digital assets were treated as products similar to what the Ethereum ETF decision suggests, lawmakers could finally pass legislation that would significantly reduce the SEC’s influence over these assets. As a result, these tokens may be subject to less stringent regulation under the CFTC. These changes in institutional oversight will reduce regulatory hurdles for cryptocurrency startups and foster a new wave of innovation in the sector.
Cryptocurrency lawyers will likely leverage the ETF decision to reshape their existing strategies in terms of how they advise clients in the digital asset space. This strategy may include advising clients in the cryptocurrency sector to place greater emphasis on the commodity characteristics of tokens and platforms in an effort to better protect them from the hands of the SEC.
If the Coinbase and Kraken legal defense teams are successful in dismissing the pending SEC lawsuit following the Ethereum ETF decision, this could create a very favorable legal precedent that will impact future regulation of the digital asset sector and usher in a new wave of blockchain innovation. in America
A new era of clarity around digital asset law will also benefit investigators and attorneys employed by the SEC and CFTC, potentially creating a more predictable and stable regulatory environment. This will result in more efficient use of agency resources, unlike the legally ambiguous environment in which we currently operate. Regulatory clarity will also provide much-needed consistency for judges presiding over digital asset cases and produce more consistent and predictable outcomes.
It is my firm belief that cryptocurrency lawyers are the guardians of blockchain and will play a critical role in the continued growth and adoption of cryptocurrency technology in the United States. The recent Ethereum ETF decision will further empower cryptocurrency lawyers to better advise and navigate the digital asset sector to their clients. And I’m excited to see how creatively they use this opportunity to do just that.
Editor: Andrew Hayward
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