On March 20, the media revealed that the US Securities and Exchange Commission (SEC) intends to classify Ethereum (ETH), the second-largest cryptocurrency in terms of market capitalization, as a security. Authority pressure has already provoked several crypto projects to shut down. For instance, SEC's actions have previously affected Telegram's Gram, the cryptocurrency exchange Bittrex, and the blockchain platform LBRY.
Here's what might happen to Ethereum if ETH is officially recognised as a security and why the Commission put under the light a project that has been around since 2015.
What's wrong with Ethereum
The SEC believes that Ethereum is an unlawfully issued security. For determining an asset's status, the authorities use the outdated Howey test. It was invented in 1946, when cryptocurrencies were not on the radar.
The essence of the test consists of four questions:
- Is the purchase of an asset considered an investment?
- Is the investor expecting profit out of it?
- Is there an investment in a common enterprise?
- Is the profit tied to the efforts of others?
Positive answers to these questions, according to the SEC, allow for the classification of cryptocurrency as a security. Under US laws, such assets need to be registered with the Commission. Cryptocurrency project teams, as you might guess, have not registered anything anywhere. Authorities consider that a violation of the law.
So, here’s how it looks: the SEC considers Ethereum a security, while the crypto project team objects. The dispute will ultimately be settled in court.
There have been similar precedents in the history of the crypto community. The SEC claimed 68 cryptocurrencies to be securities. For example, the Ripple crypto project faced SEC allegations in December 2020, and the proceedings are still ongoing. Therefore, it can be assumed that Ethereum's battle with the SEC risks dragging on for years.
The only cryptocurrency the Commission considers a commodity (and thus a coin not violating SEC rules) is Bitcoin (BTC). This is largely because Bitcoin runs on the Proof-of-Work (PoW) algorithm. Ethereum also ran on PoW until September 2022. Then the cryptocurrency transitioned to Proof-of-Stake (PoS). SEC considers all PoS coins to be unregistered securities. Learn more about the differences, nuances, and the regulator's view on PoW and PoS algorithms here.
Ethereum's transition to PoS occurred two years ago. Somehow, the SEC ignored the project, while simultaneously attacking other PoS tokens. In June 2023, the LBRY team speculated that Ethereum remained in the shadows for one reason: developers bribed the Commission. According to the theory's logic, Ethereum failed to bribe its way out in 2024.
How the battle with the SEC will affect Ethereum
In order to answer this question, we have to dive into Ripple’s case. The project was one of the first to face SEC allegations of the unlawful issuance and sale of securities wrapped in XRP tokens. Therefore, the reaction to Ripple's problems, which crypto community members hadn't encountered before, was acute. Amid pressure, unlike the overwhelming majority of other cryptocurrencies, XRP failed to update its all-time high during the digital asset market bull run in 2021.
Since Ripple's battle with the SEC began, many other projects have faced similar allegations. Over time, coins stopped reacting so emotionally. However, SEC allegations can still negatively affect investor sentiment. Therefore, Ethereum's fight with the Commission may slow down the coin's growth pace.
Important! Many members of the crypto community believe that the Ripple case against the SEC will determine the fate of other projects facing similar allegations. According to forecasts, the case will be concluded in 2024.
Ethereum-ETF verdict
In early 2024, after 13 years of waiting, spot Bitcoin-ETF trading was launched in the US. The tool democratises cryptocurrency investments. The rise of the crypto market in early 2024 is partially due to investors' interest in spot Bitcoin-ETF. More details about the tool and its role are here.
After the launch of spot Bitcoin-ETF, the crypto community began discussing the emergence of a similar tool based on Ethereum. Several major companies, including Wall Street giant BlackRock, filed applications with the SEC for its launch. As of the writing of this review, the Commission has postponed decisions several times. The deadline for some applications is set for May 2024. Denials could prolong the struggle for the tool’s launch and disappoint investors who believed in ETH growth on positive news. In this case, we can expect Ethereum sell-off.
Recognising ETH as an unlawfully issued security unties the hands of the Commission. In such a scenario, the regulator can lawfully deny the tool’s launch since it is based on an asset that violates US laws.
Should you consider buying Ethereum?
The history of other crypto projects facing similar SEC allegations suggests that Commission pressure is not a death sentence. In Ethereum's case, there's no talk of the platform's demise — it's the second-largest cryptocurrency, hosting many other projects on its blockchain.
The problems Ethereum has encountered may slow down the cryptocurrency's growth pace in a bull market. However, the pressure is unlikely to completely stifle Ethereum's positive momentum. Therefore, members of the crypto community should not prematurely "bury" ETH and dispose of the coin from their wallets.
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This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
