In May, the U.S. Securities and Exchange Commission (SEC) approved Ethereum futures ETF, which is undoubtedly great news for the crypto field. However, this decision may impact SEC’s current regulatory stance on cryptocurrencies and even weaken the effectiveness of its ongoing crackdown on cryptocurrencies. Carlo D’Angelo, a lawyer, analyzed the reasons behind this and revealed the complex impacts of this decision for us.
As the deadline for the approval of Ethereum futures ETF approaches, a bipartisan group of House members wrote a letter to SEC Chairman Gary Gensler. In the letter, they not only urged the commission to approve these funds but also hoped that the commission would consider approving “other” digital asset ETFs in the future. Finally, on that decisive Thursday evening, SEC publicly announced that it had approved eight applications for Ethereum futures ETF.
Paul Grewal, the Chief Legal Officer of Coinbase, pointed out that the SEC’s approval of futures ETF essentially means that Ethereum is considered a commodity. If Grewal’s assessment is accurate, then the regulatory authority over Ethereum would belong to the Commodity Futures Trading Commission (CFTC), rather than the SEC, which is responsible for regulating securities.
This division has far-reaching implications for Ethereum. SEC’s main responsibility is to regulate the securities market and protect investor interests, while CFTC focuses on regulating commodity markets like raw materials and agricultural products, with its core goal being to prevent market manipulation and fraud. Therefore, compared to SEC’s strict regulation of the securities market, CFTC’s regulatory framework for commodity markets is generally more lenient.
As digital assets are increasingly being adopted, the debate over which federal agency should regulate and enforce this new innovative technology is still ongoing.
Looking back to 2021, CFTC’s former commissioner Dawn Stump had commented on the then controversial XRP SEC enforcement action. She noted that she was “closely monitoring the outcome of this case, as it will help define SEC’s specific authority in the digital asset space”.
Stump added:
The regulatory practices of digital assets, similar to the characteristics of the assets themselves, are in a state of rapid change. This rapid evolution brings both exciting opportunities and troubling challenges for those seeking stability. However, the significant transformation in this field requires us to have a high degree of adaptability and creative thinking. Frankly speaking, these two traits are not inherent attributes of regulators… This is the true portrayal of the current digital asset regulation: we need to provide space for innovators to think freely, allowing this emerging field to continue to thrive. At the same time, we must also recognize that people will have different views on the utility and potential of different products. Therefore, we should anticipate and be prepared to deal with possible challenges and turbulence. As regulators, we must consider these factors comprehensively when exercising power and fulfilling our duties, to ensure that the market can develop steadily and fully unleash its inherent potential.
Perhaps, the approval of Ethereum futures ETF has brought the long-awaited regulatory clarity to this industry. If Ethereum and similar tokens are not considered securities, then according to the Securities Act of 1933 and the Securities Exchange Act of 1934, the SEC would not have the authority to regulate these assets.
This means that the SEC cannot argue anymore that these tokens are investment contracts that meet the “Howey Test” standard. If Ethereum and similar tokens are deemed commodities, crypto lawyers may argue in court that these cryptocurrencies are not investment contracts because they do not involve “an expectation of profits from the efforts of others” – a core element that SEC must establish under the Howey Test.
Crucially, if Ethereum is default as a commodity, the SEC may weaken its legal arguments in several unresolved crypto cases.
If federal judges hearing these cases accept the view that Ethereum and other similar tokens are commodities, this may change the outcomes of pending litigations against major crypto trading platforms such as Coinbase and Kraken. The core focus of these lawsuits is that SEC believes that specific tokens traded on these platforms are securities. However, if Ethereum and similar tokens are deemed commodities, this could provide favorable legal grounds for companies like Coinbase and Kraken, potentially leading to the dismissal or remand of SEC litigations.
Such a ruling would be a significant blow to SEC Chairman Gary Gensler. Critics have been accusing him of stifling the development of the U.S. digital asset industry through harsh enforcement actions, even forcing innovative activities to move to overseas jurisdictions with more crypto-friendly policies.
As Grewal recently pointed out on Twitter, since the SEC has clearly stated that “sales of Ethereum cannot be considered securities”, this essentially means that the SEC has acknowledged that Ethereum, like Bitcoin, does not have any further issues with the so-called “ecosystem”.
The approval of Ethereum futures ETF is expected to have far-reaching implications for unresolved legal issues in the digital asset field and future legal disputes. Through this decision, SEC seems to imply the commodity nature of Ethereum and other similar tokens, which may significantly weaken its regulatory authority in the crypto field.
This undoubtedly injects strong confidence into participants in the digital asset field. Faced with overly aggressive enforcement actions, they will be able to more confidently present counterarguments to defend their rights. This undoubtedly indicates a reduced likelihood of settlements, with courtroom confrontations and competitions intensifying.
With the approval of Ethereum futures ETF, SEC’s regulatory scope in the digital asset field is expected to be significantly reduced. Crypto lawyers will take this opportunity to actively challenge SEC’s enforcement actions and litigations, pointing out potential overstepping issues. If more digital assets face a situation similar to Ethereum, legislatures may further reduce SEC’s regulatory power over these assets through legal means, and possibly transfer the regulation of these assets to the more flexible CFTC. This shift will provide greater development space for crypto startups, driving the industry into a new stage of innovation.
At the same time, crypto lawyers in the digital asset field will adjust their strategies based on the new market dynamics, providing more precise legal advice to clients. They may focus more on the commodity nature of tokens and platforms to evade SEC’s strict regulation. In particular, if legal teams of companies like Coinbase and Kraken can successfully use the ruling on Ethereum futures ETF to counter SEC’s pending litigations, this will set an important legal precedent for the industry, with profound effects on the future regulatory landscape of the digital asset field in the U.S., potentially sparking an innovation boom in blockchain technology.
The gradual clarification of the legal environment for digital assets will be a great boon for SEC and CFTC investigators and lawyers. This will create a more predictable and stable regulatory environment, allowing institutional resources to be used more efficiently. Compared to the current vague legal environment, clear regulatory provisions will greatly enhance the efficiency of resource utilization. Furthermore, the clarity of the law will bring long-awaited judicial consistency to judges handling digital asset cases, resulting in more unified and predictable legal outcomes.
I firmly believe that crypto lawyers, as faithful advocates of blockchain technology, play an indispensable role in promoting the prosperity and application of U.S. crypto technology. The approval of Ethereum futures ETF by SEC undoubtedly boosts the confidence of crypto lawyers, enabling them to provide advice and guidance to clients in the digital asset field with higher professionalism. I am eagerly looking forward to how they will creatively leverage this opportunity to bring more innovation and breakthroughs to the entire industry.