As the deadline for the SEEEF decision approaches, the ether security debate continues

The debate surrounding the safety of Ether has taken center stage in the crypto ecosystem, with just one day left until the United States Securities and Exchange Commission (SEC) decides to approve the Ether exchange-traded fund (ETF).

The deadline for the SEC to decide on VanEck's spot Ether (ETH) ETF application is May 23.

Ether – the second largest cryptocurrency after Bitcoin (BTC) – is approaching a critical milestone, and much will depend on whether the SEC treats Ether as a commodity or a security.

The SEC approved Bitcoin ETFs on January 10, solidifying BTC's status as a commodity in the eyes of regulators.

The fate of the Ether ETF is less certain, with the SEC once again questioning the safety of ETH, leading many analysts to take a more pessimistic view of the ETF's chances of approval.

Bloomberg ETF analyst Eric Balchunas — who a few weeks ago gave the space ether ETF a 70% chance — said the current odds are at “a very pessimistic 25%.”

How did ether security come into the picture?

The biggest roadblock to deregulation of Ether ETFs is an ongoing investigation by SEC Enforcement Division Chief Gurbir Grewal into Ether as a security. According to new filings released in March, the SEC established a five-member commission on April 13, 2023, approved by the executive branch of “Ethereum 2.0.”

Blockchain and Web3 software company Consensys sued the securities regulator in April, challenging its authority to regulate Ether as a security.

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Cointelegraph spoke to lawyer and CEO of Wright Law Firm Jamie Wright to understand the mandate of US regulators.

When asked which decision would handle the conflict of interest between the SEC and the Commodity Futures Trading Commission (CFTC), which oversees securities matters, he said he believed the SEC would win because securities regulation is more comprehensive. Regarding investor protection, which is a top priority for the SEC:

“The CFTC focuses on commodities, which are typically less directly regulated than securities. Without an independent cryptocurrency regulator, the SEC's focus on investor protection and disclosure requirements could further influence their position.

SEC Chairman Gary Gensler himself voted against approving the spot BTC ETF, leading many to believe his vote secured their approval.

However, internal documents suggest that Gensler thinks ether is a security, and his vote could be a decisive factor in not allowing an ether ETF position.

Financial lawyer Scott Johnson said the SEC “is considering a security request for ETH in this future position of the ETF order.”

This is made clear by the SEC's inclusion of a “notice of grounds for rejection” in its decision, he said. According to Johnson, this clause was never in the Bitcoin ETF resolution.

Johnson went on to say that the purpose of this inquiry was “to deny that these placements were improperly registered as commodity-based trust shares and were ineligible if they held securities.”

Adam Becker, legal counsel at global payments platform Merkuo, told Cointelegraph that the SEC and Gensler have consistently emphasized their position of viewing all digital tokens other than Bitcoin as securities.

“[The] The SEC's approach stems from two main factors. First, Gensler adopts a global perspective to equate cryptocurrencies with securities using the Huey test. Second, the SEC could see global investors' interest in cryptocurrencies alongside traditional securities, an effort to bring this sector under its control.

He added that the SEC does not have a central authority to regulate bitcoin, which complicates the regulator's approach.

Could be a problem for the ETH ETF.

A financial instrument is considered a security if profit is expected from the investment of the participant based on the work of others in the joint financial enterprise.

Ether's initial pre-mining and initial coin offering, from a centralized organization – the Ethereum Foundation – makes it close to secure in the eyes of regulators.

The ability of ETH holders to reap huge rewards from the network is another reason why the SEC believes it could be a security.

In Ethereum's proof-of-stake (PoS) protocol, validators are elected to create new blocks and verify transactions based on the number of coins they hold and are willing to “hold” as collateral. Prizes are distributed based on the amount booked.

Peko Wan, CEO of PundiX, told Cointelegraph that while the move to PoS would introduce potential compliance with Hawaii's inspection criteria for investment contracts, it does not mean that ETH will be classified as a security.

“Ethereum still maintains important uses beyond investment purposes, such as smart contracts and decentralized applications. This utility may support arguments against classifying ETH as a security.”

On May 22, possibly anticipating potential problems with SEC approval, five ETF applicants filed updated filings regarding incorporation.

Bloomberg EFA analyst James Seifert said the amendments added “very clear language that the fund's ETH cannot be included by anyone.”

Can Presidential Elections Affect ETF Approval?

Many experts and market experts believe that the upcoming US presidential election could play a key role in determining the fate of the Ether ETF.

Kadan Stadelman, chief technology officer at Comodo, told Cointelegraph that cryptocurrency has become a growing issue this election season, especially in the recent votes to replace former President Donald Trump's crypto assets and the staff of the SECs in the US House and Senate. Account number 121 (SAB 121). He explained.

“The Gensler and Biden administrations have maintained a hostile stance toward the crypto industry. Trump has publicly stated that he is good with cryptocurrency. Since the President of the United States personally appoints the SEC chairman, a Trump victory could lead to a more crypto-friendly SEC in 2025 and beyond.

A change in government could usher in a new era for cryptocurrency and regulations amid growing institutional interest. However, these are just speculations, and experts warn that Trump's advocacy may not mean much after the election.

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Some in the crypto community have hailed Gensler's handling of the SEC's responsibilities as a victory for crypto.

However, as SEC chairman, he has taken what many in the crypto space have described as a hard line with the industry.

Wright said a new administration could change policy priorities and regulatory approaches, which “could affect how the SEC and other regulators view Ether.” He added: “Changes in key regulatory areas and the overall political climate may lead to a re-evaluation of the current position, making the regulatory environment of cryptocurrencies more flexible and subject to change.”