Carlo D'Angelo is a lawyer, former law professor and crypto and NFT enthusiast. Carlo's practice focuses on advising clients on all aspects of blockchain technology. Carlo is the host of Lex Line, a weekly crypto and blockchain law podcast.
The views expressed here are his own and do not necessarily represent those of Decrypt.
of May Approval of Spot Ethereum ETFs It's been a chef's kiss in what can only be described as a banner month for crypto policy by the US Securities and Exchange Commission (SEC) – and the move could be very damaging. The SEC's ongoing crypto crackdown.
As the deadline for approval of the Ethereum ETF approaches, a bipartisan group of House of Representatives members He sent a letter to SEC Chairman Gary Gensler. He urged the Commission not only to approve the fund, but also to consider approving “other” digital asset ETFs in the future. And finally, the SEC finally relented on that fateful Thursday and announced that it had approved eight spot Ethereum ETF applications.
According to Paul Grewal, Coinbase's chief legal officer, the SEC's approval of spot ETFs is effectively anticipated. Ethereum (ETH) being a commodity. If Grewal is right His reviewETH production will then fall under the supervision of the Commodity Futures Trading Commission (CFTC) as opposed to the SEC, which is responsible for regulating securities.
This is a key difference for ETH, as the SEC's mandate is to police securities and protect investors. The CFTC instead regulates commodities such as commodities and agricultural commodities, focusing on preventing market manipulation and fraud. Therefore, the CFTC's regulatory framework on commodities is less stringent than the SEC's handling of securities.
This week, today, has been a rollercoaster unlike any I've ever seen. ETH has always been considered a commodity as we know it. Proud to be part of the @Coinbase trusted partner and sponsor of multiple issuers who got 19b-4 approved tonight. pic.twitter.com/nz1HHFbBSQ
— paulgrewal.eth (@iampaulgrewal) May 23, 2024
As digital assets continue to gain mass adoption, there is an ongoing debate over which federal agency has the authority to regulate and enforce this new and innovative technology.
Back in 2021, former CFTC Commissioner Dawn Stump They gave a speech On the now famous XRP SEC enforcement action issueAnd “she has been closely monitoring the outcome of this case because it will help define the scope of the SEC's authority in the digital assets space.”
Commissioner Stump added:
Regulatory enforcement for digital assets, like all assets, is evolving daily. It's fun, but frustrating, for those who want more certainty. But the incredible change in this space requires adaptability and creative thinking, and let's be honest, neither is a supervisor's natural inclination. … That's where the regulatory landscape of digital assets currently stands: We need to allow creators to think creatively about how the story evolves, we need to accept, and we need to expect, the potential for different uses and perspectives of different products. Some storms arise. These are the issues that the authorities should guide us as regulators to ensure that the market develops and fulfills its potential to fulfill our mission.
Perhaps the approval of an Ethereum ETF will bring just the regulatory clarity this sector has been seeking. Since 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.
That means the SEC can no longer argue that these tokens are investment contracts under the Hawaii test. If ETH and similar tokens are commodities, crypto attorneys could argue in court that these cryptocurrencies are not investment contracts that come with “expectation of profits from the efforts of others” — critical elements the SEC must verify under the Hawaii test.
Crucially, by tacitly acknowledging that Ethereum is a commodity, the SEC may have undercut its own legal arguments in several pending crypto enforcement court cases.
If courts accept ETH and potentially other cryptocurrencies as well, this could turn the tide on pending SEC lawsuits against major crypto trading platforms like Coinbase and Kraken. These lawsuits are based on the SEC's contention that the tokens sold on these platforms are securities. But if Ethereum and similarly-settled tokens are commodities instead, this could spark renewed activity against both Coinbase and Kraken to dismiss the SEC's lawsuits.
If the federal judges in these cases agree with this argument, it would undermine claims by the SEC that both Coinbase and Kraken offer unregistered securities trading.
Such a ruling would deal serious damage to SEC Chairman Gary Gensler. Overseas for more favorable jurisdictions.
As recently pointed out by Grewal. Twitter (X) postNow the SEC has said that “ETH sales cannot be securities because Ethereum ETFs can be registered as S-1 funds.” The SEC has basically agreed that ETH no longer has an “ecosystem”. than Bitcoin”
The SEC's recent approval of the Ethereum ETF has profound potential implications for the pending and future legal battles in the digital asset sector. By suggesting that ETH and other similar tokens are commodities, the SEC may have dramatically limited its power to aggressively regulate the crypto sector.
Therefore, the Ethereum ETF decision encourages players in the digital asset sector to push for excessive enforcement measures, which will result in fewer settlements and more court battles.
Gaining long-awaited clarity on whether ETH is a security or a commodity could reduce the SEC's authority over Ethereum and other similar cryptocurrencies. This could lead to a dramatic narrowing of the SEC's regulatory reach in the digital asset sector. Crypto lawyers will no doubt oppose the ETF's decision pending SEC enforcement actions and lawsuits and argue that the agency has exceeded its mandate.
If more digital assets are treated as commodities, similar to what the Ethereum ETF decision implies, lawmakers could eventually pass rules that would greatly limit the SEC's access to these assets. As a result, these tokens may be subject to less stringent regulation under the CFTC. Such a change in agency regulation would create fewer regulatory hurdles for crypto startups and spur a new wave of innovation in the sector.
Crypto lawyers will use the ETF decision to reshape existing strategies for how they advise clients in the digital asset space. These strategies may include advising crypto sector clients to pay more attention to the commodity nature of their tokens and platforms in an effort to better shield them from SEC access.
If the legal defense teams of Coinbase and Kraken reject the pending SEC lawsuits based on the Ethereum ETF decision, this may affect the regulation of the digital asset sector in the future and may lead to a new wave of blockchain innovation. In the US
A new era of transparency regarding digital asset laws will benefit the investigators and attorneys employed by the SEC and CFTC by creating a more predictable and stable regulatory environment. This will result in more efficient use of agency resources as opposed to the legally ambiguous environment in which we now operate. Regulatory clarity brings much-needed consistency and more consistent and predictable outcomes to judges presiding over digital property cases.
It is my belief that crypto attorneys are the custodians of blockchain and will play a critical role in the continued growth and adoption of crypto technology in the United States. The recent Ethereum ETF decision will encourage crypto attorneys to better advise and navigate clients in the digital asset sector – and I'm excited to see how they creatively use this opportunity to do so.
Edited by Andrew Hayward.
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