SEC Drops Ethereum Investigation to Avoid ‘Embarrassing’ Court Case

The United States Securities and Exchange Commission's (SEC) case for ensuring the safety of Ether may not be as strong as it lets on.

On June 19, 2024, the SEC surprised the crypto industry when it officially closed its investigation into the security of Ether (ETH).

“There will be no more objections from the SEC that Ether is a security,” said Laura Brookover, the deal's attorney.

Brookver said the SEC has not voluntarily decided to end its investigation.

She said, “The recent E.T.H. She said that it is a response to the push to withdraw the subpoenas submitted on the basis of agreement [exchange-traded fund] ETH is defined as a commodity.

The letter from Consensus states that the SEC's approval of Spain's Ether exchange-traded funds (ETFs) “signals that it has updated its position to classify ETH as a commodity rather than a security.”

The SEC has not officially confirmed Consensys's thesis.

ETF is not a guarantee that Ether is a commodity

Carol Goforth, a professor at Arkansas Law School who specializes in trade unions and securities regulation, told Cointelegraph that the SEC's approval of the Space Ether ETF does not mean ETH.

“The approval of an ETF has nothing to do with whether the underlying asset is a security,” Goforth said.

She added that there are already ETFs with commodities as the underlying asset:

“The approval of an ETF has nothing to do with the proper allocation of the underlying assets in which the fund invests.”

If spot Ether ETF approval does not necessarily require the SEC to show that ETH is a security, why did the SEC stop its investigation?

Why did the SEC leave the investigation to Ethereum?

Goforth believes the SEC's retreat is “a good indication that the agency does not believe it can convince a court that ETH is a security.”

She expressed her suspicion that the SEC “will find it difficult to prove that ETH is a security in the Hawaii investment contract test given how much the asset is held and traded and how market forces determine profitability.” She said the SEC may have wanted to avoid an embarrassing defeat.

“Previous statements by SEC officials regarding Ether's classification may be embarrassing for an agency that claims classification is ‘clear.'

In the year In 2018, former SEC director William Hinman said that Ethereum is not a security.

In his speech, he mentioned that decentralization plays a key role in this commitment. The network and operations were sufficiently decentralized, meaning investors did not expect a single entity to undertake significant administrative efforts.

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The speech contrasted with the SEC's ongoing scrutiny under Gensler, suggesting that Ethereum's security is clearly vulnerable.

A major complaint of the crypto industry is that the SEC has not consistently provided guidance on how the Hawaii test applies to Ethereum or other similar cryptocurrencies.

The US crypto regulation battle is far from over.

The crypto community may be happy that the SEC has dropped its investigation.

“It's a positive development for the Ethereum network that the SEC is not currently trying to assume that ETH is a security,” Goforth said.

However, the letter from the SEC said only that “at this time” the SEC will not proceed with the investigation and “this is not a final decision.”

Goforth believes that “given the uncertainty surrounding the appropriate allocation of most crypto assets, it is too early to say the industry has a ‘winner'.

While this is a “significant” victory, it is “not a panacea for the many blockchain developers, technology providers, and industry participants who have suffered under the SEC's illegal and aggressive crypto enforcement regime.”

Goforth said the industry needs a “clear regulatory framework that can be reasonably complied with” where buyers have access to accurate information and industry participants can be held accountable for wrongdoing.

Communication may have won the battle, but the battle continues. The SEC is investigating staking, an integral part of the Ethereum ecosystem.

American crypto exchange Kraken has already settled with the SEC for 30 million dollars. The exchange stopped offering stock services after the commission said it was sacrificing security for service.

Coinbase CEO Brian Armstrong said the exchange would take the SEC to court if necessary.

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Goforth said the settlement is “definitely a more complex” topic, accusing the SEC of “embarrassing itself involving investment contracts.”

She said the SEC's position “can be taken regardless of whether the underlying crypto asset itself is a security.”

The ongoing struggle for a clear regulatory framework in the US crypto industry remains a challenge.

However, the latest developments may give Ethereum advocates a momentary respite from some of the uncertainty surrounding Ether's classification, providing a glimmer of hope in an otherwise chaotic regulatory landscape.