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Oct 13 • 5 mins

Federal Regulators To Sentence Ethereum

The United States Securities and Exchange Commission is going to take measures against Ethereum that will go across America’s borders.

It is definitely possible that regulators with the United States Securities and Exchange Commission are getting ready to overthrow Ethereum as several officials including the chair of the SEC seem to be militant.

The agency started regulating cryptocurrencies in September. During its annual The SEC Speaks conference, functionaries assured that they would keep on proceeding with law-enforcement activities. Also, the officials insisted that market players should register their products and services. The chairman of the SEC, Gary Gensler, offered a way to minimize conflicts of interest and strengthen investor protection. According to Gensler, crypto middlemen should divide into independent legal structures and register each of their functions, for example, broker-dealer, exchange, and custodial functions.

To boost the registration of crypto market players, the SEC Division of Corporation Finance is to expand its Disclosure Review Program by adding an Office of Industrial Applications and Services and an Office of Crypto Assets to it this fall. Also, there were statements on proposed bills to improve cryptocurrency regulation. Gary Gensler repeated his idea that almost all digital assets are securities, and they should be registered with the SEC.

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Possibly, the most unexpected situation took place when the United States Securities and Exchange Commission aimed at Ethereum. Recall, one of the preceding SEC officials didn’t consider both Bitcoin and Ether as a security. In his testimony before the Senate Banking Committee, the chair of the SEC assumed that the transition of Ethereum to proof-of-stake (PoS) from proof-of-work (PoW) could have brought Ethereum under the SEC’s review as when it comes to staking coins, “the investing public [is] anticipating profits based on the effort of others.”

Next, there was a complaint filed against a token promoter, in which the SEC supposed that all Ethereum transactions could be in the power of the SEC as most of Ethereum’s nodes are established in the United States. These latter positions on Ethereum obviously show that the SEC is overacting in order to force industry players to register.

As for 2018, William Hinman, then-SEC Director of Corporation Finance, stated that the United States Securities and Exchange Commission didn’t consider both Ether and Bitcoin as securities. The possible argumentation of this point of view was based on Ethereum’s being significantly decentralized and the difference between cryptocurrencies and digital tokens. The former are to replace sovereign currencies, while the latter are just assets that revolve around a particular enterprise.

However, Ethereum’s transfer to PoS has probably confused everything as the SEC considered Ether to be a security under the Howey Test. In fact, it is still unclear how Ether’s transfer could have substantially changed its decentralized nature and purpose to now consider it a security. Ethereum is more similar to Bitcoin than digital tokens.

Perhaps, Ethereum may be closer to meeting the Howey factors as there are more crypto-lending-like characteristics that the United States Securities and Exchange Commission has already declared can make any product a security. Proof-of-stake still has significant differences compared to crypto-lending platforms where interest is earned by actions of the lending company and tokens are staked. Thus, it is doubtful to consider Ethereum a security, especially taking into consideration smart contacts as its primary use case and the way its coins are mined.

Besides, the SEC’s statement that all Ethereum transactions should be in the United States’ jurisdiction as most of Ethereum’s nodes are established in the U.S. would enlarge the SEC’s reach across America’s borders. Based on the above, the United States Securities and Exchange Commission could declare an Ethereum-based token developed in Poland, offered and sold in Poland solely to the Polish to be within its jurisdiction as it believes the transactions practically occur in the United States. Such a result appears to be greatly unlikely to pass legal muster.

To sum up, it is more likely that the SEC uses such a negotiating tactic to terrify the industry and make market participants join its jurisdiction willingly. Because if Ethereum is considered a security, then all the rest tokens and decentralized finance platforms will be too.

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    About the author

    Dmitry K.

    CEO and Co-founder of ND Labs
    I’m a top professional with many-year experience in software development and IT. Founder and CEO of ND Labs specializing in FinTech industry, blockchain and smart contracts development for Defi and NFT.

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