Shortly before the 2024 United States presidential election, amidst growing criticism from lawyers and observers in the crypto industry, the U.S. Securities and Exchange Commission (SEC) has approved a proposed rule change allowing major exchanges to list Ethereum (ETH) exchange-traded funds (ETFs). This approval comes in the face of accusations that the SEC has been less than welcoming to innovative offerings, opting for regulation by enforcement rather than seeking clarification of its mandate from Congress or utilizing ordinary rule-making powers in the area of digital assets. This move is seen by many as a significant shift in the SEC's approach towards cryptocurrency regulation, potentially indicating a softening stance and greater openness to institutional adoption of digital assets like Ethereum. This development raises important questions about the future of crypto regulation in the U.S., especially as it navigates the complexities of digital asset categorization and enforcement.
In late May 2024, the U.S. Securities and Exchange Commission (SEC) approved a proposed rule change allowing the Nasdaq, New York Stock Exchange and Cboe exchanges to list eight ETH ETFs in the U.S. Although the issuers of the ETH ETFs will still need to gain the SEC's approval before they can begin trading, the market price of ETH has already increased in in anticipation of institutional investors adding ETH to their portfolios.1
Perhaps more importantly, the approval of the ETH ETFs is being seen by some commentators as a sign that the SEC may be trying to demonstrate less rigidity in its stance towards cryptocurrency generally and, in particular, to its categorization of ETH.2 This speculation has been heightened by recent setbacks for the SEC in front of U.S. courts as well as its announcement that it is dropping its investigation into Consensys Software Inc. (Consensys) for trading in ETH.
SEC enforcement action against Ethereum
We have previously reported in an Osler Update about the inter-regulator conflicts in the U.S. between the SEC and the Commodity Futures Trading Commission over the categorization of, and thus jurisdiction over, crypto assets. The SEC in particular has aggressively asserted through enforcement its view that almost all cryptocurrencies properly fall within its ambit as securities or derivatives. By contrast, the CFTC, with the support of some lawmakers and crypto market participants, alleges that most cryptocurrencies should be categorized as commodities.
In April 2024, the SEC served a Wells Notice — a notice of its intention to bring enforcement action — against Consensys,a prominent global blockchain company founded by one of the creators of Ethereum, alleging that the company acted as an "unregistered securities broker".3 The SEC took issue with the company allowing users to trade between different tokens and allowing users stake their tokens, rather than directly implicating Ethereum or its underlying technology.4 Despite this, there was a general belief that the SEC's persistent litigation against various crypto trading platforms also suggested an inclination by the SEC to treat the sale of ETH, the native token of Ethereum, as the sale of a security and/or a derivative.5
On April 25, 2024, Consensys sued the SEC in the Northern District of Texas Federal Court. Consensys sought a declaration that the sale of ETH does not constitute the sale of a security and/or a derivative and an injunction prohibiting the SEC from continuing to investigate Consensys or from bringing an enforcement proceeding against it. Consensys argued, among other things, that the SEC lacks jurisdiction over ETH because ETH is more akin to a commodity.
On June 18, 2024, Consensys announced that they had been informed by the Enforcement Division of the SEC that the SEC had closed its investigation and would not pursue an enforcement action against Consensys.
SEC approval of Ether ETFs
The SEC recently approved applications from three major U.S. exchanges under Form 19b-4 of the Securities Act of 1933 to allow for the sale of Ether ETFs. These approvals came just four months after the SEC similarly approved 11 spot bitcoin ETFs under the same Form.6 As the exchanges have proposed to list the Ether ETFs under their rules for commodity based ETFs, this is seen by some commentators as an acknowledgement by the SEC that that the sale of bitcoin and ETH are not subject to SEC regulation.7 Although the SEC's decision does not state explicitly that ETH is a commodity, it described the ETF products as "commodity-based trust shares".8
Given what had appeared to be a less than passive enforcement stance by the SEC against the sale of ETH, the ETF approvals came as a surprise to many stakeholders considering the SECs historical treatment of the cryptocurrency.
This notwithstanding, the SEC has indicated that it will not approve ETH ETFs which are engaged in staking,9 which is a popular — and for token holders, potentially quite profitable — feature of the Ethereum ecosystem. This contrasts with the approach adopted by Canadian securities regulators, who have approved ETH staking by Canadian ETH ETFs.10 The SEC's prohibition against ETH staking may diminish the attractiveness of purchasing ETH through a U,S,-based ETH ETF and may drive consumers towards the Canadian-based ETH ETFs or simply encourage the self-custody of ETH.
As we have previously commented upon, Canadian regulators have led in some ways in terms of approval of certain cryptocurrency ETFs, albeit with restrictions that may seem to some to be arbitrary. Regardless, in comparison with the SEC, the Canadian Securities Administrators Guidance for Crypto Assets Investment Funds provides more clarity than the SEC's historic position.11
Developments in the U.S. leading up to and following the upcoming election will be worthy of note.
Footnotes
1. What Does The ETH ETF Mean For Crypto? – Forbes Advisor
2. https://www.forbes.com/advisor/investing/cryptocurrency/what-eth-etf-approval-means-for-crypto/
3. Ethereum's Cofounder Says SEC Is 'Gaslighting' Everyone About Crypto | WIRED
4. Ethereum's Cofounder Says SEC Is 'Gaslighting' Everyone About Crypto | WIRED
5. Ethereum's Cofounder Says SEC Is 'Gaslighting' Everyone About Crypto | WIRED
6. Spot Bitcoin ETFs: What Are They, And How Do They Work? – Forbes Advisor
7. SEC's Ether Orders Spur Hope For Crypto, Caution From Attys – Law360
8. What Does The ETH ETF Mean For Crypto? – Forbes Advisor
9. The process of locking in digital assets for a period of time to earn passive income.
11. The CSA has stated that more developed cryptocurrencies generally are considered to be in and of themselves commodities, and also allows for funds to engage in staking provided certain criteria are satisfied.
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