Regulation
The SEC has previously commented on Ethereum (twice) – in conjunction with Bitcoin – saying that it is not a security. In addition to those preliminary comments, the CFTC Chairman publicly stated in October 2019 that ether is viewed as a commodity by the U.S. regulatory body. Ethereum will likely still be subject to any blanket regulation imposed on cryptocurrencies but regulatory restrictions that target Ethereum specifically are unlikely. As such, Ethereum will not be subject to as much intense regulatory scrutiny as the many ICOs that were launched on its platform. A recent landmark case by the SEC sets a precedent for them to evaluate ICOs as securities retroactively, but this does not affect Ethereum itself, even though it had an initial token sale in 2015.
In August 2021, current SEC Chairman, Gary Gensler, gave a speech suggesting The Securities and Exchange Commission will "regulate cryptocurrency markets to the maximum extent possible" using its existing authority. Gensler continued the speech stating the asset class is fraught with “fraud, scams, and abuse.” The comments and aggressive language suggest the SEC is likely to become more active in policing cryptocurrencies in the future.
ETH can be deemed a security if it satisfies certain properties based on the common definition and interpretation of the Howey Test, the most common legal test applied to securities. The four-component questions of the test are listed below:
- Is there an investment of money?
- Is there an expectation of future profits?
- Is the investment of money in a common enterprise?
- Do any profits come from the efforts of a promoter or third party?
Many digital assets lack clear utility and thus have no purpose other than for retail investors to speculate on price (i.e. invest). ETH has a clear-cut utility case on the platform in the form of gas. Gas performs the role of a utility in the form of an internal pricing mechanism for allocating computational resources on the network. Since it is derived from but not the same thing as the native token Ether, discerning the functionality of Ether on the network is difficult to tease apart.
Tokenized assets are also gaining steam within the broader financial system, and many companies, exchanges, and regulators have their eyes fixed on Ethereum as the potential medium for facilitating a future of tokenized securities and other non-fungible assets such as real estate. Still, a token-based landscape of financial instruments is a long way off, and requires a much more nuanced approach from the SEC, CFTC, and IRS than what they have demonstrated so far.
Regulations could also play into Ethereum’s status as the preferred status for launching ICOs. Security token offerings are potentially going to replace ICOs as the next big token offering, but it is unclear what the medium or context for launching them will be.
