The SEC filed lawsuits against Binance and Coinbase and declared “war” on 19 cryptocurrencies by wanting to classify them as securities. Amidst this regulatory crackdown, Ethereum seems to have escaped scrutiny from the SEC’s radar. On a Congress hearing, Gary Gensler refused to answer point blank in regard to whether he thought Ethereum is a security. Additionally, the exposed documents from William Hinman - a director of corporation finance at the SEC - which were published during the SEC vs Ripple court case revealed that he declared Ethereum isn’t a security.
Would Ethereum continue to be categorised as a commodity? To answer this question, we must first understand the Howey Test. According to an article on Cointelegraph (https://cointelegraph.com/news/crypto-and-securities-new-interpretation-of-us-howey-test-gaining-ground), the Howey Test comprises four aspects. They are: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, or (4) to be derived from the efforts of others. A cryptocurrency will be considered as a security if it fulfills all four criterion.
Is Ethereum decentralised enough?
Let’s explore the notion of “by the efforts of others” more closely. There are many consensus and execution clients for Ethereum, including Go Ethereum, Nethermind, Erigon, Teku, Besu, Parity OpenETH, Geth, Prysm, Lighthouse, Lodestar, and Nimbus. This means that there is no single producer of Ethereum as different people use different codes to produce it via these clients. If one of these clients were to stop producing ETH, it would still be business as usual for the blockchain as other clients will produce it. This thus suggests that Ethereum is a public good aka commodity since more than one entity produce ETH via a range of codebases. No one entity has control over the entire blockchain.
Whose purview does Ethereum come under?
Another reason why Ethereum isn’t classified as a security is that it could potentially fall under the purview of the Commodity Futures Trading Commission (CFTC), in which Bitcoin, Ethereum and Tether are considered as commodities. Hence, Gary Gensler, the Chairman of the SEC, could be deliberately iffy about the status of ETH to avoid the prospect of inciting infighting within the federal government.
Implications of Ethereum being classified as a commodity
Securities are governed differently from commodities. Since it is illegal to transfer a security from one person to another, it will be advantageous for ETH to be classified as a commodity so that developers of decentralised applications can continue building on the blockchain. If Ethereum were to be classified as a security, it would only be legal to send it to licensed brokers - which would hamper innovation.
