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What Happens if the SEC Brands ETH a Security?

The classification of Ethereum remains uncertain, with the U.S. Securities and Exchange Commission (SEC) currently not designating ETH as a security. However, this situation is subject to rapid change.

Ethereum is predominantly perceived as a decentralized cryptocurrency, avoiding the label of a security. Nevertheless, regulatory bodies such as the SEC are closely monitoring the crypto landscape and could introduce new directives or sudden shifts in stance. Keeping abreast of regulatory updates is crucial.

Reports indicate that several U.S.-based companies have been served subpoenas, potentially aiming to categorize ETH as a security.

Highly Unlikely SEC Will Classify ETH as a Security

Kenzi Wang, co-founder and general partner at Symbolic Capital, expressed to Cryptonews that the likelihood of the SEC categorizing Ethereum as a security is extremely low. Wang elaborates, stating that such a classification by the SEC would not only negate years of established precedent but also directly contradict the stance of their regulatory counterpart, the Commodity Futures Trading Commission (CFTC).

Wang states, “While the SEC continues to issue ambiguous statements regarding the potential security status of ETH, the CFTC has unequivocally declared their view of ETH as a commodity — notably evident in their 2022 filings related to the FTX/Alameda investigation.”

SEC Approved ETH Futures ETFs in 2023

In late 2023, the SEC granted approval for ETH futures trading on regulated exchanges. Throughout this approval process, Kenzi Wang notes, the SEC made no moves to alter the commodity classification of ETH as determined by the CFTC.

Wang emphasizes, “The divergence between these two regulatory bodies, the SEC and CFTC, not only poses risks to the public but also serves as a significant deterrent for the SEC to pursue the classification of ETH as a security.”

What Would Happen to ETH ETF Applications?

Numerous applications have been lodged for an Ethereum exchange-traded fund (ETF) with the SEC, and the decision regarding approval or denial of these products has been delayed, aligning with analysts’ forecasts.

The SEC’s deadline for deciding on VanEck’s ETF application for an Ethereum ETF, which tracks the world’s second-largest cryptocurrency, has now been extended until May 23.

SEC Will “Kick the Can Down the Road”

HANetf founder and co-CEO Hector McNeil conveyed to Cryptonews that the SEC might employ the review of ETH as a security as a means to delay its decision on approving ETH ETFs, essentially “kicking the can down the road.”

Laurent Kssis, head of CEC Capital, elaborates that if the SEC proceeds with reclassifying ETH as a security, it would effectively nullify any existing SEC applications involving ETH ETFs. He emphasizes, “You cannot change an asset overnight from commodity to securities, as the ETH futures are regarded de facto as non-security and fall outside the purview of the CFTC and its regulatory framework.”

So What Is a Security Token?

“A security is a representation of a slice of ownership or rights to an asset or a company. When ownership of an asset is transferred to a blockchain and assigned a token, it’s known as tokenization,” clarifies Kssis.

By merging these concepts, a security token is formed: a digital representation of ownership or rights to an asset that has undergone tokenization and is stored on a blockchain. Serving as an investment asset, a security token is a digital asset representing ownership or other rights, transferring value from an asset or a bundle of assets to the holder of the private keys to the token.

“In simple terms, security tokens are the digital counterparts of traditional investments such as stocks and bonds. Regulators classify tokens as securities when they meet the criteria outlined in the Howey test, which involves an investment of money, a common enterprise, and a reasonable expectation of profit through the efforts of others,” adds Kssis.

While Ethereum’s native token, ETH, was initially designed for paying transaction fees within the Ethereum network, it is treated as a cryptocurrency. However, due to its trading on exchanges and being held for its appreciating value, investors often regard it as a security token. Similar to stocks, these tokens must be registered with the SEC.

A reclassification of ETH as a security by the SEC would prompt its delisting.

Oliver Gale, co-founder and CEO of Panther, asserts, “ETH is not a security — the ICO was a sale of securities,” emphasizing, “in the long term, decentralization and global competition prevail.”

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I want to save money. Will cryptocurrency work?

Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

Every cryptocurrency has two main components: the units of digital exchange called “coins” and the network within which the exchange takes place. These units can be transferred between wallets and exchanged on exchanges. The networks in which these coins exist are called blockchains, which translates to “chains of blocks.”

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