What happens if the SEC classifies ETH as a security? (wrong answers only)

It emerged yesterday that the US Securities and Exchange Commission (SEC) is likely looking to reclassify Ethereum's native token, Ether. (ether)As a guarantee. Not everyone believes this to be the case, and the SEC has so far held off definitively answering whether there is an ongoing investigation into the Ethereum Foundation — just as the agency did when it definitively said that Ethereum is a currency or not. protection.

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A number of digital asset lawyers have said that the Ethereum Foundation's “voluntary investigation” into its GitHub repository is nothing to worry about. Calling out cryptocurrency companies is a normal course of action in this industry. The Ethereum Foundation's canary – a reference to “canaries in coal mines”, which refers to whether the government searched a website – was eventually forced to shut down.

“It is very difficult to know, from what has been publicly disclosed so far, the nature of the government investigation that has been sent into the Ethereum Foundation or whether the Foundation is the target of that investigation,” Preston Byrne, Byrne’s managing partner. & Storm, PC, told CoinDesk in an email.

Byrne said it was “unlikely” that the Ethereum Foundation would be a “target of investigation.” However, considering that there is an ongoing investigation, some questions remain. For example, it is not yet clear why the SEC would prosecute Ethereum's creators nearly 10 years after its launch and after hundreds of billions of dollars had been accumulated on the network.

Does the investigation relate to Ethereum's ICO and token distribution or its transition to a staking security model? How can a US securities regulator have jurisdiction over an organization based in Zug, Switzerland? The Commodity Futures Trading Commission (CFTC), which will oversee… The booming ETH futures marketpush back?

As for why cryptocurrency companies are being asked about their dealings with the Ethereum Foundation, Byrne offered two plausible reasons: Either the SEC is trying to classify Ethereum as a security to force US spot exchanges to remove or support the token. Its case is to reject highly sought-after exchange-traded funds (ETFs).

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Neither payer “would necessarily require the SEC to take enforcement action against the institution,” Byrne added.

But suppose there is a lawsuit. Let's assume ETH is a security (despite good reasons to say no). What exactly happens next? Ethereum is the second-largest blockchain by value ($414 billion at today's prices), and home to most of the most widely used instruments in the digital asset industry — and classifying Ethereum as a security would likely cause chaos. With a move of this magnitude, it's completely unpredictable where the cards will eventually fall.

One unexpected response is that Ethereum, which has switched to a proof-of-stake algorithm that rewards tokens to users who lock their tokens to secure the network, could revert back to the mining model pioneered by Bitcoin. This in itself is unlikely; It took Ethereum developers inside and outside the Ethereum Foundation years to switch to staking.

Vitalik Buterin came up with the idea for Ethereum in 2013, and even then, he saw that blockchain technology would likely need to shift to staking, a “consensus model” that was in its infancy at the time. It was only in 2020, five years after the network was actually launched, that the first concrete step towards staking on Ethereum was taken with the launch of the Beacon chain.

Ethereum developers have deployed and reconfigured a number of testnets to experiment with the shift to staking over several years, and “unmerging” will likely take a long time.

Part of the problem, aside from the scaling and cost benefits of staking, is that mining is an intentionally energy-intensive process, one that developers were happy to say goodbye to. After the “merger,” Ethereum’s energy consumption supposedly dropped by 99% — much to the frustration of critics of the cryptocurrency’s environmental footprint.

“It is impossible for me to see any outcome as you have indicated that would lead to something like a consolidation,” Paul Brody, head of blockchain at EY, told CoinDesk.

Ethereum is Ethereum and Ethereum Classic is Ethereum Classic, even if it is Ethereum Classic. (etc) It actually preserves the “original, unchanged” history of the blockchain. But what if Ethereum Classic, from which Ethereum forked, became the cone chain? This would certainly be an easier solution than “dismantling”, considering that the network is already working.

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Sure, Ethereum Classic has seen a number of faith-breaking reorganizations, but the re-certification of Ethereum's beloved sibling could answer SEC Chairman Gary Gensler's apparent concerns about staking. So is the alternative to Ethereum: EthereumPoW (ETHW), a fork launched during the merger to maintain proof of work.

Neither ETC nor ETHW rose much on news of a potential SEC investigation, suggesting that rapid adoption is unlikely. But it's not impossible. After all, Buterin admitted that ETC was “Quite a good series.”

One notable downside to this, among many, is that Etheruem founders will likely hold huge stakes of ETC or ETHW tokens, reflecting the state of their ETH holdings at the time of the fork. It is not clear whether the SEC was concerned about the Ethereum token issuance, which distributed valuable tokens to the founding team and the Ethereum Foundation. But the agency has said in the past that such payments resemble investment contracts.

The XRP army has been waiting for a moment like this for years. Although the conflict is not as clear-cut as Ethereum vs. Solana or Bitcoin vs. All, many XRP people absolutely hate Ethereum. The history here likely stems from Bill Hinman, former head of the SEC's Division of Corporate Finance, declaring that Ethereum was not a security because it was “sufficiently decentralized.” The XRP Army, which backs its own project, saw this interference as an unfair selection of winners in the cryptocurrency market, privileging one project for special considerations while ignoring others that look quite similar.

Over the years, XRP champions, Including Ripple Labs CEO Brad GarlinghouseThey argued that Ethereum is “controlled by China”; that Vitalik Buterin could be chosen by the Chinese Communist Party; And that the network itself was “carefully selected” to win by US authorities. Of course, Buterin did himself no favors by responding to these accusations Describing XRP as “sh*tcoin”.

One thing that XRP has going for it is that, unlike most cryptocurrencies, there is actually little legal clarity surrounding these assets after Ripple Labs fought back in court against the SEC, getting some concessions from the presiding judge. XRP itself is not a security, and exchange trades with it are not securities transactions, even though Ripple's programmed sales to qualified buyers were investment contracts, the judge ruled.

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“It's the selling or offering-for-sale characteristics that make something an investment contract, not necessarily what it is a cryptocurrency,” Christa Laser, a law professor at Cleveland State University, told CoinDesk. “ETH is sold on public exchanges without advertising.” “The SEC will likely target only bounties, but it will need to show the presence of a central promoter.

In fact, one possible outcome of the SEC going after ETH is another major loss for the agency in court. As former CFTC Commissioner Brian Quintens said yesterday, the SEC already implicitly said that Ethereum was a commodity after it allowed the launch of Ethereum futures and Ethereum futures ETFs in the US. Furthermore, countless US investors, companies and individuals have acted on SEC signals over the years that ETH is not a security.

Additionally, there is growing recognition that Gensler's SEC has been unfair in its legal battle with the cryptocurrency industry. Instead of devising comprehensive regulations that actually explain the differences between decentralized protocols and traditional ways of doing business, he has launched lawsuit after lawsuit against companies that add—rather than subtract—value from the US economy.

This “legal war” has not always been in Gensler's favor. Recently, a US federal judge called “Serious abuse of power” by the Securities and Exchange Commission For “deliberately perpetuating lies” in its dispute with cryptocurrency company DEBT Box. This comes in addition to the unprecedented closure by a three-judge appeals panel that called the agency's years-long rejection of spot bitcoin ETFs “arbitrary and capricious.”

In short: If it's true that the SEC is trying to build a case for rejecting ETH ETFs by going after the underlying asset, it better have a good justification.

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