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Ethereum ETFs Up in the Air as Reports Claim Gary Gensler Believed ETH Was a Security 

Published April 30, 2024 2:24 PM
Shraddha Sharma
Published April 30, 2024 2:24 PM

Key Takeaways

  • Ethereum ETFs face barriers in the US as the SEC engagement remains low. 
  • New documents revealed that the SEC has classified Ethereum as a security for over a year.
  • Consensys has initiated a lawsuit to challenge the SEC’s classification of Ethereum.

While spot Ethereum exchange-traded funds (ETFs) have begun trading in markets like Hong Kong, the situation in the United States tells a different story.

Industry insiders and recent regulatory interactions hint that US authorities might block the launch of similar products. This comes as an unredacted complaint came to light in a filing, claiming that the SEC and its chair considered Ethereum a security. 

US Regulatory Roadblocks for Ethereum ETFs

Meetings between potential issuers of Ethereum ETFs and the Securities and Exchange Commission (SEC) have reportedly  been discouraging. Industry representatives maintain a bleak outlook, expecting the SEC to deny the applications ahead of the May deadline.

Based on reports, the SEC showed a lack of engagement on details, indicating a possible adverse stance on the ETF applications.

The development in the US is in contrast to the successful launch of Ethereum spot ETFs in Hong Kong. The readiness of other global markets underlines a regulatory disconnect with the US. This could partly be because Ethereum was allegedly considered a security. 

The SEC’s View on Ethereum as a Security

The SEC and chair Gary Gensler were internally classifying Ethereum as a security, a recent filing  reveals. The view was reportedly held internally for over a year based on a recent lawsuit filed by Consensys against the SEC. 

As per an unredacted complaint made in the filing by Consensys, Gurbir Grewal, Director of the SEC’s Division of Enforcement, authorized an investigation into Ethereum 2.0. 

The investigation began on March 28, 2023, to explore the “possible offers and sales of certain securities, including, but not limited to ETH,” indicating that the regulatory body has considered Ethereum security since at least 2018.

However, the agency and the chair have been reluctant to specify Ethereum under any category in public forums. 

The Legal Challenge by Consensys

The legal action taken by Consensys against the SEC is another legal escalation in the crypto market. Laura Brookover, Senior Counsel & Head of Litigation and Investigations at Consensys, expressed  her surprise and dismay over the need to sue the SEC. In a recent interview, she stated, “I never expected to one day be suing the SEC, but here we are.” 

According to Consensys , “Ethereum is a global computing platform, not an investment scheme.  Ether is not a security. It is a commodity, as repeatedly confirmed by the Commodity Futures & Trading Commission (CFTC).”

The lawsuit seeks court intervention to clarify Ethereum’s status and comes in response to a Wells notice by the SEC. A Wells Notice is the SEC’s formal notification to Consensys that the regulator is planning to bring enforcement action against them. While the notice allowed Consensys to provide a response, it initiated a lawsuit in response instead.

CCN reported in March that the Ethereum Foundation is under the SEC scrutiny with Ethereum potentially the primary target.

Future of Ethereum ETF Uncertain 

The future of Ethereum ETFs in the United States remains uncertain amid the SEC’s skeptical approach to Ethereum. 

As the situation develops, the outcome of Consensys’ lawsuit could potentially reshape the decision on the ETFs. However, the May deadline maintains a pessimistic outlook. 

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