Ethereum’s ETH: A Dual Nature as Commodity and Security, Says Former CFTC Commissioner
Ethereum’s native token, Ether (ETH), recently experienced a downturn, reaching $1,783. However, according to the former commissioner of the United States Commodities Futures Trading Commission (CFTC), ETH has the potential to be classified as both a commodity and a security.
During an episode of Laura Shin’s Unchained podcast on May 23, Dan Berkovitz, who also served as the former general counsel at the Securities and Exchange Commission (SEC), highlighted the legal possibility of ETH falling under the regulatory jurisdiction of both agencies.
Conflicting Statements Fueling Legal Uncertainty
The ongoing confusion surrounding the legal status of Ether primarily arises from conflicting statements issued by the CFTC and the SEC. Over the past six months, the CFTC has consistently referred to Ether, along with several other cryptocurrencies, as commodities.
On the other hand, the SEC, led by Gary Gensler, has not explicitly assigned a legal category to Ether. In an oversight hearing in April, Gensler suggested that everything except Bitcoin (BTC) should be considered a security without further elaboration.
Dual Classification: Commodity and Security
While the notion of Ether being simultaneously classified as a security and a commodity may seem contradictory, Berkovitz explained that due to the overlapping legal definitions, it is indeed possible for an asset to hold both designations.
Berkovitz clarified that the confusion arises from the fact that commodities are not solely physical items such as “wheat” or “oats.” Instead, any asset falling under the scope of a “futures contract” can technically be categorized as a commodity. This is why the term “futures” is part of the CFTC’s name.
Furthermore, Berkovitz stated that a security, as defined by the Securities Act and the Exchange Act, which includes notes and investment contracts, can also be the subject of a futures contract, thus bringing it under the regulatory purview of the CFTC.
Both Regulatory Bodies’ Jurisdiction
The CFTC primarily regulates futures and swaps related to commodities, while the SEC is solely responsible for securities regulation. However, if an asset is deemed a commodity by the CFTC and a security under the SEC’s definition, both regulatory bodies can assert jurisdiction over it.
Challenging the SEC’s “Security” Classification
During the podcast, Collin Lloyd, a partner at the multinational law firm Sullivan & Cromwell, criticized the SEC’s claim that everything except Bitcoin should be considered a “security” under federal securities law.
Lloyd argued, “I don’t see anything in the case law that tells me that some string of digits that operates on a blockchain can natively just be a security.”
He suggested that the focus should be on whether a digital asset is being sold as part of a securities transaction, which depends on the specific facts and circumstances.
It is worth noting that Sullivan & Cromwell is currently involved in the FTX bankruptcy case and was hired by Coinbase on April 29 to assist the crypto exchange in navigating regulatory challenges posed by the SEC.