The U.S. Securities and Exchange Commission (SEC) filed suit against Binance today in a move that has rocked the cryptocurrency industry. 

The complaint notably includes language in which the SEC clearly elucidates that it considers many of the tokens that traded on Binance to be unregistered securities and lays out its case against several it considers notable offenders. The SEC identifies these “crypto asset securities” as including (but not limited to) Solana, Cardano, Polygon, Filecoin, Cosmos, The Sandbox, Decentraland, Algorand, Axie Infinity, and Coti. 

Today’s filing contains some of the SEC’s most explicit language to date in clarifying its judgment, but once again avoids taking on the big question: is Ethereum a security or not? If so, why is the SEC silent on it? And if not, what is it?

“Crypto Asset Securities”

The SEC’s argument for designating these tokens as “crypto asset securities” is exhaustively outlined in Section VIII of the complaint (pages 85 through 123). Notable patterns emerge from the filing: the process of initial coin offerings (ICOs), vesting of tokens, allocations for the core team, and the promotion of profit generation through ownership of these tokens, are all repeated themes. 

But Ethereum is not listed among these. Gensler has remained consistently vague on the question of whether Ethereum and its namesake coin count as securities. ETH is commonly held as an investment, suggesting it could be classified as a security, but it is also extensively used day-to-day as a medium of exchange across protocols, making its function more akin to cash or ACH settlement. 

Gensler has previously suggested that “everything other than Bitcoin” in the crypto space could be seen as a security, but has notably refused to clearly state as much about Ethereum. When pressed to say the words, “I believe Ethereum is a security,” the Hon. Chair just will not do it. Gensler’s reluctance to classify Ether is curious when his SEC is so eager to claim as much for others. Why?

The Ethereum problem

It might be a simple matter of intragovernmental contention. Ethereum could potentially fall under the purview of the Commodity Futures Trading Commission (CFTC), which regards Bitcoin, Ethereum, and Tether as commodities, not securities. Not only do the two categories differ wildly from one another, this overlap could create a regulatory tug-of-war that would Gensler’s public stance on Ethereum while trying to avoid the appearance of infighting within the federal government.

Another analysis from Protos, argues that Gensler’s evasion on the matter may be a consequence of the SEC’s earlier inaction following the infamous DAO hack, which saw the blockchain fork into Ethereum Classic and put the entire ecosystem at risk. However, at the time the SEC did nothing, and now Gensler finds himself in the unenviable position of making up for his predecessors’ oversights. Now that the Ethereum ecosystem has spent years recovering and building credibility, retroactively declaring it an unregistered security would have unforeseen, but no doubt disastrous, consequences for investors.

In other words, protecting investors in this case would mean protecting them from the protector.

However, perhaps another reason could lie beneath Gensler’s reluctance to clearly classify Ethereum: he may not know.

Cryptocurrencies and their underlying technologies are innovative and novel. They represent a fundamental shift in how we understand finance and asset ownership, and in the case of decentralized ecosystems like Ethereum, they introduce entirely new paradigms.

If this is true, it’s not unreasonable to suspect that most people—even those deeply involved in the space—may not fully understand the implications of these innovations just yet. Anything that is fundamentally new will resist categorization, and Ethereum does so—this lack of a concrete “concept” that both defines Ethereum but fits into previous understandings is the core problem around regulating it.

This regulatory ambiguity presents a complex challenge for Ethereum, but it does not lessen the urgency to address it. The advancement of the crypto industry hinges on obtaining clear legal definitions for Layer 1 (L1) tokens, such as Ethereum, that function simultaneously as mediums of daily exchange and investment vehicles within their respective ecosystems. The ambiguity in their status poses a significant hurdle, stalling progress and fostering uncertainty in a space that is ripe for growth and innovation.

The dichotomy of these tokens’ roles blurs the boundary between conventional asset classes, forcing us to confront inadequacies in existing legal structures. To propel the crypto industry forward, regulators must acknowledge and address this nuanced reality. Until a refined framework emerges that accurately captures the dual functionality of these L1 tokens, regulatory ambiguity will continue to shroud the industry, stifling its full potential and deterring mainstream adoption. This unique crypto space requires equally unique rules—ones that can encapsulate its dynamism and complexity.

Making meaningful progress

The path towards comprehensive crypto regulation is obscured by two significant obstacles, which must be addressed urgently for the sector’s responsible advancement.

Firstly, the U.S. Securities and Exchange Commission (SEC) must establish a formal position on Ethereum. Given the SEC’s historical inaction in restraining Ethereum’s growth when opportunities were present, it has inadvertently fostered an environment where investors are left in regulatory limbo. The SEC, as the protector of investors, has a duty to provide some form of regulatory guidance—even if it proves to be temporary—to offer a foundational starting point and eliminate the current state of speculation. The lack of clear regulation is not merely an inconvenience; it is a failure to provide the necessary protections for participants in an increasingly significant market.

Secondly, authentic, open-ended discussions about the nature of digital assets are crucial. This implies engaging in conversations devoid of preconceived notions, biases, ideological posturing, or empty rhetoric. We often speak of making space to “have the conversation,” but acknowledging that conversation needs to take place and actually having one are two very different exercises indeed.  Perhaps everyone in the industry—as well as those watching over it—would benefit from practicing the latter.