The regulatory environment governing cryptocurrencies is still up for dispute and is unclear. Regulating bodies have issued inconsistent statements regarding Ether (ETH), the native cryptocurrency of Ethereum, regarding its classification as a security or a commodity. Dan Berkovitz, a former commissioner of the United States Commodities Futures Trading Commission (CFTC), discussed the likelihood of ETH coming within the purview of both the CFTC and the Securities and Exchange Commission (SEC) on a recent episode of Laura Shin’s podcast Unchained.
This article examines the ramifications of Ether being classified as both a commodity and a security by delving into the complex legal definitions of both.
The Commodity-Security Duality:
In terms of regulation, Berkovitz emphasized how closely related commodities and securities are. The legal definition of a commodity goes beyond the tangible things that are typically thought of as commodities, such as ‘wheat’ or ‘oats’. Everything that is covered by futures contracts is regarded as a commodity by the CFTC, which is in charge of regulating them.
“The law is clear. Something can actually be both a commodity and a security.”
Therefore, regardless of how physically present an asset is, it can be categorized as a commodity if it is the subject of a futures contract. Investment contracts and notes fall within the category of securities, which are supervised by the Securities Act and the Exchange Act. It’s interesting to note that security might also be the subject of a futures contract, placing it into the CFTC’s regulatory purview.
Ethereum’s Legal Conundrum:
The confusion surrounding Ether’s legal status arises due to the lack of a clear designation by the SEC. While the CFTC has consistently categorized Ether and several other cryptocurrencies as commodities, the SEC has refrained from explicitly classifying Ether as either a commodity or a security.
SEC Chair Gary Gensler has suggested that, aside from Bitcoin, most other cryptocurrencies should be treated as securities. However, he has yet to provide further clarification on the matter, leaving the status of Ether uncertain.
The Viewpoints:
Colin Lloyd, a partner at Sullivan & Cromwell, a multinational law firm working on prominent cryptocurrency cases, challenged the SEC’s assertion that digital assets can be inherently classified as ‘securities’.
“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.”
Lloyd argued that the determination should instead depend on whether the digital asset is being sold as part of a securities transaction, emphasizing the importance of evaluating the facts and circumstances surrounding the asset’s sale.
Implications and Regulatory Jurisdiction:
The CFTC primarily oversees futures and swaps related to commodities, while the SEC focuses on securities. However, if an asset is deemed both a commodity by the CFTC and a security under the SEC’s definition, both regulatory bodies can claim jurisdiction over it. This situation creates a complex regulatory landscape for Ether and potentially other cryptocurrencies with similar characteristics, requiring coordination and collaboration between the CFTC and the SEC.
“It’s kind of a weird question to be asking, ‘Is this digital asset a security or not?’ I think you should be asking, ‘Is this digital asset being sold as part of a securities transaction?’ That depends on the facts and circumstances.”
The legal classification of cryptocurrencies, such as Ethereum’s Ether, remains an ongoing challenge. With the possibility of an asset being considered both a commodity and a security, the regulatory landscape becomes intricate. While the CFTC and SEC navigate this dual jurisdiction issue, stakeholders in the cryptocurrency industry eagerly await further clarity. As the digital asset ecosystem continues to evolve, policymakers and regulators will need to adapt and provide coherent frameworks to ensure legal certainty while fostering innovation in this rapidly expanding sector.