Gary Gensler’s SEC has halted its investigation into whether Ether is a security. What could have motivated the SEC withdrawal, and is the fight over?

The recent closure of the SEC's investigation into whether Ether (ETH) is a security has been a significant development in the cryptocurrency world, particularly for Ethereum advocates. Here's a comprehensive breakdown of the situation:

SEC Investigation Closure

On June 19, 2024, the SEC officially closed its investigation into whether Ether is a security. This decision came as a surprise to the crypto industry, given the longstanding uncertainty and regulatory scrutiny surrounding Ether's classification.

Consensys' Role and the ETF Approval

Consensys, a key player in the Ethereum ecosystem, argued that the SEC's recent approval of spot Ether exchange-traded funds (ETFs) indicated a shift in the SEC's position, classifying ETH as a commodity rather than a security. Laura Brookover, a lawyer for Consensys, stated that the SEC was compelled to drop the investigation after being pushed to lift subpoenas on Consensys, given the recent ETH ETF rule change approvals.

Expert Opinions and Legal Interpretations

Carol Goforth, a professor at the University of Arkansas School of Law, pointed out that the approval of an ETF does not necessarily classify the underlying asset as a commodity or a security. ETFs can be based on various asset types, including commodities and securities. She speculated that the SEC dropped its investigation because it realized it might struggle to prove that ETH is a security under the Howey test. The Howey test determines whether an asset is a security based on whether there is an investment of money in a common enterprise with an expectation of profit primarily from the efforts of others.

Historical Context and Decentralization

In 2018, former SEC director William Hinman stated that Ethereum was not a security, citing the network's sufficient decentralization. This speech suggested that Ethereum’s status as a non-security was clear at that time. However, under SEC Chair Gary Gensler, the scrutiny on Ethereum continued, causing regulatory uncertainty.

Implications for the Crypto Industry

The closure of the SEC's investigation is seen as a positive development for Ethereum, providing a degree of regulatory relief. However, this decision is not final, and the SEC has indicated that it may revisit the issue in the future. The industry still faces significant regulatory challenges, particularly regarding staking services. For instance, Kraken settled with the SEC for $30 million over its staking-as-a-service offering, which the SEC alleged constituted a security. Coinbase has also indicated its willingness to challenge the SEC in court over staking issues.

The Need for Clear Regulatory Framework

Goforth emphasized the need for a clear regulatory framework that provides accurate information to purchasers and holds industry participants accountable for illicit activities. Despite the temporary relief from the SEC's decision, the crypto industry continues to grapple with regulatory uncertainties.

Conclusion

The SEC's decision to drop its investigation into Ether marks a significant, albeit temporary, victory for Ethereum advocates. However, the broader battle for clear and consistent crypto regulation in the United States is far from over. As the industry evolves, stakeholders continue to push for a regulatory environment that fosters innovation while ensuring compliance and protecting investors.