SEC's approval of Ethereum ETFs still leaves some questions on whether ETH is a security, lawyers say

The U.S. Securities and Exchange Commission's approval of spot Ethereum ETH -0.18% products left some this past week wondering: is ether a commodity now? That answer is still unclear.

Whether the SEC has jurisdiction over ether has been hazy. The agency's Chair Gary Gensler has not explicitly said ether is a security. However, Consensys alleged that the agency has considered ether to be a security, in a complaint the crypto firm lodged against the agency last month.

Meanwhile, at the SEC's sister agency, Commodity Futures Trading Commission Chair Rostin Behnam has asserted that ether is a commodity.

This comes as the SEC approved 19b-4 forms for eight Ethereum ETFs on Thursday, though issuers would need to have their S-1 registration statements go effective before trading can begin. Legal sources have differing views on whether the SEC's approval of Ethereum ETFs means that anything has changed.

"I do think this is a watershed moment in the long-running debate about ETH's status," Coinbase's Chief Legal Officer Paul Grewal said in an interview with The Block on Friday. "For too long a time, the SEC has played hide the ball on its position as to whether or not eth is a security, a non-security, a commodity or something else altogether."

Grewal asserted that since issuers used the form S-1, a certain percentage of assets in the fund can be securities.

"By designating the S-1 as the registration of choice, what the SEC is saying is that these funds, by definition, do not include assets that have more than 40% of their portfolio in securities," Grewal said.

"There's no way to square that with any other conclusion than eth is not a security," Grewal added.

The SEC did not immediately respond to a request for comment.

Others, including Coy Garrison, former counsel for SEC Commissioner Hester Peirce, also said ETH has to be a commodity following approvals of spot Ethereum ETFs.

The SEC's approval order confirms that ETH is a commodity, Garrison said in an email to The Block. In the SEC's order approving the Ethereum products, the funds are referenced as "commodity-based trust shares."

"If ETH is a security, approval would not have been appropriate under these specific exchange rules," Garrison said. Garrison is now a partner at Steptoe LLP.

The caveat over ether's status

The SEC could still say ether is a security, Coinbase's Grewal and others said.

"Even with the approval order, the SEC could always argue that any particular facts and circumstances concerning the manner in which ETH is offered and sold in a particular transaction constitutes a securities offering," Garrison said in an email to The Block.

The SEC's approval order doesn't mean the agency has decided how to categorize ether, said Ashley Ebersole, general counsel at 0x Labs. The SEC could still say that ether is a security down the road, the former SEC attorney added.

"They [the SEC] would say, I think, just because I accepted this description of ETH in the ETF process does not mean anything for whether we could later determine it to be a commodity or a security," Ebersole said.

The contents of the ETF don't need to be a security, Martin Auerbach, of counsel at Withersworldwide noted, citing gold-based ETFs as an example. It still leaves the door open for the SEC to say ETH is a security, Auerbach confirmed.

"The SEC was able to grant approval for trading the ETF as a security without definitively saying that ETH is a security as they have frequently suggested, or that it's a commodity, which they haven't quite said and haven't said at this point," Auerbach said.

Finally, to further complicate the issue, while ether may or may not be a commodity, the classification of staked ether is likely an entirely different matter.

In recent years, the SEC has brought several lawsuits and reports about pending enforcement actions that suggest staked ETH, or even just ETH that is staked through a third party, could be classified separately from ether. As per those legal actions, staked ether likely qualifies as an investment contract, making it a security, according to a new report from crypto-focused financial services firm Galaxy Digital Holdings.

So while the picture over ether's status is getting clearer, it's still not yet clear as day.