Ethereum Under Federal Scrutiny, According to WSJ Report

Ethereum, the second largest digital currency by market capitalization, is being examined by federal regulators to determine if it meets the criteria of a security, according to The Wall Street Journal.

Federal Probe Underway

WSJ reported on Tuesday that multiple regulatory agencies are examining whether Ethereum and other cryptocurrencies should be classified as a security. The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have been tasked with leading the investigation.

Regulators are zeroing in on Ethereum due to its role in propagating hundreds of other projects, which rely on the protocol to design their own virtualized tokens. Initial coin offerings (ICOs), as they’ve come to be known, have faced intense scrutiny from the SEC. According to SEC Chairman Jay Clayton, all ICOs are securities and must therefore be regulated as such.

The SEC’s approach to ICOs has spooked token issuers from making their project available on U.S. soil. Many projects do not allow Americans or U.S. residents to participate in their token sale over fears of being labelled a security token by the SEC.

Ethereum, which boasts a market cap of more than $65 billion, derives much of its value from its role as a leading ICO platform. However, in the eyes of some regulators, the platform’s creation in 2014 was “probably an illegal securities sale,” according to the WSJ report.

Two Agencies, Two Definitions

The SEC and CFTC don’t quite agree on how to define cryptocurrency, which makes governing their use more difficult in practical terms. The CFTC considers them to be commodities, which puts them outside the purview of the SEC. On the other hand, the SEC considers them to be securities, as evidenced by the leadership’s view of ICOs. In March, SEC regulators said they would seek to apply securities laws on all aspects of the digital currency market, including exchanges and asset storage facilities such as wallets.

Interestingly, bitcoin has largely evaded federal regulation, with the CFTC labelling it a commodity that does not require federal oversight from the SEC. The WSJ report implied that regulators have already moved beyond evaluating bitcoin as a security.

Former CFTC Chairman Gary Gensler has made the case that one or both of Ethereum and Ripple meet the definition of “non-compliant securities.” In his view, this is more the case for Ripple, which is largely governed by a San Francisco startup that goes by the same name.

Proponents of Ethereum argue that the cryptocurrency has become so decentralized that it should not be considered a security. This is in stark contrast to Ripple XRP, which is largely controlled by the company that founded it.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi