Ethereum
Are Solana and Polygon safe now that the SEC’s Ethereum investigation is over?
If the SEC no longer investigates Ethereumdoes this mean other similar cryptocurrencies are off the hook?
The U.S. Securities and Exchange Commission notified Ethereum software company Consensys on Tuesday that it has abandoned its investigation into “Ethereum 2.0,” With reference to blockchain network transition has proof of stake almost two years ago.
This, combined with the SEC’s approval of Ethereum ETFs for trading in the United States, was widely seen as an admission by the Commission that Ethereum is not a security, which in turn could mean that d other proof of participation documents such as Solana And Polygon are not titles either. But legal experts who spoke with Decrypt warned against thinking in such black and white terms.
“I expect the letter to have little or no impact on the legal classification of other [proof-of-stake] coins,” Drew Hinkesa lawyer specializing in digital assets, said Decrypt. “These other tokens were likely not investigated as part of the investigation into Ethereum 2.0 and their facts regarding creation, distribution, etc. are probably different from those of Ethereum.
Consensys sued the SEC earlier this year, as a pre-emptive measure after receiving a Wells Notice, which typically indicates that the regulator intends to take enforcement action. (Disclosure: Consensys is one of 22 investors in Decrypt.) In its lawsuit, Consensys revealed the SEC works under the assumption that Ethereum has been an unregistered security for at least a year, in part due to the network’s move to proof-of-stake.
Proof of stake refers to a system in which users of the cryptocurrency network pledge their assets – in this case ETH – in order to participate in validating transactions and securing the network. Staking users are then rewarded in ETH for their efforts, with returns ranging from 1% to 4% APY, depending on the staking platform.
Ethereum, which once functioned much more like the energy-intensive Bitcoin blockchain, completed its transition to proof-of-stake in September 2022 after a years-long process. At the time, questions immediately arose about whether staking could implicate federal securities laws in the United States. SEC Chairman Gary Gensler said he believed staking could go against of the law because “the investing public expects profits based on the efforts of others”, according to the Wall Street Journal.
The SEC has apparently changed its mind. But even if the Commission is no longer investigating Ethereum, it might proceed differently with other tokens, Hinkes says, depending on how those specific assets were initially sold. The SEC may also consider factors such as the state of the technology, its block validation mechanisms, etc., according to the lawyer.
Matt Corva, attorney for Consensys, seems to agree: posted yesterday on Twitter: “We don’t know [if Polygon, Solana, or other coins are securities] because the SEC has avoided showing its homework explaining precisely why it has now concluded that Bitcoin and Ethereum are not securities,” he tweeted. “We do not know the details of importing other parts.”
Other legal experts are also baffled by the SEC’s opacity.
“The SEC was very careful in the language they used in their letter,” said a crypto criminal defense attorney. Carlo D’Angelo said Decrypt. “Without a more specific statement from the SEC or a definitive ruling from a court, it is unclear how the agency views ETH and other [proof of stake networks].”
While the end of the Ethereum investigation may not be carte blanche for proof-of-stake coins, one expert believes it is a good building block.
Sébastien Heine, head of risk and compliance at institutional staking firm Northstake, says it “strengthens” some cases, but each coin is “too individual” to make sweeping statements. “The SEC is still very negative on crypto, so there should not be high expectations of the SEC acting favorably toward other proof-of-stake coins,” he said.