Is Ethereum (ETH) security and commodity at the same time?4 min read
Ethereum, the second largest cryptocurrency by market cap, is facing a particular challenge in the US. Compared to Bitcoin, Ethereum has several characteristics. It not only serves as a digital store of value or digital cash, but can also be staked, for example. Ethereum has properties that indicate both a commodity and a security. This versatility poses a core problem for regulators in the US: Should Ethereum be classified as a commodity or a security, and which agency should be responsible for regulation?
In the USA, the legal definitions and the associated regulations for securities and commodities are very different compared to UK or other countries. As a result, various authorities feel responsible for regulating cryptocurrencies. On the one hand the US Securities and Exchange Commission (SEC) and on the other hand the Commodity Futures Trading Commission (CFTC). Two properties of ETH in particular are causing headaches for regulators in the US.
On the one hand, Ether serves as a kind of “oil” for the Ethereum blockchain. It is necessary to conduct transactions in ETH within the ecosystem. In this function it is similar to raw material.
On the other hand, Ethereum’s success is based on the efforts of a large number of developers. This circumstance is similar to a company that creates value through the work of its employees. In addition, investors who stake their ethers can earn dividends similar to stocks.
Ethereum a Security: The SEC’s View
The SEC has not yet determined a final legal classification for ETH. However, current SEC Chairman Gary Gensler has already expressed his views on cryptocurrencies in general.
In a hearing last September, Gensler theorized that all cryptocurrencies, with the exception of Bitcoin, should be considered securities. From this statement one could conclude that Gensler is inclined to classify ETH as a security, even if he has not explicitly commented on ETH in particular. Gensler and the SEC argue, among other things, that profits from staking activities are comparable to dividends in the traditional financial sector and that Ethereum should be classified as a security based on the so-called Howey test.
But is this view actually correct? There are critics who take this view questionable. They argue that the SEC misinterprets the Howey test, which is used to classify an asset as a security.
Ethereum as a Commodity: The CFTC Perspective
The United States CFTC has repeatedly referred to ETH and other cryptocurrencies as commodities, in contrast to the SEC. This means the CFTC sees ETH more as a commodity on which to base futures and swaps contracts, much like traditional commodities like wheat or oil. This reflects the CFTC’s view that cryptocurrencies can be viewed as a type of digital commodity regulated by the agency.
That’s what a former CFTC commissioner says
Former CFTC Commissioner Dan Berkovitz, however, has a more complex view of the issue. In an interview on May 24, 2023 on the Unchained Podcast Berkovitz argued that it is legally possible for ETH to fall under both CFTC and SEC jurisdiction. He claimed that ETH can be considered both a security and a commodity at the same time, due to the overlapping legal definitions of securities and commodities.
The law is clear. Something can be both a commodity and a security.
Former CFTC Commissioner, Dan Berkovitz
Berkovitz explained that the confusion stems from many thinking that the CFTC only regulates physical commodities such as “wheat” or “oil.” However, the CFTC regulates anything that is technically definable as a commodity as a “futures contract.” This explains why the term “futures” is part of the CFTC’s name itself.
As such, Berkovitz says a security — which is defined by the Securities Act and the Exchange Act — can also be the subject of a futures contract, bringing those contracts under CFTC jurisdiction as well.
With that in mind, if something is a commodity as defined by the CFTC and a security as defined by the SEC, it’s entirely possible that both regulators have jurisdiction over it.
What’s next? 3 scenarios
The future regulation of Ethereum in the US is difficult to predict. Especially given the ongoing discussions and disagreements between different regulators. However, the following scenarios could be likely:
- Dual regulation by the SEC and CFTC: There is a possibility that Ethereum will be classified as both a security and a commodity. In this case, Ethereum would be under the joint supervision of the SEC and the CFTC.
- Uniform regulation by a single authority: Depending on how the legal discussions and wrangling plays out, either agency – either the SEC or the CFTC – could emerge as the primary regulator for Ethereum.
- Development of a new regulatory body or laws: Given the uniqueness and new challenges that cryptocurrencies bring, the US government could also decide to create a new agency or enact specific legislation to regulate cryptocurrencies.