The United States Commodity Futures Trading Commission (CFTC) filed suit against Binance on March 27 for violations of the Commodities Exchange Act and CFTC regulations. Those violations included transactions with Ether (ETH), according to the suit. This claim, at first glance, touched on a notable point of contention between the CFTC and the Securities and Exchange Commission (SEC).
The CFTC claimed in its suit that Binance engaged in transactions with “digital assets that are commodities including Bitcoin (BTC), Ether (ETH), and Litecoin (LTC) for persons in the United States.” That was not a new position for the agency. The CFTC claimed ETH was a commodity in its suit against FTX in December and chair Rostin Behnam stated his opinion that ETH and stablecoins were commodities as recently as March 8 in a Senate hearing.
The CFTC position on ETH was fairly uncontroversial before the Ethereum Merge; after Ethereum moved to a proof-of-stake consensus mechanism, SEC chair Gary Gensler commented on staking coins that “From the coin’s perspective […] That’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.”
Gensler’s comment brought on a slow wave of reactions. In February, for example, Ethereum co-founder and crypto entrepreneur Joseph Lubin told Cointelegraph, “Staking is not a security,” and it would be a “terrible path for the U.S.” to make it so. He added that he thought the U.S. courts would agree with him and “there would be a tremendous outcry from not just the crypto community but different politicians and certain regulators,” if ETH were classified as a security.
The CFTC case against Binance does not rest on the nature of ETH as much as the nature of Binance products, however, limiting its applicability to the larger argument.
“In this particular case, ETH is being treated as a ‘commodity’ rather than a ‘security,’” Timothy Cradle, director of regulatory affairs at Blockchain Intelligence Group, told Cointelegraph. “The complaint references securities as they relate to swaps.” Cradle added:
“The economics of an offering including ETH could still change the definition applied to the token. For example, ETH staking could still be construed as an investment contract, and as such a security.”
Some transactions, such as mixed swaps involving ETH, could be subject to regulation by both the SEC and CFTC, Cradle said, but that “would not necessarily define ETH itself as a security as mixed swaps also include commodities and currencies.”
This more complex approach to regulation would not necessarily imply cooperation between the two agencies. Yankun Guo, partner at law firm Ice Miller, said of the situation in a statement to Cointelegraph:
“It shows that both the multifaceted nature of how tokens function and how they are used can cause them to be fall under multiple agency’s jurisdiction; […] I wouldn’t be surprised to see a similar lawsuit by the SEC naming all the same tokens except BTC as securities.”
The CFTC suit against Binance states that ETH is a commodity
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— sassal.eth (@sassal0x) March 27, 2023