Deciphering the Dual Nature of Ethereum’s Ether: A Commodity and a Security

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The financial regulatory landscape is often fraught with complexity, particularly with the advent of digital assets like Ether. Ether, Ethereum’s native token, finds itself at the intersection of two regulatory territories, standing as both a commodity and a security. These classifications are according to former Commissioner Dan Berkovitz of the U.S. Commodities Futures Trading Commission (CFTC).

The Legal Status of Ether: A Conundrum

Ether has long been the subject of a classification problem. Renowned regulatory figure Dan Berkovitz, the former general counsel for the Securities and Exchange Commission (SEC), recently argued that Ether could simultaneously fall under the CFTC and SEC jurisdictions. This notion was shared on the May 23 episode of Laura Shin’s Unchained podcast.

The legal status of Ether has been a subject of ongoing debate due to differing viewpoints from the CFTC and the SEC. Over the past half year, the CFTC has consistently classified Ether and several other cryptocurrencies as commodities.

In stark contrast, the SEC, under the leadership of Gary Gensler, has not provided a definitive legal classification for Ether. During an oversight hearing in April, Gensler suggested that all digital assets, excluding Bitcoin, should be considered securities. However, he has since refrained from offering further clarification.

Dual Classifications: A Commodity and a Security

Berkovitz, however, posits that Ether’s classification as both a commodity and a security is not a contradiction. Instead, this is because the legal definitions of commodities and securities have certain overlaps, allowing for a single asset to carry dual classifications.

As per Berkovitz, “The law is clear. Something can actually be both a commodity and a security.” This notion seemingly unravels the confusion surrounding the classification of Ether, where a commodity is not confined to physical items such as “wheat” or “oats.” 

Instead, any item falling within the spectrum of a “futures contract” can be deemed a commodity. This reasoning sheds light on why the term “futures” is intrinsic to the title of the CFTC.

Berkovitz’s Perspective on Ether and Securities

Berkovitz also brings attention to the definition of a security as outlined by the Securities and Exchange Acts. Security — including notes and investment contracts — can form the subject of a futures contract, thus putting it under the CFTC‘s jurisdiction.

While the CFTC’s principal regulatory authority focuses on regulating futures and swaps on commodities, the SEC predominantly regulates securities. Yet, if an asset is perceived as a commodity by the CFTC and a security by the SEC, both regulatory bodies could potentially have jurisdiction over it.

Challenging SEC’s Classifications: The Perspective of Legal Experts

On the same podcast, Collin Lloyd, a partner at the multinational law firm Sullivan & Cromwell, criticized the SEC‘s assertion that all digital assets, except Bitcoin, should be designated “security” under federal securities law.

Lloyd said, “I don’t see anything in the case law that tells me that some string of digits that operates on a blockchain can natively just be a security.” 

He suggested that the real question should be whether a digital asset is being sold as part of a securities transaction. According to Lloyd, this depends on each case’s unique facts and circumstances.

Notably, Sullivan & Cromwell is currently handling the FTX bankruptcy case and was hired by Coinbase to assist in the crypto exchange’s ongoing regulatory disputes with the SEC.

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