The United States Commodity Futures Trading Commission (CFTC) filed a lawsuit against Binance on March 27 for violations of the Commodity Exchange Act and agency regulations. Those violations included transactions with Ether (ETH), according to the lawsuit. This lawsuit, on its face, struck a notable point of contention between the CFTC and the Securities and Exchange Commission (SEC).
The CFTC alleged in its complaint that Binance transacted “commodity digital assets, including Bitcoin (BTC), Ether (ETH), and Litecoin (LTC) for persons in the United States.” It was not a new position for the agency. The CFTC asserted that ETH was a commodity in its lawsuit against FTX in December and Chairman Rostin Behnam stated his view that ETH and stablecoins were commodities as recently as March 8 at a Senate hearing.
The CFTC’s stance on ETH was fairly uncontroversial prior to the Ethereum Merge; after Ethereum moved to a proof-of-stake consensus mechanism, SEC Chairman Gary Gensler commented on PoS-based coins that “from a coin perspective […] That is another indication that, according to the Howey test, the investing public is anticipating benefits based on the efforts of others.”
Gensler’s comment sparked 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 US.” make it so. He added that he thought US courts would agree with him and “there would be a tremendous outcry not only from the cryptocurrency community, but from different politicians and certain regulators” if ETH were to be classified as a security.
However, the CFTC’s case against Binance is based less on the nature of ETH than on the nature of Binance products, which limits its applicability to the broader argument.
“In this particular case, ETH is being treated as a ‘commodity’ rather than a ‘security'”, said Timothy Cradle, Blockchain Intelligence Group director of regulatory affairs, via Cointelegraph. “The complaint refers to securities in regards to swaps.” Furthermore, Cradle added:
“The economics derived from an offer that includes ETH could still change the definition applied to the token. For example, the staking of ETH could continue to be interpreted 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 “I 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, addressed the situation in statements to Cointelegraph:
“It shows that both the multifaceted nature of how tokens work and the way they are used can cause them to fall under the jurisdiction of multiple agencies; […] I wouldn’t be surprised to see a similar lawsuit by the SEC qualifying all the same tokens except BTC as securities.”
Silver lining
The CFTC suit against Binance states that ETH is a commodity
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— sassal.eth (@sassal0x) March 27, 2023
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