Will SEC Declare Ethereum As Security? Legal Expert Weigh-In

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In a recent X post, analyst and legal adviser Metalaw draws attention to a significant historical event: the action taken by New York Attorney General (NYAG) Letitia James approximately a year ago. In this past move, Attorney General James made headlines by publicly asserting that Ethereum, one of the leading cryptocurrencies in the market, should be treated as a security.

This interpretation wasn’t merely a statement but was backed by tangible action as the NYAG’s office issued a press release backing the development. 

Will @GaryGensler declare $ETH a security?

Maybe.

Don't forget, NYAG Letitia James already did this a year ago and issued a press release trumpeting the move.

"This action is one of the first times a regulator is claiming in court that ETH, one of the largest cryptocurrencies…

— MetaLawMan (@MetaLawMan) April 23, 2024

Though the SEC’s stance on Ethereum’s classification remains undecided, pressure from Ethereum ETFs could prompt action. In the ongoing case, the New York Attorney General’s lawsuit against KuCoin, where Ethereum was argued to be a security, sheds light on why Ethereum’s status is under scrutiny.

The press release emphasized the gravity of the situation, highlighting that such a move by a regulator marked a precedent-setting event. It underscored the significance of the legal proceedings, indicating that the NYAG was taking Ethereum’s classification seriously and pursuing it in a court of law.

ETH Identified as a Security?

According to Metalaw, one notable aspect of the lawsuit is the claim that Ethereum (ETH), one of the largest cryptocurrencies, is a security. This interpretation sets a precedent in court, as it’s one of the first times a regulator has made such a claim about ETH. The lawsuit argues that ETH and other virtual currencies like LUNA and TerraUSD (UST) are speculative assets requiring registration before being sold.

This is the first time the New York Attorney General’s office quoted Ethereum (ETH) as a security because of its new way of validating transactions called Proof-of-Stake. This change lets people earn rewards by holding onto Ethereum, which regulators see as similar to earning interest on investments.

Now, regulators like SEC Chairman Gary Gensler are saying that tokens like Ethereum could be seen as securities under U.S. law because of this. As Ethereum’s staking becomes more popular, the debate over whether it’s a security gets more intense.

Legally ETH in Trouble? 

The NYAG argues that Ethereum (ETH) isn’t decentralized enough to avoid being considered security. They point to the significant influence of Vitalik Buterin and the Ethereum Foundation on ETH’s development, including the transition to proof-of-stake.

Plus, they highlight ETH’s promotion as an investment opportunity and the large stakes held by Vitalik Buterin and the Ethereum Foundation. Regulators believe ETH lacks the full decentralization and mining creation required to escape classification as a security.