Ether’s hazy status with US regulator leaves crypto coin far behind rally in Bitcoin

MUMBAI – US regulatory uncertainty surrounding Ether is seen by some market observers as damaging the token’s performance compared with a recent rally in Bitcoin.

The ambiguity stems from whether the US Securities and Exchange Commission (SEC) will add Ether to a growing list of digital assets it deems to be unregistered securities, a designation that can make the tokens harder to trade. Bitcoin is treated as a commodity in the United States rather than a security, helping to clarify its status.

The SEC this month labelled 19 coins as unregistered securities in lawsuits against the Binance Holdings and Coinbase Global crypto exchanges. Some of those tokens have plunged more than 20 per cent since the first legal action hit on June 5.

Ether, the second-largest crypto coin, is little changed over the same period whereas top-ranked Bitcoin has jumped around 14 per cent. The latter likely reflects investor flight from regulatory risk as well as exuberance that proposed Bitcoin exchange-traded funds from BlackRock and others herald new sources of demand. Even so, both are up significantly in 2023, with Bitcoin almost doubling and Ether surging around 60 per cent.

“I don’t know what rationale the SEC used to name these tokens (in its lawsuits),” said Mr David Lawant, head of research at digital asset trading platform FalconX.

The fact that Ether is not mentioned “doesn’t mean that the asset is in the clear”, he added.

The SEC had hinted that under its new proof-of-stake model, Ethereum’s native token Ether might be categorised as a security. Soon after, the regulator suggested that the US had jurisdiction over the blockchain and even the New York Attorney-General’s office called Ether a security in a compliant filed against crypto exchange KuCoin.

While the SEC has not explicitly named Ethereum, the blockchain and its token have similar origins as some of the 19 tokens recently signalled out. Solana and Cardano are based on the same proof-of-stake mechanism. Polygon’s Matic is an Ether scaling token, while AXS and Sand are play-to-earn tokens built on Ethereum during the initial coin offering boom.

If Ethereum were relaunched today, it would encounter regulatory headwinds, but since it has passed into common use and a long time has elapsed since the initial sale, that enforcement action against Ethereum itself would be unlikely in any event, Mr Preston Byrne, a partner at law firm Brown Rudnick, wrote in an e-mail.

“There is a possibility that Ethereum might be deemed a security for the purposes of certain secondary transactions,” Mr Byrne said. “At the end of the day, the SEC can allege whatever it wants but it is for a court, not the commission, to determine whether Ethereum is a security or not. My suspicion is that if that were going to happen, it would have already.”

Ether staking services have been named in the SEC suits, and as Coinbase and Binance represent a significant portion of that staking, it could explain some of the caution regarding Ether at the moment, said Mr Riyad Carey, a research analyst at digital asset data provider Kaiko.

FalconX’s Mr Lawant said the SEC does not necessarily need to name every crypto asset it deems a security to make its case in these proceedings, so it does not “benefit from getting into the murkier discussion about whether Ether is a security in this context”. BLOOMBERG