(Kitco News) – Ethereum (ETH) saw its price surge 83% from the beginning of February to hit a high near $4,100 on March 12 amid speculation that the first spot Ether exchange-traded fund (ETF) could launch within months.
The move came as traders looked to position themselves ahead of the potential approval in much the same way they did before the approval of the first spot Bitcoin (BTC) ETFs, which likewise saw the price of Bitcoin rise ahead of the launch.
But lately, the likelihood of an approval has been called into question, with Bloomberg Intelligence ETF analysts Eric Balchunas and James Seyffart lowering the chances of an approval in May to 30% after previously saying there was a 60% chance.
In recent days, the Securities and Exchange Commission (SEC) has pushed the deadlines on multiple Ether ETF applications, including the applications from VanEck, Hashdex and ARK 21Shares. This led Seyffart to speculate that the current round of Ether ETF applications with May 2024 deadlines would “ultimately be denied.”
“The SEC hasn't engaged with issuers on Ethereum specifics,” Seyffart tweeted. This is the “Exact opposite of #Bitcoin ETFs this fall.”
On Wednesday, reports emerged showing that the SEC has issued subpoenas to various companies about their dealings with the Ethereum Foundation, with many speculating that the move was being done as part of an effort to classify Ether as a security.
While previous comments from the regulator suggested that the top smart contract platform was a commodity as it had achieved a notable level of decentralization, its transition from a proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS) muddied the waters as holders can now earn the equivalent of a dividend for staking the token.
The Ethereum Foundation made a post via GitHub saying it may be under investigation “from a state authority,” and several U.S.-based companies reportedly received subpoenas from the SEC requesting they provide documents and financial records related to dealings with the Ethereum Foundation.
According to people familiar with the matter, the commission launched a campaign to classify ETH as a security following the blockchain’s transition from PoW to PoS in 2022.
The SEC is likely going after the Ethereum Foundation due to its active role in promoting and supporting activity on the blockchain. If the SEC's investigators decide this constitutes a common enterprise, it could check one of the four requirements to satisfy the Howey test, making a classification as a security more likely.
According to the Howey test, an asset is considered to be a security if “An 'investment contract' exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Along with the involvement of the Ethereum Foundation, the SEC also argues that proof-of-stake cryptos offer a reasonable expectation of profits, checking another box on the Howey test.
While the SEC’s investigation into the Foundation is ongoing, and no allegations or charges have been brought at this time, news of the inquiry coincided with a pullback in the price of Ether below $3,100 as traders questioned the likelihood of an Ether ETF being passed anytime soon.
ETH/USD Chart by TradingView
Crypto classification has been a touchy subject for years, with both the SEC and Commodity Futures Trading Commission (CFTC) vying for the right to oversee tokens such as Ether. Lawmakers have been attempting to enact legislation to clarify the roles each regulator would take over digital assets for some time but have thus far been unsuccessful.
Just because the SEC is investigating the Ethereum Foundation does not guarantee that they will bring charges against the organization, but it does add another source of FUD to the equation at a time when the crypto market is attempting to sustain bull cycle energy. More than anything, the development has added additional uncertainty in the minds of crypto traders and is one to keep an eye on as things progress.
