The United States Commodity Futures Trading Commission (CFTC) filed charges against Binance on March 27 for violating the Commodities Exchange Act and CFTC regulations. The violation involved transactions with Ether (ETH), according to the suit. This statement, at first glance, touches a point of contention between the CFTC and the Securities and Exchange Commission (SEC).
The CFTC claimed in the suit that Binance engaged in transactions with “digital assets that are commodities including Bitcoin (BTC), Ether (ETH), and Litecoin (LTC) for persons in the United States.” This is not a new position for the agency. The CFTC claimed that ETH is a commodity compatible with FTX in December and its chairman Rostin Behnam expressed his opinion that ETH and stablecoins are commodities that broke up on March 8 in a Senate hearing.
The CFTC’s position on ETH was fairly uncontroversial before the Ethereum Merger; after Ethereum moved to a proof-of-stake consensus mechanism, SEC chairman Gary Gensler commented on staking coins that “From a coin perspective […] This is another indication that in Howey’s test, the investing public expects profits based on the efforts of others.
Gensler’s comments prompted a slow reaction. In February, for example, Ethereum founder and crypto entrepreneur Joseph Lubin told Cointelegraph, “Staking is not a security,” and it would be a “terrible path for the US” to create one. He added that he thinks the US courts will agree with him and that “there will be tremendous objections from not only the crypto community but different politicians and certain regulators,” if ETH is classified as a security.
Related: CFTC chief looks to new Congress for action on crypto regulation
The CFTC’s case against Binance does not hinge on the nature of ETH as much as the nature of Binance’s products, but limits its application to the larger argument.
“In this particular case, ETH is considered a ‘commodity’ rather than a ‘security,'” Timothy Cradle, director of regulatory affairs at Blockchain Intelligence Group, told Cointelegraph. “The complaint refers to securities related to swaps.” Cradle added:
“The supply economy including ETH can still change the definition applied to tokens. For example, staking ETH can still be considered as an investment contract, and as a security.
Some transactions, such as mixed swaps involving ETH, may be regulated by the SEC and CFTC, Cradle said, but “it does not always define ETH itself as a security because mixed swaps also include commodities and currencies.”
This more complex approach to regulation does not necessarily indicate cooperation between the two agencies. Yankun Guo, a partner at the Ice Miller law firm, had this to say about the situation in a statement to Cointelegraph:
“This shows that the multifaceted nature of the token’s functionality and how it is used may cause them to fall under several agency jurisdictions; […] I wouldn’t be surprised to see a similar lawsuit by the SEC in the name of all the same tokens except BTC as a security.
The silver lining
The CFTC’s lawsuit against Binance alleges that ETH is a commodity
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— sassal.eth (@sassal0x) March 27, 2023
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