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Ethereum is an open-source decentralized blockchain platform which uses its own cryptocurrency, Ether (ETH), on its platform for transactions and smart contracts. ETH is the second largest cryptocurrency by market capitalization. In September 2022, Ethereum switched from Proof-of-Work (PoW) to Proof-of-Stake (PoS) to improve its scalability, security and efficiency.
SEC started investigating Ethereum in 2018 but later stopped investigation since it did not classify Ethereum as a security at that time.
SEC drops investigation into Ethereum. (Source: SEC)
In March 2023, news outlets reported that the new leadership of SEC is investigating three companies associated with Ethereum for securities fraud. Reportedly, current investigations focused on the following:
- Since PoS resembles an investment contract, the SEC deemed it worthy of investigation.
- To ensure that the decentralized nature of Ethereum does not make it vulnerable to fraud.
- To investigate the possibility of unregistered offerings and sales of Ethereum.
On June 18, 2024, SEC officially announced that it had stopped the investigation. It also emphasized that this does not necessarily rule out the possibility of investigations in future.
Does this episode signify a turning point for how governments regulate cryptocurrencies?
The Rise of Crypto and Regulatory Concerns
There has been explosive growth of crypto in recent years due to significant investment. The rapid development has potentially increased the chances for unregistered offerings, price manipulation and scams. This has attracted the attention of regulators to protect the interests of the investors and customers.
Ethereum Investigation: A Case Study
The SEC investigation focused on classifying Ethereum as a security. Doing so would bring stricter regulations on Ethereum and its associated dApps and their tokens as well as DeFi platforms. Consensys filed a lawsuit against the SEC to stop it from classifying Ethereum as a security. The lawsuit states that Ethereum 2.0 is not a security since it is decentralized, and the smart contracts are controlled by algorithm.
Source: The Market Periodical
Potential Challenges of Crypto Regulations
- Overly strict regulations would stifle innovation and hinder development of new blockchain technologies by startups.
- Such investigations by the SEC would create market volatility and discourage potential customers from entering the crypto space.
- Decentralization is the cornerstone of cryptocurrency and undue regulations can potentially clash decentralization.
Potential benefits of Crypto Regulations
- Clear regulations would legitimize the crypto space which would attract institutional investors.
- SEC’s involvement could potentially limit fraudulent Initial Coin Offerings (ICOs) leading to improved confidence of investors.
- It would also help legitimize ICOs.
What is the Future?
Analysts are viewing the SEC's decision as a win for the crypto space. Another aspect is that it gives an image of legitimacy to Ethereum 2.0 as a commodity. Investor confidence in Ethereum is also reflected by the bullish trend of ETH following the announcement.
It is noteworthy that Consensys has not dropped its suit against SEC. This implies that Consensys wants to obtain clear regulations for the crypto industry that do not violate securities laws.
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Hamza Malik
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