A recent move by a special purpose broker dealer (SPBD) to unilaterally declare custody of the digital asset ether (ETH) as a digital asset security has thrown a curve at the industry, stirring confusion and potential legal repercussions. It’s worth noting that the majority of the cryptocurrency industry currently views ETH as a non-security, including the Commodity Futures Trading Commission (CFTC).
CFTC-registered exchanges trade ETH futures, and if ETH is declared a security, these futures would then move under the joint oversight of the Securities and Exchange Commission (SEC) and CFTC as they would be classified as security futures. Parties in these transactions would then need to be dual-registered with the SEC and CFTC, complying with further requirements.
SEC and CFTC have the power to agree for a different type of financial instrument to act as the referent for a single-security futures contract. However, public records do not indicate any discussions, formal or otherwise, about authorizing security futures on ETH between the two entities.
The SEC could take a few steps to clarify the situation including endorsing the SPBD’s claim that ETH is a security, acknowledging ETH futures as security futures, and issuing an exemptive order under Section 36 of the Securities Exchange Act of 1934, effectively allowing ETH futures to trade as futures rather than security futures. The SEC has used this power before, in December 2020, allowing the Minneapolis Grain Exchange to trade security futures on the SPIKES index .
However, a federal court later overturned this exemptive order, claiming the SEC failed to explain its reasoning fully, and did not consider “the potential resulting harms to SPIKES futures investors” that wouldn’t have been exposed to significant risk disclosures had the product continued to trade as security futures. This ruling might preclude similar action for ETH futures. This information can be viewed in more detail here.
This fallout was due to a statement issued by SEC staff in December 2020, which purposed that the SEC would not take action for five years against any firm registering as an SPBD, handling only digital asset securities. An SPBD is required to establish, maintain, and enforce policies and procedures to determine whether a digital asset is a security offered and sold pursuant to an effective registration statement or an exemption from registration. The SEC is not required to review or approve a determination made by an SPBD that a digital asset is a security, according to the statement.
Industry participants and customers need to consider the ramifications of these developments. It is also plausible that, under a provision of law adopted in connection with the Dodd-Frank Act, any person proposing to list or trade futures on ETH moving forward could file a notice with the SEC and CFTC for their formal evaluation regarding whether this product is a security or non-security.
The chairs of the SEC and CFTC should ideally come to a consensus to handle this potential future development to reduce the likely market disruption that could occur if the SPBD begins to custody ETH as a digital asset security without such coordination.
This article is an abstract based on the original publication found here.