The Ethereum community is rejoicing after the U.S. Securities and Exchange Commission approved the 19b-4 filings from spot Ether ETF applicants. The ruling overcomes the first hurdle to the funds commencing trade, and, crucially, indicates that ETH comprises a commodity asset.

The May 24 approvals followed several months of pessimism regarding the prospects that the funds would receive approval, with many onlookers anticipating that the SEC would try to classify Ether as a security asset.

Such a move would have dashed hopes of the funds being greenlit, and set the stage for a regulatory offensive from the SEC against U.S.-based exchanges hosting Ether markets under charges of securities law violations.

SEC reverses anti-Ethereum crusade

The fears stemmed from long-term hostility towards Ether from Gary Gensler, the chair of the SEC, who suggested that all Proof of Stake assets are securities in March 2023.

Recent legal action against the regulator from Consensys, a blockchain software development company, revealed that the SEC launched a secret investigation into whether ETH comprises a security that same month. The lawsuit sought a court ruling establishing that Ether is a commodity.

Consensys said that while it welcomes the s19b-4 approvals, the “last minute” approval is the latest example of the SEC’s “troublesome ad hoc approach to digital assets.”

“Today’s approval signals that the SEC views that ETH is a commodity and not a security — contrary to the position it continued to take prior to the events of this week, as described in our recent lawsuit against the SEC,” Consensys said. “No other industry, market, or asset is subject to such deliberate regulatory abuse. It is unfair to market participants, antithetical to the rule of law, and handcuffing innovation.”

The SEC’s sudden change of heart appears to have been spurred by spot Ether ETF applicants removing provisions pertaining to the staking of underlying Ether from their filings.

The price of ETH abruptly rallied on Tuesday after it was reported that the SEC had requested the applicants update their filings. A flurry of filings were quickly handed in, notably without clauses relating to Ethereum staking.

“Any claim that Ethereum’s move to proof-of-stake has turned it into a security, or that staking itself is a securities transaction, is misguided and harmful to innovation,” said VanEck, a spot Ether ETF applicant. “We applaud this decision, as we believe the evidence clearly shows that ETH is a decentralized commodity, not a security.”

Regulatory uncertainty

The news follows an extended period of regulatory uncertainty for the Ethereum sector in the United States since Gensler’s appointment to the head of the SEC in February 2021.

In June 2018, William Hinman, the then director of the SEC’s Division of Corporate Finance, declared that both Bitcoin and Ethereum were “sufficiently decentralized” to be deemed commodities, regardless of whether the SEC believes Ether should have been subject to U.S. securities law at the time of Ethereum’s initial coin offering in 2014.

The view that Ether comprises a commodity and not a security is shared by the Commodity Futures Trading Commission (CFTC), the U.S. regulatory agency tasked with overseeing commodity markets.

In March 2023, CFTC Chairman, Rostin Behnam, told the Senate Agriculture Committee that Ether futures products would not have been permitted to commence trading in February 2021 if it believed ETH comprised a security.

“We would not have allowed the Ether futures product to be listed on a CFTC exchange if we did not feel strongly that it was a commodity asset,” Benham said.

The agency reaffirmed its position in its March 2024 complaint against Kraken, which asserted that Ether, Bitcoin, and Litecoin all comprise commodities. That same month, Benham also warned that the SEC’s apparent position that Ether is a security threatened to place CFTC-regulated exchanges that list Ether as futures contracts “in non-compliance of SEC rules” despite also adhering to CFTC guidelines.

However, it appears that the SEC and CFTC will collaborate on U.S. crypto regulations following the passing of the Financial Innovation and Technology for the 21st Century Act (FIT21) through the U.S. House of Representatives. The bill would require the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) to work together on issuing rules establishing digital asset regulations.

Further approvals needed

Despite the 19b-4 filings passing SEC scrutiny, the S-1 filings from spot Ether ETF hopefuls must also receive approval before the funds can begin trading.

“This does not mean they will begin trading tomorrow,” tweeted James Seyffart, a Bloomberg analyst. “Also needs to be an approval on the S-1 documents which is going to take time. We’re expecting it to take a couple weeks but could take longer.”

The SEC has already received updated S-1 filings from Fidelity and VanEck.