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Adam Cochran

Ethereum’s SEC Showdown: Will It Change Crypto Forever?

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Ethereum’s fate is about to change as it awaits the SEC verdict. While the regulator’s decision could have a potential cascading effect on the broader crypto market, there are discussions that the current chair of the U.S. Securities and Exchange Commission [SEC], may find it difficult to classify Ethereum as a security using the Howey Test. As per Adam Cochran, he might pursue a different angle based on the Reves analysis. Recent developments in the social coordination layer of Ethereum have also been noted as potentially influential in this regard.

Ethereum
Ethereum's SEC Showdown: Will It Change Crypto Forever? 2

The spotlight has now shifted to a U.S. District Attorney who has brought charges against exploiters, citing the risk they pose to the stability of the Ethereum network. This move indirectly acknowledges that the U.S. legal system has the necessary tools to track and prosecute fraud on the blockchain, seize fraudulent assets, and enforce social behaviors to maintain network stability and protect users.

This development underscores the belief within the U.S. jurisdiction that actions involving cryptocurrencies fall under existing legal frameworks, similar to any other transactions involving currencies or commodities. Several cases in the U.S. have demonstrated the ability to track and recover assets, ensuring safety and security.

Ethereum’s Legal Stand: Transparency, Fraud, and the Reves Test

The importance of transparency and immutability in financial systems is highlighted by the fact that such enforcement actions would not be feasible in a non-transparent and mutable financial environment. If Gensler intends to argue that ETH should be classified as a security under the Reves test, these ongoing fraud cases could serve as crucial evidence to the contrary.

The Reves test, along with the Howey test, are the two primary legal frameworks used to determine if something qualifies as a security under the Securities Act. Gensler’s potential case under the Howey test seems weak, which could explain why he might be considering the Reves test instead. However, these recent cases involving Ethereum fraud could weaken his arguments even further.

Overall, these developments highlight the adaptability of existing laws to the cryptocurrency space, even with its complex technological nuances. The Ethereum community sees these legal actions as a validation of the existing legal framework’s ability to address fraud and maintain stability in the crypto space.

SEC In Hot Water: Crypto Proponents Hit Back

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Following the SEC’s approval of the Bitcoin ETF, critics and proponents clashed over the decision. Adam Cochran emphasized that, contrary to Senator Warren’s assertion, the SEC does not set or decide the law; instead, it serves as a rulemaking organization offering guidance and interpretations. The binding interpretation of the law, as Cochran pointed out, rests with the judiciary. In her words, “If the SEC is going to let crypto burrow even deeper into our financial system, then it’s more urgent than ever that crypto follow basic anti-money laundering rules.”

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In response, proponents of cryptocurrencies argued that existing robust laws are already in place to prevent money laundering within the crypto space. US agencies such as FinCEN, SEC, and CFTC actively enforce anti-money laundering [AML] compliance, sanctions adherence, and transaction monitoring. Additionally, individual states, including New York with its BitLicense, contribute significantly to AML efforts. They emphasize that the approval of a Bitcoin ETF aligns with existing legal frameworks.

Users also pointed to a significant legal precedent. The DC Circuit Court of Appeals overturned the SEC’s rejection of Grayscale’s attempt to convert its trust into an exchange-traded fund. This decision, made by a panel of three judges, underscored the court’s belief in the legality of approving a Bitcoin ETF. In a notable ruling in August 2023, the court found the agency’s rejection of Grayscale’s proposal to be “arbitrary and capricious,” criticizing the lack of a clear explanation for the denial.

SEC’s Reversals & Rulings

Grayscale had argued that converting to an ETF would benefit investors by allowing easy creation and redemption of shares, a feature not available in the current closed-end structure. The decision was hailed by crypto advocates as a pivotal moment and a challenge to the SEC’s stance under Chair Gary Gensler.

Despite these developments, the regulator has been active in enforcing regulations within the crypto space, with Ripple being a prominent target. The legal proceedings involving Ripple and its XRP cryptocurrency gained significant attention, particularly after a judge ruled that XRP qualified as a security only when sold to institutional investors. Many in the crypto community believe that these legal precedents have paved the way for broader approval of spot Bitcoin in traditional financial markets.