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Is Ethereum A Commodity, Security, Or both? Ex-CFTC Commissioner Responds

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It is not contradictory for Ethereum to function as both a security and a commodity, former CFTC commissioner and current SEC Counsel, Dan Berkovitz claimed.

According to Berkovitz, who participated in a podcast hosted by acclaimed journalist Laura Shin, there are specific legal provisions that allow Ethereum to fall under the purview of both the SEC and the CFTC.

The confusion arises from the fact that a commodity only relates to the physical components, like cotton, eggs, and so forth, to a layman. Berkovitz said.

However, anything that is covered by a “futures contract” as stated in the Commodity Exchange Act is likewise considered a commodity. The word “futures” being a part of the CFTC’s name makes sense in light of this.

Regarding the division of jurisdiction, the CFTC is in charge of commodities futures and swaps, and the SEC controls matters pertaining to securities.

Notes, proof of debt, and investment contracts fall under the category of security. While the aforementioned plainly falls under the authority of the SEC, they can also be the subject of a futures contract, which places them under the purview of the CFTC as well.

Furthermore, according to Berkovitz, it is feasible for an asset to be categorized as both a commodity and a security due to the overlap in the legal meanings of the two terms.

Another guest on the podcast, Collin Lloyd, a partner at the law firm Sullivan & Cromwell, challenged SEC chair Gensler’s claims that everything other than Bitcoin should be given “security” status under federal securities law.

I don’t see anything in the case law that tells me that some string of digits that operates on a blockchain can natively just be a security. I think you should be asking, is this digital asset being sold as part of a securities transaction? That depends on the facts and circumstances.

The classification of Ethereum, the second-ranked crypto in the world, has caused more confusion in the US since regulators cannot agree on whether it is a security or a commodity.

Ethereum Classification Debate

At a congressional oversight session held in April, Congressman Patrick McHenry pressed the Securities and Exchange Commission chair about whether Ether is security.

Gensler avoided going into further detail when he declared that everything covered by Bitcoin is secure.

The Commodity Futures Trading Commission, likewise responsible for overseeing the US derivatives markets, also took steps that further demonstrated the lack of agreement in the sector of digital assets.

On 27 March, CFTC filed suit against Binance for engaging in “Willful Evasion” of laws by selling unregistered crypto derivative products.

The regulator’s definition of Ethereum as a commodity in the filing contrasted with the SEC’s classification of them as securities.

Crypto Regulations: CFTC Chair Asserts Control Over DeFi Exchanges

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CFTC Chair Rostin Behnam has asserted that decentralized finance (DeFi) crypto exchanges can be regulated under U.S. law, even if they operate autonomously, according to the latest report.

In a conversation for Bloomberg’s Odd Lots podcast, Behnam clarified that regulations from either the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC) would apply to DeFi exchanges, despite their reliance on “self-effectuating” protocols driven by code.

Behnam emphasized that the key factor in determining regulation is the offering and exposure of products to U.S. customers, as well as the individuals or groups responsible for establishing and operating the platforms. He stated that the belief in the immunity of decentralized platforms to regulation is misguided.

Limited CFTC Regulation In Cash Crypto Markets

The CFTC Chair also highlighted an area of limited regulation for the CFTC: markets where tokens function solely as cash substitutes. As the CFTC does not regulate cash markets, Behnam explained that their authority is confined to investigating fraud or manipulation within these markets.

Behnam referenced the CFTC’s recent lawsuit against Binance, a centralized exchange, for allegedly conducting business in the U.S. without proper registration as a commodities exchange. 

He mentioned the surprising content of internal messages cited in the CFTC’s complaint, in which Binance executives seemingly acknowledge their involvement in wrongdoing.

Regarding the legal analysis of digital assets, Behnam stressed the importance of precedent, specifically referring to the Howey Test, which determines whether a contract involves a security. 

He acknowledged the unique characteristics of crypto assets and the need for distinct policy ideas to regulate them effectively.

One area of uncertainty Behnam identified pertains to tokens initially launched as securities but later traded on decentralized exchanges purely as cash substitutes. 

The transition from security to commodity due to decentralization poses an open question that demands further consideration and policy development.

Nevertheless, Behnam’s remarks underscore the CFTC’s commitment to regulate DeFi exchanges and ensure compliance with U.S. law. While acknowledging the distinctive aspects of crypto assets, he emphasized the application of existing legal frameworks and the ongoing need for refined regulations in this rapidly evolving sector.

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Binance’s Troubled Future Hangs In The Balance: Former SEC Lawyer Sounds The Alarm

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In a recent tweet, John Reed Stark, a former lawyer in the SEC Enforcement Division, expressed grave concerns about the future of Binance. With 18 years of experience in spotting red flags, Stark highlighted several alarming issues surrounding the popular cryptocurrency exchange.

As an expert in securities enforcement, Stark’s opinion carries weight and raises questions about the reliability and trustworthiness of Binance.

Binance’s Lack of Reliable Information & Audits

One of the major red flags Stark pointed out is the lack of reliable and trustworthy information about the exchange. He mentioned several concerning aspects, including a CFTC action that alleged massive regulatory violations and accusations of commingling customer funds. 

Furthermore, the exchange has never provided audited financial statements or proof of reserves. The sudden departure of its auditor and the mystery surrounding the exchange’s headquarters location only adds to the skepticism.

Stark emphasized the importance of audited financial statements for understanding a company’s financial condition. However, the exchange’s so-called “proof-of-reserves” audit, which they touted as evidence of financial stability, falls short. 

The PCAOB, the organization overseeing auditing standards in the US, has stated that these audits should not be relied upon due to their limitations. Such audits fail to address liabilities, asset usage, or the effectiveness of internal controls, rendering them inadequate.

Using an analogy, Stark highlighted the stark difference between bona-fide and proof-of-reserves audits. 

While a legitimate audit involves an exhaustive review of a company’s financials and operations, its scheme merely offers a snapshot of assets at a specific moment. This approach lacks the thoroughness and reliability required for proper financial scrutiny.

Stark identified the CFTC enforcement action against Binance as the most significant red flag. The allegations in the action included shocking and incriminating emails and texts. These exchanges revealed Binance’s willful evasion of US law and prioritizing profits over legal compliance.

The discovery of a VIP Handling Policy, which guided Binance personnel to troubleshoot for US customers, further demonstrated their efforts to evade regulations.

Stark also shed light on the issue of regulatory misappropriation within the crypto ecosystem. Cryptocurrency trading platforms often adopt regulatory labels such as “exchanges,” “brokers,” and “market-makers” to create a false sense of trust, oversight, and consumer protection. 

However, these platforms lack the necessary qualifications and regulatory scrutiny associated with their traditional counterparts.

Given the close relationship between Binance and Binance.US and evidence of efforts to circumvent US regulations and serve US clients, Stark warned that more civil and criminal prosecutions against Binance are likely imminent. Given these concerns, he advised Binance users to withdraw funds and seek alternative platforms.

Nevertheless, as Stark’s opinion reverberates within the cryptocurrency community, it remains to be seen how Binance will address these red flags and regain trust in the eyes of investors and regulators.

Related Reading | Bitcoin Long-Term Holders Show Confidence During Market Volatility 

Crypto Giants Shaken: Binance Loses 16% Market Share Amid Regulatory Turmoil

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The realm of cryptocurrencies has been fraught with challenges lately. In the midst of this turmoil, Binance, the top digital currency exchange globally, has experienced a significant setback, losing 16% of its market share in the first quarter and closing the quarter at 54%.

The CFTC’s legal measures and Binance’s termination of its zero-fee trading initiative are the primary reasons for this drop.

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Source: Kaiko

A recent report by Kaiko highlighted that Upbit was the only exchange to claim a significant share of volume, with much of the recent volume on the Korean exchange concentrated in XRP trading pairs. In the meantime, Binance.US has compensated for the global corporation’s shortcomings by tripling its market share from 8% to over 24%.

During Q1, Coinbase, known for its strong regulatory compliance efforts, experienced a drop in its market share from a weekly average of 60% to 49%.

Even though Kraken had to shut down its service earlier this year, Bittrex announced it was shuttering its U.S. operations due to regulatory uncertainties. Coinbase received a Wells Notice focused on its staking service. 

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Source: Kaiko

Currently, the remaining exchanges in the U.S. market are under immense pressure, making it appear delicate. Despite this instability, trade volume has risen, reaching a four-month peak in mid-March and staying consistently high during a broader market upswing. However, following the termination of Binance’s free program, trade volumes started plummeting sharply.

Derivatives Dominance Maintained By Binance

According to the report, Binance remains the top player in the derivatives market, with only a marginal 2% decrease in its share of perpetual futures trade volume. It indicates that the majority of the market share decline was a result of discontinuing zero-fee spot trading rather than concerns related to legal actions.

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Source: Kaiko

Overall, in the aftermath of the FTX collapse, Binance and OKX emerged as the clear winners, whereas Bybit and several smaller exchanges experienced a loss in their market share. Binance’s market share surged from 50% to 65% by November 2022, while OKX saw its market share rise from less than 10% to 17%. 

Conversely, Bybit, along with three other smaller exchanges, namely Huobi, Bitmex, and Deribit, witnessed a decline in their respective market shares.

Nevertheless, the crypto market remains uncertain due to the regulatory crackdown, but the market is resilient despite the challenges. The loss of market share by Binance in the spot market clearly indicates that even the largest exchanges are not immune to regulatory pressure.

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Binance CEO Responds To CNBC Host’s “Sketchy” Remark

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The CEO of Binance, Changpeng Zhao, a.k.a., CZ, once again responded to CNBC’s “Mad Money” host Jim Cramer for his remarks that the trading platform was “too sketchy.”

The top executive eloquently reacted with an emoji of folded hands. He also used the opportunity to cite data showing that BinanceUS’ weekly trading volume last week outpaced Coinbase’s [global] trading volume by 41%.

For context, Cramer made his remarks in response to an interview in which Timothy Massad, a former chairman of the CFTC, called the regulator’s legal action against Binance “a big deal” a few days prior.

“If you read the complaint, there is so much detail to it. It suggests that [CFTC] did have some information from people inside,” said Massad, now a research fellow at Harvard University’s John F. Kennedy School of Government. He also called the level of detail “really quite striking.”

Meanwhile, Cramer who is known for his anti-crypto stance has frequently found himself at odds with the CEO of Binance.

Post FTX, the CNBC host warned that the largest crypto exchange, lacked legitimacy, a charge denied by Zhao, stating that the exchange is safe.

The feud resurfaced when the outspoken critic urged his supporters to give up crypto assets on January 9 when bitcoin was languishing between $16 and 17k.

Binance CEO- “Ignore FUD”

Later when BTC surpassed $21k for the first time since Nov 2022, the Binance CEO tweeted that one of his New Year’s resolutions was to ignore FUD in an indirect reference.

After the CFTC lawsuit, Cramer continued to throw barbs at the trading platform calling it an example of “a company went rogue.” in a tweet on March 29.

Binance and its CEO, hogged the limelight after it was accused of regulatory violations filed by the CFTC in a federal court in Chicago.

According to the CFTC, Zhao, and Binance violated trading and derivatives regulations by soliciting and accepting orders from US clients for spot and derivative transactions since July 2019 while not being CFTC-registered.

In a blog post response, Zhao said the complaint “appears to contain an incomplete recitation of fact,” adding that the exchange does not concur ”with the characterization of many of the issues alleged in the complaint.”

The lawsuit has raised more concerns about the regulatory framework for cryptocurrency exchanges, notably in the US, where rules have been getting stricter.

Binance’s BUSD Bleeds As Outflows Hit Over $500 Million

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Outflows of BUSD, a Binance stablecoin pegged to the US dollar have steeply increased following CFTC’s lawsuit alleging “Willful Evasion” of U.S. regulations and the sale of unregistered crypto derivative products.

Over $500 million of the asset has been removed from the exchange in 24 hours since the lawsuit went public, but this is still less than the February SEC crackdown on BUSD issuer Paxos, which resulted in over $2 billion in BUSD outflows.

After Paxos was told by US regulators to stop minting BUSD, the exchange is reportedly converting its BUSD holdings in the Secure Asset Fund for Users [SAFU] to TUSD and USDT.

The trading platform recently announced the addition of XRP, Solana, Matic, SSV, Lido DAO, and Optimism as additional TUSD trading pairs. The blog stated that trading them can begin on March 29 at 08:00 UTC.

Even though the stablecoin backed by Justin Sun only has a $2 billion market cap, Binance’s preference for it has sparked discussions in the crypto community.

“It might be due to the fact that Binance was preparing for the transition from BUSD to an alternative stablecoin such as TUSD or USDC,” CryptoQuant head of marketing Hochan Chung told media source in a Telegram message.

“Also the changes in Binance’s exchange reserves of BTC, ETH, and other stablecoins are not notably significant. Only the BNB price has been damaged [down 5.78% in the past 24 hours] from the issue,” Chung added.

Data from Nansen revealed that the trading exchange holds over $7 billion in BUSD.

BUSD Is A Commodity- CFTC’s Complaint

As reported by TronWeekly, Binance was the subject of a complaint filed by the Commodity Futures Trading Commission [CFTC] for violating federal regulations.

C.Z dismissed the CFTC’s civil lawsuit as an ”incomplete recitation of facts” and called it unexpected after cooperating with the agency for more than two years. He also assured a full response to the lawsuit in the near future.

As per the lawsuit, CFTC considers BTC, ETH, LTC, and BUSD as commodities while the SEC labeled these as security, reflecting regulators’ lack of clarity over the crypto assets classification.

Meanwhile, the filing has sent a panic wave in the crypto markets, as the market rally stalled at the $1.2 trillion level.

Ethereum Supply Hits Lowest In 8 Years, Only 10% Remains

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Ethereum’s supply on exchanges has dwindled, hitting an all-time low since it sprung into public existence in 2015. Investors scrambled to secure the asset, leaving only 10.3% of the current ETH on exchanges, as shown by Santiment.

This means ETH is being held in self-custody. In retrospect, the trend also indicates hodlers’ confidence.

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Ethereum Supply Hits Lowest In 8 Years, Only 10% Remains 6

This comes amidst CFTC’s civil complaint against Binance on March 27 where the regulator termed Bitcoin, Ethereum, and Litecoin as Commodities.

While Binance has vowed to come back with a full response to CFTC allegations, one cannot help but notice how regulators are not on the same footing over the classification of ETH.

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Ethereum Supply Hits Lowest In 8 Years, Only 10% Remains 7

Weeks before CFTC leveled charges against Binance, another leading crypto exchange Kraken was forced to shut down its staking services by the SEC which labeled Ethereum as a security.

United States Securities and Exchange Commission [SEC] chair Gary Gensler has steadfastly maintained that Ether is likely a security under U.S. law.

His comments shortly came after Ethereum completed “The Merge,” its shift to a proof-of-stake [PoS] transaction processing algorithm, last Sept.

Ethereum Commodity Or Security?

Without naming the asset directly, Gensler in a Senate Banking Committee told that digital asset exchanges and other online providers who offer PoS blockchain “staking services” act like lenders. 

“From the coin’s perspective…that’s another indicia that under the Howey Test, the investing public is anticipating profits based on the efforts of others,” Gensler stated to the Wall Street Journal.

On the other hand, CFTC, in a court filing on 13 December 2022, insisted on calling ETH a commodity.

Post FTX, the regulatory body stated, “Certain digital assets are ‘commodities,’ including Bitcoin [BTC], Ether [ETH], Tether [USDT] and others, as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9).”

As regulatory bodies grapple over the asset’s classification, the co-founder of Ethereum, Joseph Lubin, criticized authorities for comparing the ether to security and claimed that it was more comparable to a commodity like oil.

During a recent interview with CNBC, Lubin said he was “very confident” ether was not a security.

If it were treated as such, ether would need to be registered with regulators and subjected to much stricter requirements around pre-clearance and reporting. “Anyone can say anything, it doesn’t make it true,” Lubin told CNBC.

Binance CEO Addresses Few Key Points On The CFTC Complaint

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In an extraordinary turn of events, the CFTC filed a complaint against Binance, alleging “Willful Evasion” of U.S. regulations and the sale of unregistered crypto derivative products.

Filed in the U.S. District Court for the Northern District of Illinois, the regulator claimed that Binance has undertaken a “calculated approach to increase its presence despite publicly stating its purported intent to block or restrict customers located in the United States from accessing its platform”.

The CFTC alleged that Binance initially concentrated on seeking out retail customers in the United States.

It then gradually started to rely on staff and suppliers in the US and actively pursued lucrative and strategically valuable “VIP” customers, including institutional customers, who were based in the US.

The complainant also alleged that the top exchange has flouted federal laws by not registering with the commission.

Despite Binance’s solicitation of and reliance on customers located in the United States to generate revenue and provide liquidity for its various markets, Binance has never been registered with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets.

Changpeng Zhao, also known as C.Z., the CEO of Binance, responded by making a public statement on its website.

C.Z dismissed the CFTC’s civil lawsuit as an ” incomplete recitation of facts” and called it unexpected after cooperating with the agency for more than two years.

Binance Would Come Out With A Detailed Response Soon

While stating that a full response would be given in due course, the CEO also addressed a few major concerns in the blog.

In response to the charge that the exchange secretly permitted US users, CZ argued that the firm adheres to the highest standards in KYC and AML, and has blocked US users based on their nationality [KYC], IP [including VPN endpoints outside of the US], bank and blockchain deposits and withdrawals, and more.

In addition to that CZ revealed that employees are subjected to a 90-day no-day-trading rule, which prohibits them from selling or buying coins. Staff is not allowed to trade in futures as well.

Since the FTX meltdown, regulators have stepped up their enforcement campaigns against significant players in the crypto market, as evidenced by actions like Coinbase’s wells notice, Kraken’s suspension of US staking offerings, Do Kwon’s arrest, and TRON’s Justin Sun lawsuit.

However, a top exchange like Binance getting hammered has sent panic in the sector with some calling it as a dark day for crypto. The news caused Bitcoin, to drop below the $27k level and is still down by 3% at press time.

SEC & CFTC Clash Over Ethereum’s Classification: Security Or Commodity?

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Once again, in the debate over Ethereum’s classification, Securities and Exchange Commission Chair Gary Gensler raised concerns about the potential classification of tokens using staking protocols as securities under U.S. law in a recent interview on March 15th.

Speaking to reporters, Gensler suggested that the returns seen by token holders from staking indicated that these tokens are securities and would need to be registered as such.

Gensle has indicated that he considers Ethereum to be a security, in contrast to the view expressed by the Chair of the Commodity Futures Trading Commission (CFTC), Rostin Behnam, last week in a March 8th interview, who consistently referred to Ethereum as a commodity.

Speaking to reporters, Behnam defended his position by pointing to the fact that the CFTC has already regulated ETH derivatives, which he argues would not have been possible if ETH were considered a security.

Meanwhile, the SEC has not formally declared whether Ethereum is a non-security asset. The agency’s Director of Corporation Finance, Bill Hinman, stated in 2018 that he viewed the Ethereum network at that point as “decentralized” to the extent that “current offers and sales of Ether are not securities transactions,” according to Behnam’s statement.

However, Gensler took over the SEC in 2021, and his views on ETH may differ from those of his predecessor. Nevertheless, the differing perspectives of the two regulatory agencies could potentially lead to complications in the future.

Diverging Views On Ethereum Classification

Gensler spoke with reporters after the commission voted to advance three proposed rules aimed at tightening cybersecurity, consumer privacy, and system standards for the securities industry.

During the interview, Gensler stated that the investing public is anticipating a return on their investment with these tokens, including proof-of-stake tokens.

He added that these investors are looking to receive returns of 2%, 4%, or even 18% on their investments. Gensler urged all token operators to seek compliance and for intermediaries to do the same.

Gensler’s comments come after the SEC’s first staking-as-a-service enforcement action, which settled with Kraken last month. 

Additionally, in a lawsuit filed by New York Attorney General Letitia James against crypto company KuCoin, it was argued that Ethereum is an unregistered security.

However, as the SEC continues to scrutinize the crypto industry, Gensler’s remarks indicate that staking protocols may be the next target of regulation. 

Token operators and intermediaries should take heed of Gensler’s suggestions and take steps to comply with US securities law to avoid potential enforcement actions in the future.

Crypto Takes the Stage: Senator Gillibrand Introduces New Bill Set For April Release

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In a Senate Agriculture Committee hearing on CFTC oversight, Senator Kirsten Gillibrand announced a new draft of her crypto bill. The committee discussed the CFTC’s limitations when it comes to crypto markets, with members expressing concerns over fraud and criminal use. Despite being a farm bill year, the committee acknowledged the importance of federal oversight in the crypto industry.

Senators Express Concerns About Criminal Use Of Crypto

Leo Schwartz, a reporter for Fortune Magazine, live-tweeted the hearing, noting that the committee has been relatively quiet this year regarding crypto. However, the committee hosted an FTX-focused hearing in December, and Schwartz speculated on whether crypto and digital assets would be a focus of the hearing.

However, Senator Debbie Stabenow opened the hearing by warning of the volatility and fraud present in the industry, highlighting the need for federal oversight. Ranking member Boozman spoke about the CFTC’s role and expressed confidence in its ability to regulate the digital commodity spot market.

Chair Rostin Behnam reiterated the CFTC’s limitations when it comes to crypto markets, highlighting the need for legislation that could help prevent fraud before it happens.

Senator Roger Marshall expressed his concerns about the criminal use of digital currencies and questioned the activities of Binance. He cited Binance as having laundered billions of dollars. Senator Sherrod Brown also expressed concerns about crypto markets and their potential for fraud and manipulation.

Other senators, including Tuberville, Klobuchar, and Durbin, also shared their views on the crypto industry and its regulation. Behnam praised Gillibrand’s new crypto bill as being comprehensive, covering stablecoins, custody, cybersecurity risk, and other important issues.

The hearing highlighted the differing views of the CFTC and SEC regarding Ether, with Behnam insisting that it is a commodity, while the SEC has yet to make a definitive ruling. The issue of stablecoins was also discussed, with Behnam stating that they are going to be commodities in his view, potentially setting up another conflict with the SEC.

The committee discussed various crypto bills, with Senator Roger Marshall expressing concerns over criminal use and Binance’s alleged laundering of $2.35 billion. Behnam ranked his concern over digital assets markets at 7.5 out of 10, while Senator Sherrod Brown expressed a higher concern level.

The committee discussed the definition of commodities versus securities in relation to digital currencies. Behnam stated that Bitcoin, Ether, and Tether are commodities, while Gensler has said that every cryptocurrency is likely a commodity except for Bitcoin. 

Senator Amy Klobuchar asked Behnam about his current views on crypto markets, to which Behnam stated that he does not see the current bear market as a permanent change.

Towards the end of the hearing, Gillibrand announced a new draft of her bill with Senator Lummis, set to be released mid-April. Behnam praised the bill for being comprehensive and addressing stablecoins, custody, and cybersecurity risk. He also stated that stablecoins are commodities in his view, potentially setting up a conflict with the SEC.

However, the Senate Agriculture Committee’s hearing on CFTC oversight highlighted the importance of federal oversight in the digital assets industry, with members expressing concerns over fraud and criminal use. Additionally, announcing a new draft of Senator Gillibrand’s bill adds to the ongoing discussion surrounding federal regulation in the industry.

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