SEC: Ethereum not a security token?

The SEC’s case against Ripple is revealing some very interesting background, especially regarding the nature of Ethereum as an alleged security token. 

To defend itself against allegations that it sold XRP as an unregistered security, Ripple obtained a court order against the SEC that forced the agency to publish some emails from past years. 

Those emails did not mention XRP but Ethereum, although of course Ripple hopes that what they claimed for Ethereum also applied to XRP. 

SEC emails did not deem Ethereum a security token

The emails were published a few days ago, and they reveal that in 2018 several members of the SEC thought quite clearly that Ethereum could not be considered a security. 

Two conclusions emerge from these emails. 

The first is that, at the time, the assumption that Ethereum was a security turned out to be rather vague, and therefore very weak. The second is that the hypothesis that it was not turned out to be much more solid, and therefore stronger. 

It is important not to forget that although the SEC is precisely the government agency that oversees the security market in the US, it does not have the power to decide arbitrarily and unilaterally what should be considered security and what should not. 

In fact, it had to go to a court for the XRP issue, and after two and a half years of hearing the court has not yet reached a conclusion. 

It is worth mentioning that the parties, especially Ripple, have taken a lot of time thanks to legal skirmishes that have so far prevented the court from being able to come to a conclusion. 

Moreover, what applied to Ethereum in 2018 did not necessarily apply to XRP, and with the introduction of staking in 2022, it is not even certain that it applies today. 

The situation in 2018

2018 was the year of the big boom for XRP, which even went so far as to surpass Ethereum in market capitalization for a few days. 

It was January 2018 that was XRP’s big moment, because in the following months it then lost much of the market value it had gained since late 2017. 

The fact is that in the SEC’s emails from that year, it clearly emerges that there is no need to regulate Ethereum, and since the need to regulate XRP does not clearly emerge either, it is safe to assume that the SEC in 2018 did not think there was a real risk that XRP was a security. 

Not least because the two cryptocurrencies at the time were not very far apart, except for strictly technological features. 

The current situation: does the SEC still think Ethereum is not a security token?

The open questions therefore are twofold. 

Taking for granted that the SEC in 2018 did not consider Ethereum a security, the first issue concerns the introduction of staking. 

With the move to Proof-of-Stake in 2022, has Ethereum become a security? 

Many argue no, not least because the actual staking is done independently on one’s own validator node. 

Admittedly, there are some intermediaries who offer staking-as-a-service, which could be considered a form of investment contract (and therefore a security), but this does not apply to the Ethereum protocol.

So perhaps only the staking-as-a-service offered by some intermediaries could be a security, but not ETH. 

The second question concerns XRP, because it has always been based on a transaction validation mechanism similar to Proof-of-Stake. 

The question is whether what the SEC claimed about Ethereum in 2018 could really be referred to XRP as well. 

There are many doubts on this point, not least because it was a private company, namely Ripple, that created and issued XRP in the market. 

It is no coincidence that in recent days the price of XRP has not gone up. 

In fact shortly after the news was published that the 2018 SEC emails would be released its price rose from $0.51 to $0.56, but only to fall back below $0.51 as soon as they were actually released. 

Later it also fell as low as $0.46, only to rise slightly again to the current $0.49. 

In other words, the market did not feel that those emails helped Ripple in its lawsuit against the SEC. 

The price of Ethereum

The price of ETH, on the other hand, did not vary significantly after the news or after the emails were published, perhaps in part because the markets already expected the notion to emerge from those emails that ETH was not considered a security in 2018. 

It actually fell from $1,740 to $1,630 the next day, but for other reasons. Indeed within two days it then recovered the entire gap, returning to around $1,730. 

It is enough to think that already on 2 February this year it had touched $1,710, after falling as low as $1,070 in November last year. 

It has practically been four and a half months that the price of ETH has been hovering around the $1,700 mark, albeit with ups and downs that have taken it all the way above $2,100, but also below $1,400. 

It remains a decidedly volatile asset over the medium term, although much less so than in the past. And in the short term it has been fluctuating significantly more moderately than in the past, and for several months now.