Coinbase’s Chief Legal Officer, Paul Grewal, recently revealed new details regarding the U.S. Securities and Exchange Commission’s (SEC) internal documents related to its investigation into Ethereum 2.0. These documents were disclosed as part of a Freedom of Information Act (FOIA) lawsuit filed by Coinbase against the SEC. The release of these documents sheds light on the SEC’s internal deliberations about whether Ethereum 2.0 should be classified as a security. The discussions within the SEC have been extensive, focusing on the regulatory nature of Ethereum 2.0.
Grewal highlighted some of the documents included in the SEC’s “Vaughn index,” which is a list of nonproduced documents. These documents provide insights into the SEC’s extended discussions regarding the regulatory classification of Ethereum 2.0. The SEC has been evaluating whether Ethereum 2.0 meets the standards of a security, particularly through the application of the Howey test. The classification of Ethereum 2.0 as a security by the SEC could lead to more stringent regulations being applied to the cryptocurrency.
In February 2023, an email titled “RE Is Ethereum a Security” raised doubts about the classification of Ethereum within the SEC. Despite the transition to Ethereum 2.0, which operates on a proof-of-stake protocol, the SEC’s discussions on how to categorize Ethereum have not reached a conclusive decision. The timeline of the SEC’s investigation into Ethereum 2.0 started when the cryptocurrency shifted from a proof-of-work to a proof-of-stake consensus mechanism, prompting concerns about its classification as a security.
In April 2023, the SEC created a memorandum to formally initiate the investigation into Ethereum 2.0’s regulatory status. This memorandum could provide insights into how the SEC intended to proceed with its decision on regulating Ethereum. Discussions within the SEC in February and April 2024 indicated considerations of legal actions regarding Ether classification under various legal frameworks, including in the first quarter of 2024.
Coinbase has been critical of the SEC’s regulatory approach to cryptocurrencies under Gensler, citing inconsistencies and lack of clarity. Despite the SEC dropping a lawsuit against Coinbase, the exchange faced legal action from Oregon, accusing it of offering unregistered securities in violation of state laws. Coinbase’s push for regulatory clarity includes a demand for the release of documents explaining the SEC’s criteria for passing certain tests, such as the “ecosystem” test, for Ethereum 2.0.
The SEC’s handling of Ethereum 2.0 occurs amidst controversies surrounding former SEC official William Hinman, recently cleared by the agency. Hinman’s 2018 statement that Ethereum was not a security sparked debates. With a new SEC leadership under Paul Atkins, the regulatory approach is shifting away from “regulation by enforcement.” The disclosure of internal SEC documents could provide insights into the agency’s handling of similar cases and contribute to a clearer understanding of its approach to regulating digital assets.
