House Republicans Demand SEC Clarify Jurisdiction Over ETH

Republicans on the House Financial Services Committee and the House Committee on Agriculture requested clarification from the SEC as to whether the Ethereum token, Ether ("ETH"), is a security. (See related coverage.)

In their letter to SEC Chair Gary Gensler, the Republican members reacted to an announcement by SEC approved "Special Purpose Broker Dealer" ("SPBD") Prometheum Capital that it will provide custody services for ETH. The Republican members raised concerns about (i) the SPBD’s ability to custody non-securities, (ii) the SEC's willingness to address SPBD non-compliance, (iii) the regulatory classification of ETH and (iv) the SEC's position regarding the announcement. (Note: Prometheum Capital is the only broker-dealer to receive approval from the SEC to clear, settle and custody crypto assets. It is able to do so under an exemption from the SEC that allows an SPBD to custody crypto assets, provided that the only crypto assets that the broker-dealer provides custody services for are those that are considered to be securities—hence, the SEC has implicitly recognized that ETH is a security.) (See, e.g., Custody of Digital Asset Securities by Special Purpose Broker-Dealers.)

In response to the SEC's implicit position that ETH is a security, the Republican members said that the agencies have an "extensive... record" identifying ETH as a non-security digital asset and there are multiple regulatory actions based on that position. They further said, "we are faced with an alarming scenario in which [Prometheum Capital] has announced that it intends to offer custodial services for ETH under a regime that does not permit such activity."

The Republicans also referenced the CFTC's enforcement action against a digital asset exchange, where the CFTC claimed that several digital assets, including Ether, are commodities. (See related coverage.) The Republicans said they are concerned about the SEC’s lack of transparency and its failure to address Prometheum’s intent to custody ETH—even when the CFTC states that it is a commodity.