House Republicans Say SEC, FINRA Are "Complicit" in ETH Confusion
Commentary by Andrew Lom
Republicans on the House Financial Services Committee and House Agriculture Committee called on the SEC and FINRA to clarify regulatory inconsistencies surrounding Ethereum's token, Ether ("ETH").
In a letter to SEC Chair Gary Gensler and FINRA CEO Robert Cook, Republican representatives John Rose, French Hill, Dusty Johnson and William R. Timmons IV raised concerns about the May 2024 "soft-launch" announcement by Prometheum Capital, an SEC-approved Special Purpose Broker-Dealer, that it would offer custodial services for ETH. (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. The SEC has implicitly recognized that ETH is a security.) (See, e.g. Custody of Digital Asset Securities by Special Purpose Broker-Dealers.)
The representatives cited previous testimony by SEC Chair Gary Gensler who asserted that "SPBDs are not allowed to custody non-securities." They argued that Prometheum's ability to custody ETH conflicts with existing SEC and FINRA rules that prohibit SPBDs from handling assets not classified as securities. They further argued that the SEC and FINRA are "complicit in perpetuation confusion and uncertainty in the marketplace."
The representatives argued that "the SEC effectively acknowledged that ETH is not a security when, in July 2024, it formally approved a number of Ethereum [ETFs]." (See previous coverage.) The representatives noted that the SEC permitted another crypto company to continue to offer trading in products, including ETH, on the basis that it is not a security.
Commentary
The agencies' inconsistent stance—acknowledged by certain commissioners—has led to significant frustration among industry participants. Given the likelihood that a new SEC will prioritize rulemaking to bring clarity to the crypto sector rather than relying on regulation by enforcement, and with the incoming administration's focus, it is likely that there will be a serious effort for rulemaking to bring about consistency and clarity. This raises the question: will this issue (possibly alongside rejection of ESG policies) become a litmus test for Trump's SEC appointees?
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