In the latest episode of Unchained, former CFTC Commissioner Dan Berkovitz said that Ethereum’s native asset, ETH, is both a commodity and security.
While it is likely a surprise to most industry watchers who would say the two are mutually exclusive, he said the confusion arises from two different U.S. regulatory bodies, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), having potentially overlapping jurisdiction based on their definitions of commodities and securities.
The crux of the discussion centered on two seemingly contradictory statements:
- CFTC Chair Rostin Behnam has stated that ETH is a commodity.
- SEC Chair Gary Gensler has suggested (though not officially declared) that everything but bitcoin (BTC) should be viewed as a security. When he was asked by Congress directly: “Is ETH a security?” he didn’t respond.
To many people, this sounds contradictory because commodities and securities are often thought of as distinct categories of assets.
However, Berkovitz says it’s not necessarily a contradiction because the legal definitions of “commodity” and “security” can overlap. “The law is clear,” he states.
He said a commodity, under the Commodity Exchange Act, is defined not just as a physical good (like oil or wheat), but more broadly as anything that can be the subject of a futures contract. On the other hand, a security, as defined in the Securities Act and the Exchange Act, includes things like notes, evidence of indebtedness, and investment contracts, with the latter determined by the so-called Howey Test. A security, take Apple stock for example, can be the subject of a futures contract, putting it under the jurisdictional purview of the CFTC.
The CFTC’s main regulatory jurisdiction is over futures and swaps on commodities (hence its full name, the Commodity Futures Trading Commission), whereas the SEC regulates securities. However, if something is both a commodity (under the CFTC’s definition) and a security (under the SEC’s definition), both agencies could theoretically have regulatory jurisdiction over it.
However, Berkovitz, who served as general counsel at the SEC following his time at the CFTC, added nuance to this understanding. He clarified that the CFTC also has enforcement jurisdiction to deal with fraud and manipulation of a commodity. This is the main way their jurisdiction extends to the underlying commodity, and not just to the futures contract.
Many within the industry maintain that it doesn’t make sense that every crypto asset but Bitcoin would be a security. “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,” lawyer Colin Lloyd, a partner at law firm Sullivan & Cromwell, said during the Unchained episode. “You can sell anything: you can sell whiskey barrels, you can sell oranges, you can sell minks or whatever as part of an investment contract. But that doesn’t make the underlying asset itself an investment contract.”
Sullivan & Cromwell was recently enlisted by Coinbase in its dispute with the SEC.
“It’s kind of a weird question to be asking, ‘Is this digital asset a security or not?’ 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,” Lloyd said.