The recent approval to list spot Ethereum ETFs in the US has brought some clarity to the question of whether ether is a security or a commodity, since the issuance order for the funds lists them as “commodity-based trust shares.”

As Unchained recently reported, the issuance order, which places ether’s status as a commodity, could provide a strategic advantage to any crypto companies caught in legal battles with the U.S. Securities and Exchange Commission (SEC) regarding ether. Yet many of those battles surround staking and staked ether, which the agency is yet to provide any clarity on. From the day Ethereum switched to proof of stake, Gary Gensler, the chairman of the SEC, has been hinting that staking could violate securities laws.

“From the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” he said in an interview with the Wall Street Journal in September 2022, not referring to any one specific cryptocurrency at that time.

The Significance of the Merge

In March, Fortune reported the Ethereum Foundation had been under scrutiny by the SEC since Ethereum transitioned to a proof-of-stake model in September 2022. This transition, according to sources familiar with the SEC’s investigation, provided the agency “with a new pretext to attempt to define Ethereum as a security.” Software firm Consensys received a Wells notice from the agency regarding MetaMask staking, which partners with liquid staking providers Lido and RocketPool. Crypto exchanges Kraken and Coinbase were also sued by the agency in relation to its staking services among other allegations.

“The change in Ethereum’s consensus mechanism to proof of stake (and the way in which staking was determined to work, as a result) was certainly a moment in time when the facts surrounding the protocol (or aspects of the protocol) changed,” said Zachary Fallon, a partner at law firm Ketsal, in an email. “And it seems to me that the SEC has viewed this change as potentially material and worth exploring for purposes of its potential oversight.”

Regulatory Uncertainty Remains Around Staked ETH

Prior to the approvals of the spot Ethereum ETFs, the ETF issuers who intended to offer staking were asked to remove that detail from their filings, which means the ether ETF approvals do not put staked ether in the clear in the same way it does for ether’s security status. However, several ETF experts previously told Unchained that it was unlikely that staking would be included in the initial approval of the funds because it was not “the status quo” across all applications.

And while the issuance order brings some more clarity to ether’s security status, Sam Enzer, a partner at Cahill Gordon & Reindel, previously told Unchained that the commission could still revisit that determination. An SEC spokesperson declined to comment on the status of ether or staked ether.

“The SEC has, I think, … reserved room to argue that ether staking is securities activity,” said Enzer. “Whether they will press that argument remains to be seen.”

The Consensys lawsuit against the SEC seems to indicate that the SEC views liquid staking tokens as securities, with passages such as, “[O]n September 21, 2022, Consensys received another letter from the SEC staff advising that the agency was conducting an investigation into certain staking protocols on the Ethereum network.” 

Elsewhere the lawsuit stated, “The SEC staff also stated its view that Consensys, in connection with its MetaMask Staking program, violates both Sections 5(a) and 5(c) of the Securities Act by engaging in the offer and sale of unregistered securities and violates Section 15(a) of the Exchange Act by acting as an unregistered broker-dealer.” The liquid staking tokens available on MetaMask Staking in the US include tokens from Lido and Rocket Pool.

Is Staked ETH a Security?

Alex More, head of litigation at Carrington, Coleman, Sloman, and Blumenthal, previously told Unchained that it would be tough to argue that a user who is staking is participating in a securities transaction because there is no managerial efforts, they are just protecting the integrity of the network. The challenge is when an entity — decentralized or centralized — aids the user in the staking process, he said. If the entity does something to manage those staked assets then the SEC might have a stronger case that it’s a securities offering, he added. 

Enzer agrees with More’s assessment, noting that he doesn’t believe staked ether itself is a security nor is Gensler going to sue someone who holds staked ether. Tokens are not securities, he added.

“I think [Gensler] thinks the Ethereum Foundation is a centralized issuer and the security they are offering is a staking program,” Enzer said. “The staked ether, you could say, is the object of that transaction.”

The foundation, staking providers and developers of staking protocols could all be in danger of being characterized as operating an investment contract scheme by the SEC, he added.

The Ethereum Foundation did not respond to a request for comment from Unchained regarding the status of staked ether or regarding the reports of an investigation by the SEC.

Where the SEC Could Go From Here

The SEC already won one case in relation to staking. It charged crypto exchange Kraken with failing to register the offer and sale of its staking-as-a-service program. The SEC alleged that Kraken touted benefits derived from the exchange’s efforts on behalf of investors. Kraken settled with the SEC, closing down its staking program in the US and paying $30 million in civil penalties.

“Kraken was his first case against a major exchange, but it wasn’t an attack on the entire exchange’s platforms. It’s one little thing, then he sues Coinbase, Binance, Kraken. Whether he would go after the Ethereum Foundation or Lido or any of these other providers in the ecosystem that relate to staking, I think it depends on what happens as cases are making their way through the courts — if he wins certain rulings in some pending cases,” Enzer said.

If a case is brought against Uniswap and MetaMask, which have both already received Wells notices, then those could touch on issues that could set a precedent that would be relevant for whether he would want to pursue a case against staking protocols or the Ethereum Foundation, he added.