Ether Is…a Commodity

Client Alert
October 10, 2019

It is official. Finally. On October 10, 2019, the Commodity Futures Trading Commission (“CFTC”) Chairman Heath Tarbert announced that he believes ether is a commodity and thus falls under the jurisdiction of the CFTC. Previously, spokesmen of the Securities and Exchange Commission (“SEC”) have affirmed that they do not consider present transfers of ether as securities transactions.[1] No matter how unsurprising the statement was, it was a long-awaited and welcome removal of ambiguity which has two positive consequences.

CFTC Chairman Heath Tarbert

We've been very clear on bitcoin: bitcoin is a commodity. We haven't said anything about ether—until now.” Tarbert spoke at Yahoo Finance’s All Markets Summit in New York. Picture:

Ether is the second largest cryptocurrency with a market cap of over $20 billion which means that the statement is important for the following reasons. First, the regulatory uncertainty has hampered the ether derivatives market. Now, the Chairman says that the market will see ether futures and derivatives “absolutely… even sooner than in 12 months.” This is great news for both investors and trading platforms. The announcement is expected to expedite the registration procedures for exchanges, brokers, clearing houses, trading advisors, and other regulated parties. “We better make sure we’re up to speed,” the Chairman laughed.

Second, the Chairman’s statement put the CFTC’s view on altcoins in line with the SEC’s. Embracing the ancient Howey test from 1946, the Chairman recognized that it has stood the tests of time. He encapsulated the CFTC’s standpoint: if, based on the Howey test, a coin is not a security, it is most likely a commodity. Further, he joined the SEC in saying that a digital asset can morph from one regulatory status to another.

You can have a situation where something in an initial coin offering is very much a security, but over time, as the system becomes more and more decentralized, the enterprise that originally sort of sponsored the currency is no longer in the fore and the thing is sort of running itself, there's a tangible value….”

However, it is important to note that both the SEC and now the CFTC have alluded that a digital asset, that has once morphed from a security to commodity, could later do the reverse.

[Y]ou can have things that actually swing back and forth. You can also imagine a scenario where something is very much decentralized but then all of a sudden, you know, there is a pull-back, the company gets more involved in it and it starts to look more like a common enterprise where profits are derived from the activity of others, thereby being the Howey test.”

So far the market has not seen a digital asset that regulators have deemed to have gone back and forth. Nevertheless, the possibility creates a continued cloud of uncertainty for the market. The risk of double-morphing illustrates the importance of long-term planning for governance structures from the get-go.

After today, the almost 2,000 other cryptocurrencies must be analyzed with the knowledge that the CFTC has officially announced that two digital assets (bitcoin and ether) are commodities, the SEC has declined to treat four digital assets (bitcoin, ether, TurnKey tokens, and Quarters tokens) as securities, and that the SEC continues to maintain in public statements that many of the tokens sold in so-called ICOs may very well constitute investment contracts under the Howey test and, therefore, securities. We continue to be left with a muddled legal landscape that is perhaps somewhat helped by the CFTC Chairman’s comforting words:

Similar assets should be treated similarly.”

Lastly, the Chairman announced that Melissa Netram will be the new director of LabCFTC which is the agency’s hub for engagement with the FinTech innovation community.

Digital Asset Transactions: When Howey Met Gary (Plastic), William H. Hinman, Director, Division of Corporation Finance, June 14, 2018.

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