SEC's Ethereum Probe: 3 Theories Unveiled by Crypto Lawyer Amid ETF Controversy

Amid intensifying regulatory scrutiny, a crypto lawyer has outlined three key theories behind the SEC's ongoing investigation into Ethereum and its foundation. These insights emerge as the agency faces pressure from legislators and market watchers to clarify its stance on cryptocurrency regulations, particularly concerning the approval of Ethereum-based exchange-traded funds (ETFs).

SEC's Strategic Investigation into Ethereum: Balancing Regulatory Scrutiny with Market Dynamics

According to a crypto lawyer, a recent report by CoinTelegraph reveals that the securities regulator's reported investigation into Ethereum and its foundation could allow it to comfortably deny spot Ether ETFs and satisfy senators' concerns without jeopardizing its ongoing lawsuits.

On March 22, Scott Johnsson, general partner at Van Buren Capital and a finance lawyer, explained why the SEC may have launched its investigation into Ethereum and the Ethereum Foundation.

According to Johnsson, one theory is that the SEC is using the investigation to appease cryptocurrency skeptics who have called for the agency to take a stricter stance.

Earlier this month, Democratic senators Jack Reed and Laphonza Butler urged SEC Chair Gary Gensler not to approve any additional spot crypto ETFs. Senator Elizabeth Warren has also been outspoken in criticizing these investment products.

Another theory that has recently gained traction on X is that the SEC is using it to deny spot Ethereum exchange-traded funds (ETFs), as a non-correlation objection may not be valid.

"The SEC needs a non-correlation objection to deny ETH spot ETFs this year," said Johnsson.

According to the crypto lawyer, denying spot ETH ETFs based solely on correlation analysis may be a temporary solution because correlation levels improve over time.

Correlation describes the difference between spot market and futures prices and has been a critical argument for the SEC's decision to approve or deny crypto ETPs.

However, earlier this month, ETF analyst Eric Balchunas stated that the "correlations between futures and spot isn't as strong" and that he was "not nearly as optimistic here vs BTC ETFs."

SEC's Ethereum Strategy: Navigating Legal Complexities without Compromising Key Lawsuits

Finally, Johnsson believes the investigation will help the SEC thread a needle — deny spot Ethereum ETFs while avoiding "undermining the arguments" in its legal action against Coinbase and Binance.

In June 2023, the SEC accused Binance and Coinbase of offering unregistered securities, citing 19 tokens. However, ETH was not among them.

In an interview with Bloomberg TV earlier this month, SEC chair Gary Gensler was asked directly about the status of ETH as a security, to which he responded with his usual ambiguity, without answering the question.

Also, he speculated that the SEC may eventually take a "soft approach" by claiming an ongoing investigation into ETH's security status rather than pursuing a definitive enforcement action.

He stated, "We find motivation in the present for the SEC to further an investigation into ETH security status as an additional pretense to deny approval."

"Could the SEC go full scorched earth? Absolutely, but I'll still hold my breath for the moment. I've heard reasonable arguments that this might be the case, so be warned."

ETF Store President Nate Geraci stated that the best time for the SEC to argue that ETH was security was before approving Ethereum futures trading in October 2023. Still, they did not do so, per TradingView.

"It's also too late to make a correlation argument, IMO," he said before adding, "If you're okay with grandma buying ETH futures ETF, then why not spot it?"

In response to the reported SEC Ethereum probe, Coinbase's chief legal officer, Paul Grewal, claimed, "The SEC has no good reason to deny the ETH ETP applications."

He added, "We hope they won't try to invent one by questioning the long-established regulatory status of ETH, which the SEC has repeatedly endorsed."

On March 21, US Congressman Patrick McHenry responded to the SEC's move against Ethereum, stating, "This is contrary to the CFTC's assessment and the SEC's prior actions," before adding:

"Congress decides the SEC's jurisdiction and budget, Chair Gensler doesn't get to make it up as he goes along."

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