Galaxy Digital: SEC will determine that ETH is not a security but the pledge becomes a security! May damage the current DeFi ecosystem

The critical moment for whether the U.S. Securities and Exchange Commission (SEC) approves the Ethereum spot ETF will come on the 23rd of this week. The SEC needs to make a final decision on the applications of VanEck and Ark/21Shares. (Respectively on the 23rd and 24th), the final decision on Grayscale needs to be made on the 30th.

Originally, the market generally expected that the SEC would reject the relevant application. However, Bloomberg ETF analyst Eric Balchunas reversed his attitude this morning and raised the probability of approval from 25% to 75%, causing Ethereum to soar by more than 20% after hearing the news. %, reaching the $3,700 mark.

However, it should be noted that another analyst James Seyffart also added that the 19b-4 rule (change in exchange rules) that increases the probability of passing to 75% will require approval of S-1 (registration) in the future. Statement) before you can officially see Ethereum spot ETF trading, which may take several weeks to months.

SEC will determine that ETH is not a security, but does pledging ETH become a security?

As for the SEC’s possible approval of the Ethereum spot ETF, Alex Thorn, director of research at Galaxy Digital, published his analysis: If the speculation about the SEC’s 180-degree turn in its attitude towards the Ethereum spot ETF is true. My guess is that the SEC will try to find a balance between: ETH itself is not a security, but pledged ETH (or, more far-fetchedly, "pledged ETH as a service") is a security. This is broadly consistent with their various lawsuits and reports of investigations, and may maintain the views they have previously stated and argued while allowing the SEC to approve an Ethereum spot ETF. In this case, and possibly other reasons, you might expect the SEC to ban these ETFs from staking their ETH holdings.

If the pledge becomes a security, what will happen to the ecosystem?

Although it may not be as speculated by the research director of Galaxy Digital, as long as the pledge is provided, it will become a security. But if the situation really becomes like this, then Lido, which currently has a TVL of up to US$35 billion, and EigenLayer, the recently popular re-pledge agreement, may face severe regulatory challenges.

Next, the consensus mechanism of the Ethereum network has been transformed into PoS. If the staking behavior really turns ETH into securities, it may bring significant changes to the current network security mechanism... It needs to be grasped We continue to pay attention.

Whether it is recognized as a security is key to whether it can be approved

So far, the SEC has not clearly determined that Ethereum is a security or commodity. Scott Johnsson, general partner of VanBuren Capital, previously pointed out that the SEC in March This issue was still being considered when conducting an opinion survey on BlackRock’s Ethereum spot ETF application on the 8th.

In the filing, the SEC asked Nasdaq whether it “takes into account the nature of the underlying assets held by the trust” and asked, given “its PoS mechanism and the centralized control of a few individuals or entities.” Do the arguments supporting a Bitcoin spot ETF listing apply to Ethereum?

K&L Gates partner Richard Kerr pointed out that the Ethereum spot ETF is a commodity-based product under the Securities Act of 1933. If Ethereum is considered a security, the issuer will not be allowed to use this Transactions are carried out in this name.

In fact, the SEC has not clearly stated whether Ethereum is a security, which has made members of the U.S. Congress quite dissatisfied. 48 members of the U.S. Congress jointly sent a letter to Gary Gensler in March, asking him to clarify whether Ethereum is a security. Are securities, and whether Prometheum, a special purpose broker for digital asset securities, plans to provide ETH custody services in violation of regulations.

Regardless of whether it is approved or not, many industry observers have previously stated that the SEC will rarely allow ETFs to pledge their ETH holdings. Ark Invest and 21Shares have previously stated that their ETF plans However, they did not include such language in the S-1 update document submitted on May 10.

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