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Are Solana and Polygon Safe Now That SEC’s Ethereum Investigation Is Over?

Are Solana and Polygon Safe Now That SEC’s Ethereum Investigation Is Over?

If the SEC is no longer investigating Ethereum, does that mean other similar cryptocurrencies are off the hook?

The U.S. Securities and Exchange Commission on Tuesday informed Ethereum software company Consensys that it has dropped its investigation into “Ethereum 2.0,” referring to the blockchain network’s transition to proof of stake nearly two years ago.

This combined with the SEC’s approval of Ethereum ETFs for trading in the U.S. has been widely perceived as an admission by the Commission that Ethereum is not a security, which in turn could mean that other proof-of-stake coins like Solana and Polygon are also not securities. But legal experts who spoke with Decrypt have warned against thinking in such black and white terms.

“I expect that the letter has little to no impact on the legal classification of other [proof-of-stake] coins,” Drew Hinkes, an attorney who specializes in digital assets, told Decrypt. “Those other tokens were presumably not investigated in the investigation of Ethereum 2.0 and their facts as to creation, distribution, etc. are likely different from those of Ethereum.”

Consensys sued the SEC earlier this year in a preemptive move after receiving a Wells Notice, which typically indicates the regulator intends to bring an enforcement action. (Disclosure: Consensys is one of 22 investors in Decrypt.) In its lawsuit, Consensys revealed the SEC has been operating under the assumption that Ethereum is an unregistered security for at least a year, partially because of the network’s switch to proof of stake.

Proof of stake refers to a system in which cryptocurrency network users pledge their assets—in this case ETH—in order to participate in validating transactions and securing the network. Users who stake are then rewarded in ETH for their trouble, with yields ranging from 1% to 4% APY, depending on the staking platform. 

Ethereum, which once operated much more like the energy-intensive Bitcoin blockchain, completed its transition to proof of stake in September 2022 after a years-long process. At the time, questions immediately arose as to whether staking could implicate federal securities laws in the United States. SEC Chair Gary Gensler said he believed staking could run afoul of the law because “the investing public is anticipating profits based on the efforts of others,” according to the Wall Street Journal.

The SEC has now apparently changed its view. But even if the Commission is no longer investigating Ethereum, it could proceed differently with other tokens, says Hinkes, according to the manner in which those specific assets were initially sold. The SEC may also consider factors like the state of the technology, the mechanics of its block validation, and more, according to the attorney. 

Matt Corva, a lawyer for Consensys, seemingly concurs, posting yesterday on Twitter: “We don’t know [if Polygon, Solana, or other coins are securities] because the SEC has evaded showing their homework on precisely why they’ve now concluded that Bitcoin and Ethereum are not securities,” he tweeted. “We don’t know the specifics of import for other coins.”

Not all companies can spend millions of dollars and thousands of hours dealing with an unlawful investigation – and they shouldn’t need to. We know Bitcoin is not a security and we know Ethereum is not a security. What about Polygon, or Solana, or any other coin?

— Matt Corva (@MattCorva) June 19, 2024

Other legal experts are similarly befuddled by the SEC’s opaqueness.

“The SEC was very careful in the language it used in its letter,” crypto criminal defense lawyer Carlo D’Angelo told Decrypt. “Without a more specific statement from the SEC, or a definitive ruling from a court, it remains unclear how the agency views ETH and other [proof of stake networks].”

While the end of the Ethereum investigation might not be a carte blanche for proof-of-stake coins, one expert believes it’s a good building block. 

Sebastian Heine, head of risk and compliance at institutional staking company Northstake, claims it does “strengthen” some cases, but every coin is “too individual” to make sweeping statements. “The SEC is still very crypto negative so there shouldn’t be any high expectations from the SEC acting favorably towards other proof-of-stake coins,” he said.

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Source: https://decrypt.co/236154/solana-polygon-safe-sec-ethereum-investigation-over

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