Gary Gensler’s hearing in front of the House Financial Services Committee stirred up controversy when the SEC chairman found himself unable to answer what was, at least on the surface level, a relatively simple question: is ether a security?
So why wasn’t Gensler able to provide a proper response to what was essentially a yes-or-no question? The truth is clear if you’re willing to examine how Ethereum was founded and what’s transpired since.
The DAO and the end of the beginning
In 2016, Vitalik Buterin, a slew of investors, and the Ethereum Foundation worked to market, build, and deploy Ethereum — one of the first successful initial coin offerings since the establishment of Bitcoin. But, unfortunately, the reality was that it wasn’t a successful deployment as shortly afterward, the DAO was hacked.
If ever there was a time for the SEC — or any other government regulator — to make a move to protect users and classify ether (ETH) as a security, it was at this pivotal moment in time, when many investors found themselves underwater at the hands of a blackhat hacker. But, instead, regulators chose silence and inaction.
This inaction changed the entire history of the crypto industry.
Government apathy forces private solutions
Following the DAO’s disastrous launch, investors, users, and validators were tasked with answering an important question: what do we do now?
The solution was to vote on how to move forward, and unsurprisingly, most users wanted to alter the blockchain and act as though the hack had never occurred. But the unfortunate truth about blockchains is that, unless you have consensus by validators, then you have a serious problem and it results in what’s been termed a ‘fork.’
The simplest explanation of a hard fork is that, after a contentious problem is discovered, the majority of nodes agree to specific protocol rules, a minority of validators agree to an alternative set of protocol rules, and in the end you get two completely different blockchains. In this case, the majority of validators stuck with Ethereum and chose to negate the hack, the minority of validators believed the hacked coins were gone forever and the blockchain should acknowledge as much. This cryptocurrency was called Ethereum Classic.
If there was a final, best moment to put the kibosh on ETH and Ethereum Classic, this was it. Yet, once again, the industry was met with indifference and inaction from government regulators.
The blockchain marches on
And so, for years, ETH, while likely a security (investors, promise of profits, centralized, and controlled by a few actors), continued on. Thousands of smart contracts — most, again, unregistered securities — slowly propagated the Ethereum blockchain, the price of ETH continued to go up, and the currency appeared to become “sufficiently decentralized.”
And this is how we get to the awkward situation that Gary Gensler found himself in last week.
Can’t move back but can’t admit what happened
There were four SEC chairmen who didn’t do anything about ETH: Michael Piwowar, Jay Clayton, Elad Roisman, and Allison Herren Lee. The four chairmen had ample time and numerous opportunities to make conscious efforts and strong decisions but instead chose to, seemingly on purpose, ignore ETH.
This is where Gensler finds himself.
Anyone can see that ETH, when initially established, was an unregistered security. Then it pivoted and pushed forward — ultimately, changing what it was and who could alter it. But if Gensler went in front of Congress, in front of the public, and openly stated, “Yes, Ether was 100% a security, but due to lack of regulatory oversight and general government malaise, nothing happened, and now it would be difficult, costly, and could hurt investors if we attempt to enforce securities laws – if it’s even possible for us to enforce securities laws – on Ether,” it’d be difficult for the SEC to be taken seriously.
This would suggest that securities laws and regulation are fluid and that, perhaps, anything that’s a security could be altered enough to be redefined and not prosecutable. It takes all the power from the SEC insofar as any entity could then use an ‘Ether defense’ and state that, on a long enough timeline, anything could eventually be no longer considered a security.
This isn’t a defense of Gensler or the SEC, nor is it a defense of ETH or a push against security laws. But it’s worth realizing why the chairman of the SEC may be keen to avoid stating exactly what ETH is or was: they want to keep some semblance of power.