The Securities and Exchange Commission (SEC) is actively pursuing legal action to classify Ethereum, the second-largest cryptocurrency, as a security, as indicated by subpoenas received by U.S. companies involved in an investigation. This development deals a blow to the crypto industry’s hopes for SEC approval of Ethereum ETF applications, especially following the agency’s greenlighting of several Bitcoin ETFs in January.

The SEC’s inquiry into Ethereum entails requesting companies to provide any documents and financial records pertaining to their interactions with the Ethereum Foundation, a nonprofit organization overseeing the governance and development of the Ethereum blockchain.

According to sources at subpoenaed companies, the SEC’s investigation into the Ethereum Foundation commenced shortly after the blockchain transitioned to a new governance model called “proof-of-stake” in September 2022. This shift, which moved Ethereum away from Bitcoin’s energy-intensive model to one relying on a network of trusted validators, has provided the SEC with grounds to potentially classify Ethereum as a security.

Despite the lack of official confirmation from the SEC regarding the investigation, reports indicate a push to label Ethereum as a security amidst the agency’s broader efforts, under the Biden administration, to rein in the crypto industry. However, the legal ambiguity surrounding cryptocurrencies has led to jurisdictional disputes and court battles over the SEC’s authority.

While Bitcoin is widely considered a commodity, Gensler, the SEC chair, has suggested that most other cryptocurrencies, including Ethereum, should be treated as securities subject to SEC regulation. This stance contrasts with previous statements by SEC officials, indicating a shift in regulatory approach under Gensler’s leadership.

The approval of Ethereum futures-based ETFs by the SEC, overseen by the Commodities and Futures Trading Commission (CFTC), added further complexity to Ethereum’s regulatory status. While the CFTC views Ethereum as a commodity, the SEC’s stance remains uncertain, especially in light of recent developments such as Prometheum’s announcement of plans to offer Ethereum custody services under SEC oversight.

The ongoing efforts by financial giants like Fidelity and BlackRock to secure approval for spot Ether ETFs highlight the urgency surrounding Ethereum’s classification. However, signs point to the SEC likely rejecting these applications by the May deadline. A potential declaration of Ethereum as a security would exacerbate uncertainty and raise questions about the CFTC’s oversight of Ethereum futures markets.