A group of Republican lawmakers, including the chairmen of the House Financial Services Committee and House Committee on Agriculture, has formally requested SEC Chair Gary Gensler to provide clear guidance on the regulatory stance regarding the custody of non-security digital assets by Special Purpose Broker-Dealers (SPBD).

The March 26 letter specifically demands clarity on the status of Ethereum (ETH) and further requests the regulator to establish clear definitions for various terms related to crypto, digital assets, securities, and investment contracts.

The letter was signed by 48 members of Congress, including House Financial Services Committee chair Patrick McHenry and House Committee on Agriculture chair Glenn Thompson. Lawmakers asked for a response to their questions by April 9.

Ethereum’s status

According to the letter, the SEC has failed to propose a rule or provide comprehensive guidance for asset classification, and the term “digital asset securities” remains undefined.

Lawmakers said that despite a public record from both the SEC and the CFTC identifying ETH as a non-security digital asset, there is concern over the lack of transparency in the SEC’s SPBD regime and the potential regulatory implications of allowing such custody services.

The letter poses the question:

“Is ETH a digital asset security?”

The query is followed by several other questions depending on the answer.

The letter comes in the wake of Prometheum Inc.’s announcement that its subsidiary — Prometheum Ember Capital, a FINRA-approved SPBD — plans to offer custody services for Ethereum to institutional clients.

They emphasized the “alarming scenario” posed by Prometheum’s announcement, arguing that it could lead to “irreparable consequences for the digital asset markets” if allowed to proceed under the current regulatory framework, which does not explicitly permit SPBD custody of non-security digital assets.

Exacerbating the issue

Highlighting the discrepancy between the SEC’s enforcement actions and the historical recognition of ETH as a non-security digital asset, the letter criticized the SEC for not providing comprehensive guidance or rules for the digital asset marketplace regarding asset classification.

The lawmakers said that this lack of clarity has “exacerbated” the uncertainty within the digital asset ecosystem, complicating the ability of regulated entities to comply with SEC regulations.

The letter also highlights the broader implications of the SEC potentially classifying ETH as a digital asset security, including the impact on CFTC-registered commodity derivative exchanges and the availability of ETH Futures for trading.

Such a decision could have significant repercussions for market participants, potentially eliminating access to essential risk management tools and causing significant price dislocation across the ETH market.

The letter concludes by warning of the “chilling effect” on US digital asset markets should regulatory uncertainty persist, emphasizing the importance of clear and consistent regulatory guidance to ensure continued growth and innovation within the digital asset space.

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