90% of Ethereum supply leaves exchanges as regulators struggle to classify ETH as Security or Commodity

Ethereum is known not only as the second-biggest cryptocurrency but also as the second-generation cryptocurrency. The blockchain not only brought Decentralized Finance (DeFi) to the crypto space but also framed a target on its back following its Proof of Stake transition plan. A target that regulators have aimed and shot at repeatedly.

Ethereum - A Security or Commodity?

On March 27, the Commodity Futures and Trading Commission (CFTC) announced charges against Binance for not complying with federal laws. In its lawsuit, the regulatory body also claimed Ethereum to be a commodity. This came weeks after the Securities and Exchange Commission shut down Kraken's crypto-staking service, wherein ETH was labeled as a security.

The lack of regulatory clarity in the industry is attributed to conflicting views on whether Ethereum should be classified as a security or a commodity. This is not the first occurrence. Earlier this year, SEC Chair Gary Gensler reiterated the same view as his agency did, and the CFTC Chair stood in tandem with ETH being a commodity.

By their definition, a "security" is a financial asset or instrument that has value and can be bought, sold, or traded. Examples of the same are stocks, bonds, etc. A "Commodity," on the other hand, is a physical good that is traded on exchanges, and its value is determined by supply and demand.

Considering Ethereum invokes staking as a key feature of being a part of the network, it fits into the category of security much more than a commodity. Bitcoin, on the other hand, which shares a likeness with Gold on a financial level, is closer to being a commodity than a security.

But if Ethereum is declared a "security", it would bear an impact on the exchanges planning on listing it. These platforms and exchanges would need to register as a "securities" broker-dealer with the SEC or delist ETH to protect them from selling securities illegally. Not only would the centralized exchanges face this, but also the decentralized exchanges such as SushiSwap.

This could waver confidence in exchanges, which, as it happens to be, is already on a decline.

Ethereum leaves exchanges

Total Ethereum supply on exchanges fell to just 10.3% on March 27 as users shifted their ETH to self-custody wallets or staked it. This is the lowest the supply has been since the launch of the cryptocurrency in 2015. 

ETH holders' confidence in these exchanges has remained unrestored following the FTX collapse, which is why the exchanges now hold less than 12.5 million ETH ($25.4 billion).

ETH supply on exchanges

Furthermore, investors' confidence in the asset is also far from recovering as whale activity that spiked significantly on March 11 to a nine-month high fell cold again.

Ethereum whale activity 

Whales pulling out of the market indicates a lack of expectations of a price rise which is concerning since ETH has been unable to sustain above $1,800, a level that was last tested as support in June 2022.