(Bloomberg) -- The digital-asset world is going about business as usual despite some worrisome issues that may be raised by the US Securities and Exchange Commission’s probe of the Ethereum Foundation, the organization that supports the second-biggest cryptocurrency.

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The unspecified investigation highlights the long-running debate over whether Ether, a token used on the blockchain, is a security. If declared as such, that would make the token commonly referred to as ETH subject to SEC guidelines that many in the industry have bristled against. Even so, Ether has gained about 5% since Tuesday.

That’s a big change from when the threat of pending action by the SEC would often send the prices of tokens lower. Market observers point to a series of legal setbacks suffered by the SEC over the last year that have undermined Chairman Gary Gensler’s enforcement crackdown. Just Monday, a federal judge accused the SEC of “gross abuse of power” in pursuing a crypto company known as DEBT Box.

“Securities law risk is table stakes for any company operating in this industry,” said Michael Selig, a partner at the law firm of Willkie Farr & Gallagher. “All of this will be litigated in court and may become moot as a result of the upcoming elections.”

The biggest immediate impact is probably on whether the probe puts in question the likelihood of an approval by the agency of exchange-traded funds investing directly in Ether. A number of issuers, from VanEck to Fidelity, have filed for permission to launch them. Bloomberg Intelligence analysts figure there’s only a 25% chance of approval.

“That would be a very difficult hill to climb in terms of seeking ETF approval because effectively the regulator would be approving an ETF on an asset they’d labeled as illegal,” Stephane Ouellette, chief executive of digital-asset platform FRNT Financial.

A security designation could also put pressure on exchanges to delist Ether. When the SEC named 19 tokens as securities in lawsuits last year, platforms such as Bakkt, Robinhood Markets and Bitstamp delisted some of the tokens. Even so, many of the tokens actually saw an increase in trading volume as investors shrugged the designation off.

If Ether is designated as a security, that may also create trouble for decentralized exchanges, known as dexes, that run on the Ethereum blockchain.

“The SEC has few hooks today to enforce against the decentralized finance protocols being run globally on top of [such] chains,” said Lex Sokolin, co-founder of Generative Ventures. “Perhaps if ETH is a security, they would have further reach to treat the Dexes as exchanges, the lenders as debt issuers, and so on.”

Other digital assets, like nonfungible tokens such as CryptoPunks and Bored Apes that are minted on Ethereum network and bought and sold with Ether could also be impacted. Still, the so-called floor, or lowest, prices of many NFTs surged in the last 24 hours. Pudgy Penguins’ floor price increased 20%, and Bored Apes’ rose by 5%, according to data compiled by NFT Price Floor.

“The entire ecosystem could take a short-term hit if ETH was classified a security mostly due to the uncertainty it creates rather than it being a blanket cause for every [Ethereum-technology]-based token to become a security, as that would be very unlikely,” said Yat Siu, co-founder of Animoca Brands, which invests in blockchain games that use NFTs.

Even so-called Layer-2 blockchains, which overlay Ethereum to provide cheaper transaction costs, may need to change “their operational structure or compliance measures to meet SEC regulations,” said Pedro Herrera, co-founder of PrimeTrader, a gamefied tokens platform. “The added regulatory burden could either slow down innovation (due to the need for compliance) or potentially stimulate it, as projects seek to navigate or leverage the new regulatory environment.”

On the other hand, blockchains that compete with Ethereum, such as Solana, could benefit as some Ethereum businesses and users migrate over, if Ether is deemed a security.

The SEC is investigating Ethereum after its 2022 software upgrade drastically altered the way the network orders transactions. The upgrade, called the Merge, allowed people to stake their Ether to earn interest, and that raised fresh questions of whether it’s a security. There’s also the question of whether a small group of people has an outsized influence on Ethereum’s development and operations.

In last year’s lawsuit against crypto exchange KuCoin, New York Attorney General Letitia James called Ether a security, saying that Ether’s development and growth have been managed by a small number of developers who “stand to profit from the growth of the network and the related appreciation of ETH.” She said that co-founder Vitalik Buterin and the Ethereum Foundation hold significant influence over Ethereum’s development.

In its solicitations for public comments on the proposed spot Ether ETFs, the SEC asked, “Are there particular features related to ether and its ecosystem, including its proof of stake consensus mechanism and concentration of control or influence by a few individuals or entities, that raise unique concerns about ether’s susceptibility to fraud and manipulation?” Since the Merge, there have been worries of too few entities controlling some aspects of Ethereum’s operations.

“This suggests that the SEC may be examining Ethereum governance and upgrade management processes that could reveal ‘control or influence by a few individuals or entities,’” Ouellette said in a newsletter Thursday.

The agency has demanded information from companies about dealings with the Ethereum Foundation as part of a review of aspects of Ether, Bloomberg reported Wednesday.

Of course, 2024 is an election year in the US, and depending on the outcome, Gensler may not even be in office in a matter of months. And then there are the courts for crypto companies to fall back on.

“He is not an emperor,” said Michael Terpin, a long-time crypto investor who owns Ether and Bored Apes.

--With assistance from Muyao Shen.

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