The Securities and Exchange Commission (SEC) and its chairman, Gary Gensler, have been considering ethereum as an unregistered security trading out of compliance with federal regulations for at least a year, according to a lawsuit filed by ethereum software company Consensys. The SEC plans to sue Consensys for allegedly failing to comply with federal securities laws. The timeline of the SEC’s investigation into ethereum’s status as a security reveals that a formal order of investigation was approved by the head of the SEC’s Division of Enforcement in March 2023, authorizing enforcement staff to investigate and subpoena individuals and entities involved in buying and selling the ethereum token. The investigation, referred to as “Ethereum 2.0,” began based on the SEC’s belief that potential unregistered offerings and sales of ethereum had occurred since at least 2018.
This investigation into ethereum’s status as a security represents a shift in the SEC’s stance on cryptocurrencies. Prior to this investigation, then-Director of Corporation Finance Bill Hinman stated in a speech in June 2018 that ethereum, along with bitcoin, was not a security. This announcement led to a 10% jump in the price of ethereum as the industry believed that the SEC would not regulate these cryptocurrencies due to their decentralized nature. However, the recent investigation suggests that the Gensler SEC may be considering classifying ethereum as a security, contradicting previous guidance from the SEC. Furthermore, the Commodity Futures Trading Commission announced that ether, the native cryptocurrency of the ethereum network, is a commodity falling under its jurisdiction, adding another layer of complexity to the regulatory landscape.
Consensys, established by one of the founders of the ethereum blockchain, Joe Lubin, has filed a lawsuit against the SEC claiming that the agency is attempting an unlawful power grab by seeking to classify ethereum as a security. The lawsuit aims to challenge the SEC’s actions and seeks to settle the dispute over ethereum’s regulatory status through the court. The new filings show that the SEC’s investigation into ethereum’s status intensified in recent weeks, with Consensys receiving multiple document subpoenas and a Wells notice outlining the agency’s intent to bring an enforcement action against the firm for allegedly acting as an unregistered broker-dealer offering unregistered securities, including ethereum, through its MetaMask wallet.
The uncertainties surrounding ethereum’s regulatory status have raised concerns within the crypto industry. Gary Gensler’s reluctance to provide a definitive answer on whether ethereum is a security during his testimony before the House Financial Services Committee has led to speculation about the implications of ethereum’s transition to a “proof-of-stake” consensus mechanism. This shift in the way ethereum is secured and new tokens are created could potentially impact its classification as a security under the Howey Test, a legal standard used to determine whether an asset constitutes an investment contract and thus a security. The outcome of the SEC’s investigation and the lawsuit filed by Consensys could have significant implications for the future regulatory landscape of the cryptocurrency market.
Overall, the SEC’s investigation into ethereum’s status as a security and the lawsuit filed by Consensys highlight the regulatory challenges facing the cryptocurrency industry. The conflicting viewpoints within the SEC regarding ethereum’s classification, from initial statements claiming it is not a security to recent investigations suggesting otherwise, demonstrate the complexities of regulating digital assets. The outcome of this legal battle will likely have far-reaching consequences for ethereum and the broader crypto market, shaping future regulatory policies and influencing investor confidence in the industry. As the case unfolds, the crypto community awaits a resolution that could provide clarity on the regulatory status of one of the largest cryptocurrencies in the market.