US SEC Slams Ethereum

The US SEC has been hammering Ethereum for a year.

On April 30, according to an exclusive report by Fox Business, the latest court documents showed that U.S. SEC Chairman Gensler has believed that Ethereum is a security for at least a year. The U.S. SEC and its Chairman Gary Gensler seemed to have believed at least a year ago that Ethereum may be an unregistered security and its trading does not comply with current federal regulations.

The news comes after Ethereum software development company ConsenSys filed an unredacted version of its complaint with the agency. The company filed a redacted version of the lawsuit with a federal court in Texas on Thursday in response to a so-called Wells Notice it received detailing that the SEC plans to sue the company for failing to comply with federal securities laws.

The new filings, which have not yet been made public, provide a timeline of the SEC’s thinking on ethereum’s alleged security status and shed light on the biggest question facing the $2 trillion digital asset industry: the regulatory status of cryptocurrencies held by millions of investors.

It should be noted that a formal investigation is considered an early step in the SEC's investigation and does not necessarily represent the SEC's broader views. A spokesman for the SEC declined to comment.

Last week, ConsenSys sent shockwaves through the crypto community when it filed a lawsuit against the U.S. Securities and Exchange Commission (SEC), alleging that the agency was attempting to illegally seize power by classifying Ethereum as a security.

According to the latest filings, on March 28, 2023, Gurbir Grewal, head of the U.S. Securities and Exchange Commission's enforcement division, approved a formal investigation order into the securities status of Ethereum, authorizing law enforcement officers to investigate and subpoena individuals and entities involved in the purchase and sale of Ethereum tokens.

ConsenSys, a company founded by Ethereum co-founder Joe Lubin, is one of a handful of companies associated with Ethereum that received a subpoena from the SEC during this time, according to a source familiar with the matter.

The document states that the so-called "Ethereum 2.0" investigation is based on the SEC's belief that "possible issuance and sales of certain securities, including but not limited to ETH" have occurred since at least 2018. If Gensler determines that Ethereum is a security, this will contradict the SEC's previous guidance under Chairman Jay Clayton; in June of the same year, Bill Hinman, then the company's chief financial officer, stated the SEC's position in a speech that Ethereum, like Bitcoin, is not a security.

Hinman was not immediately available for comment.

After Hinman spoke at the Yahoo Finance Total Markets Summit, Ethereum prices surged 10% as the cryptocurrency industry understood that the SEC would not regulate Ethereum or Bitcoin because Hinman believed that they were both "decentralized enough." A year later, the Commodity Futures Trading Commission declared Ethereum a commodity under its jurisdiction.

ConsenSys said in the lawsuit that it built its business in the context of this regulatory unification.

New documents show that the five-member committee approved the enforcement division’s “Ethereum 2.0” investigation on April 13, 2023, just five days before Gensler appeared before the House Financial Services Committee and refused to answer repeated questions from committee chairman Patrick McHenry about whether the SEC considered Ethereum a security.

In launching the investigation, law enforcement officials took what securities lawyers called an unusual measure of confidentiality. Sources with direct knowledge of the matter told Fox Business that the SEC directed subpoena recipients to sign nondisclosure agreements in order to receive information about the progress of the investigation. One source who received the subpoena likened interacting with the SEC to signing a nondisclosure agreement.

It’s unclear why the SEC is keeping its ongoing investigation so secret, but one motivation could be the far-reaching implications for the cryptocurrency market if the second-largest cryptocurrency, with a market cap of nearly $400 billion, is deemed a security.

Even before testifying, Gensler’s reluctance to give a definitive answer about Ethereum’s regulatory status has raised alarm bells in the cryptocurrency industry, where many speculate that Ethereum’s September 2022 merger to a so-called “PoS” consensus mechanism (validators “stake” their Ethereum holdings to secure the network and create new tokens) could make the cryptocurrency more like a security than the original “PoW” consensus mechanism that Bitcoin runs on.

Gensler alluded to the concept in comments shortly after the Ethereum merger, saying that the nature of PoS tokens could trigger the so-called Howey Test, a Supreme Court ruling used by courts to determine whether an asset qualifies as an investment contract and, therefore, a security.

Consensys' lawsuit shows that the SEC has made many document requests over the past year, asking the company to provide more details about its role in the merger to PoS, as well as its acquisition, holding and sales of Ethereum. This also suggests that the SEC may believe that the sale of Ethereum before the merger as early as 2018 was a security.

The investigation has escalated in recent weeks, with ConsenSys receiving a fourth subpoena for documents in March and Wells notifying the company on April 10 that the agency intends to bring an enforcement action against the company for allegedly operating as an unregistered broker-dealer and offering unregistered securities, including Ethereum, through its MetaMask wallet.

The lawsuit would mirror previous cases against exchanges Coinbase and Kraken, as well as cross-border payments company Ripple, and ConsenSys hopes the courts will finally resolve the dispute over Ethereum’s regulatory status.