Consensys: Four Reasons Why Ethereum Is Not a Security

Source: BeInCrypto; Compiled by: Baishui, Golden Finance

Ethereum has come under scrutiny from the U.S. Securities and Exchange Commission (SEC), which has hinted at classifying it as a security. The SEC's move has sparked controversy, especially after it made clear in 2018 that Ethereum did not meet the criteria for securities.

In light of these events, blockchain software company Consensys has firmly opposed the SEC's reconsideration. Here are four compelling reasons to support that Ethereum should not be considered a security.

1. SEC's historical position on Ethereum

In 2018, William Hinman, then director of the SEC's Division of Corporation Finance, delivered a major speech indicating that Ethereum is not considered a security.

"Putting aside the fundraising activities during the creation of Ethereum, based on my understanding of the current state of Ethereum, the Ethereum network and its decentralized structure, the current offers and sales of Ethereum are not securities transactions," Hinman said.

This historical position of the SEC forms the cornerstone of the argument against its current reclassification effort. The SEC has not formally withdrawn this position, which leads to a strong presumption in favor of Ethereum's current non-security status.

"Based on Hinman's 2018 view, there is no difference between now and 2018. Today, in terms of theory and openness, if anything, the number of people developing and working on Ethereum and adopting it is more extensive than it was," a Consensys spokesperson told BeInCrypto.

Therefore, the SEC's sudden change of view in the absence of a lot of new evidence or a change in circumstances seems unwarranted and a capricious challenge to previous regulatory guidance.

Second, CFTC's classification of commodities

The Commodity Futures Trading Commission (CFTC), another U.S. regulatory agency, has always recognized Ethereum as a commodity. Recently, in a civil enforcement action involving cryptocurrency exchange KuCoin, the U.S. Commodity Futures Trading Commission (CFTC) finally classified Ethereum as a commodity.

“KuCoin solicits and accepts orders, accepts property on margin, and operates futures, swaps, and facilities for leveraged, margined, or financed retail trading involving digital assets, including Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC),” the compliance officer wrote.

This classification supports Ethereum’s broader market understanding and regulatory treatment, further emphasizing its role and functions as distinct from securities. A Consensys spokesperson said that the historical dual recognition by the SEC and CFTC strengthens the argument that Ethereum operates within the regulatory framework applicable to commodities, not securities.

“For many years, the SEC has clearly declared that Ethereum is a commodity. Therefore, I think you don’t really need to look any further than what the CFTC continues to say and what the SEC has said in the past to reach the correct result in this case,” the Consensys spokesperson added.

3. Decentralization and Open Protocol

The essence of Ethereum’s architecture lies in its decentralization. Unlike securities, which are often managed by central entities to benefit insiders with asymmetric information, Ethereum operates on a platform where all information is publicly accessible.

The network’s governance and operating protocols do not rely on centralized organizations. Therefore, it negates the main reason for securities classification to protect investors from information asymmetry.

“There is no doubt that Ethereum is decentralized. There is no core problem or team, no core development team with privileged insider information, which is a normal enterprise that must exist for security,” a Consensys spokesperson told BeInCrypto.

This fundamental property of Ethereum is consistent with the principles originally guided by the SEC’s 2018 decision.

Fourth, the irrelevance of the consensus mechanism transition

Ethereum's recent transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism was seen by the SEC as a potential reason for reclassification. However, this change does not fundamentally affect the core nature of Ethereum's operations or its non-security classification.

"If you look at Hinman's 2018 speech, when he said Ethereum was not a security, he did not base it on PoW or PoS. The consensus mechanism is irrelevant," the Consensys spokesperson concluded.

The transition to PoS does not introduce typical security elements, such as dividends or ownership of centralized companies. It is simply a technological evolution that improves efficiency and sustainability without changing the fundamental, decentralized characteristics of the platform.

In summary, the SEC’s reconsideration of Ethereum as a security does not hold up to scrutiny, particularly given the platform’s historical regulatory treatment, classifications by other regulators, decentralized nature, and irrelevance of its internal consensus mechanism to securities laws.