US SEC Slams Ethereum

The U.S. SEC has been hammering Ethereum for a year.

On April 30, according to an exclusive exposure by Fox Business in the United States, the latest court documents show 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 seem to have believed at least a year ago that Ethereum may be an unregistered security and its transactions do not comply with current federal regulations.

The news was disclosed after an unedited complaint filed by Ethereum software development company Consensys to the agency. The company filed an edited version of the lawsuit with a federal court in Texas last Thursday in response to the so-called Wells notice it received, which detailed that the U.S. Securities and Exchange Commission plans to sue the company for failing to comply with federal securities laws.

The new documents filed last Monday morning have not yet been released. The documents give us a timeline of the SEC's thinking on Ethereum's alleged securities status and reveal 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 seen as an early step in the SEC's investigation and does not necessarily represent the SEC's broader views. A spokesperson for the SEC declined to comment.

Last week, Consensys filed a lawsuit against the U.S. Securities and Exchange Commission (SEC), claiming that the agency was trying to illegally seize power by classifying Ethereum as a security, which caused an uproar in the crypto community.

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

Consensys, founded by Joe Lubin, one of the founders of Ethereum, is one of the few companies associated with Ethereum that received a subpoena from the U.S. Securities and Exchange Commission during this period, according to a source familiar with the matter.

The so-called "Ethereum 2.0" investigation is based on the U.S. SEC's view that "possible issuance and sales of certain securities, including but not limited to ETH" since at least 2018, the document said. If Gensler determines that Ethereum is a security, it 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 did not immediately comment.

After Hinman spoke at the Yahoo Finance All 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 they built their business against this backdrop of regulatory unification.

The new documents show that the five-member committee approved the enforcement department'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, enforcement officials adopted what securities lawyers say is an unusual level of confidentiality. Sources with direct knowledge of the matter told Fox Business that the SEC directed the subpoena recipient to sign a nondisclosure agreement in order to receive information about the progress of the investigation. One source who received the subpoena likened the interaction with the SEC to signing a nondisclosure agreement.

It is unclear why the SEC is keeping its ongoing investigation so secret, but one motivation may be that if the second-largest cryptocurrency with a market value of nearly $400 billion is determined to be a security, it will have far-reaching consequences for the cryptocurrency market.

Even before testifying, Gensler's reluctance to give a clear answer on Ethereum's regulatory status has sounded alarm bells in the cryptocurrency industry. Many speculate that after Ethereum merges to the so-called "PoS" consensus mechanism in September 2022 (validators "stake" their Ethereum holdings to secure the network and create new tokens), the cryptocurrency will be more like a security than the original "PoW" consensus mechanism that Bitcoin runs on.

Gensler made comments alluding to the concept 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, is a security.

Consensys' lawsuit shows that the SEC has made numerous document requests over the past year asking the company to provide more details about its role in the merger into PoS and its acquisitions, holdings, and sales of Ethereum. This also suggests that the SEC may believe that pre-merger Ethereum sales as early as 2018 were securities.

In recent weeks, the investigation has escalated, with Consensys receiving a fourth document subpoena in March and Wells receiving a notice on April 10 that the agency intends to file an enforcement action against the company for allegedly acting as an unregistered broker-dealer and offering unregistered securities, including Ethereum, through its MetaMask wallet.

The lawsuit will be similar to the lawsuits against exchanges Coinbase and Kraken and cross-border payment company Ripple. Consensys hopes that the court will finally resolve the dispute over Ethereum's regulatory status.