Consensys Takes SEC To Court Over Efforts To Regulate Ethereum As Security

Ethereum software giant Consensys has filed a preemptive lawsuit against the U.S. Securities and Exchange Commission (SEC).  

Consensys explains that it decided to strike the SEC early because it does not want the formidable regulator to expand its jurisdiction by “wrongly” categorizing ether as a security under current chairman Gary Gensler. 

Consensys Sues SEC Over Ethereum Classification

Consensys, the crypto startup backing projects critical to the Ethereum ecosystem, has taken the first step to bring clarity on Ethereum’s legal status as a non-security. Consensys has sued the Securities and Exchange Commission and its five commissioners, alleging they are overreaching in their apparent efforts to reclassify Ethereum as a security token.

Today, Consensys filed a lawsuit against the Securities and Exchange Commission.

The goal behind this is to ensure that Ethereum remains a vibrant and indispensable blockchain platform and to preserve access for the countless developers, market participants, and institutions…

— Consensys (@Consensys) April 25, 2024

“The U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) seeks to regulate ETH as a security, even though ETH bears none of the attributes of a security — and even though the SEC has previously told the world that ETH is not a security, and not within the SEC’s statutory jurisdiction,” the 34-page legal filing on April 25 reads.

Consensys claimed that the SEC had crafted a campaign “to seize control over the future of cryptocurrency” with enforcement actions aimed at regulating Ethereum. The firm further mentioned the securities regulator’s record of calling Ether a commodity. Citing Chairman Gary Gensler’s statements declaring ETH was not a security as early as 2018, Consensys warned of the potential implications of the agency changing its stance after companies had created businesses based on the legal precedent:

“The SEC’s unlawful seizure of authority over ETH would spell disaster for the Ethereum network, and for Consensys,” said the filing. “Every holder of ETH, including Consensys, would fear violating the securities laws if he or she were to transfer ETH on the network. And the ability of anyone new to acquire ETH to use Ethereum’s repository of decentralized applications and services would be extinguished. This would bring use of the Ethereum blockchain in the United States to a halt, crippling one of the internet’s greatest innovations.”

The complaint further reveals that the SEC sent Consensys a Wells Notice on April 10 over MetaMask, indicating its intent to sue the company and alleging that MetaMask was operating as an unlicensed broker-dealer. As a result, Consensys opted to lodge a preemptive suit against the regulator, seeking a declaration that Ether is indeed not a security.

Ether: To Be A Security Or Not To Be A Security

Ethereum’s regulatory status and classification as a security has long been a subject of contention between regulators and the cryptosphere. The SEC’s previous position was that ETH, similar to Bitcoin, is not a security and, as such, is outside its jurisdiction. This view has not received any additional clarification from the federal agency or its chair.

The recent legal action gives credence to previous reporting about the SEC’s attempts to designate the second-largest cryptocurrency by market cap as a security with several subpoenas. 

The SEC is now expected to deny spot Ethereum ETF applications, including the one from Wall Street giant BlackRock. While speaking to Fortune, Consensys founder Joe Lubin observed that the SEC’s aggressive stance was likely intended to justify the looming rejection. Lubin claims that the agency wants to suppress innovation and deter huge inflows of cash into the crypto market. Nonetheless, BlackRock’s boss Larry Fink asserted it would still be possible to introduce ETH ETFs even if Ether was labeled a security.