Consensys Says SEC Is Ending Investigation Into Whether ETH Is A Security

Consensys sued the SEC in pursuit of a court ruling establishing that Ether is a commodity asset and not a security in April.

By: Samuel Haig Loading...

Consensys Says SEC Is Ending Investigation Into Whether ETH Is A Security

The U.S. Securities and Exchange Commission (SEC) has reportedly ceased efforts to classify Ether as a security asset.

On June 18, Consensys, the blockchain software development company that recently launched a lawsuit against the SEC over the regulator’s efforts to treat ETH as a security, tweeted that the SEC said it is ending its investigation into Ethereum.

“The Enforcement Division of the SEC has notified us that it is closing its investigation into Ethereum 2.0,” Consensys posted on X. “This means that the SEC will not bring charges alleging that sales of ETH are securities transactions.

Ethereum 2.0 was a previously popular term used to describe Proof of Stake (PoS) Ethereum in the lead-up to the network’s PoS transition.

The SEC versus Ethereum

The news comprises a significant win in the saga of the SEC’s campaign of aggression targeting the crypto industry in recent years, during which the regulator has frequently placed Ethereum in its crosshairs.

Consensys sued the SEC on April 25, seeking a court order ruling that the SEC does not hold regulatory jurisdiction over Ethereum and that Ether does not comprise a security asset. In June 2018, William Hinman, the then director of the SEC’s Division of Corporate Finance, declared that both Bitcoin and Ethereum were “sufficiently decentralized” to be deemed commodities and not securities.

Consensys’ lawsuit revealed that the SEC had launched an investigation into whether Ether is a security asset in March 2023, with the SEC reportedly conducting the investigation with unusual secrecy. Gensler also sought to argue that all Proof of Stake assets comprise securities that same month.

Against this backdrop, analysts had little hope that the SEC would approve spot Ether exchange-traded fund (ETF) applicants as the deadline for the regulator’s verdict loomed, despite the Commodity Futures Trading Commission (CFTC) regulating Ether futures products as derivatives tracking commodity assets.

However, the SEC abruptly changed its tone and greenlit the spot funds’ initial 19b-4 filings in May, and is expected to give final approval to the ETFs’ S-1 registration statements by fall. Consensys said it asked the SEC if it would drop its investigation into ETH after the regulator abruptly approved the spot Ether ETFs.

“The decision follows a letter we sent on June 7, asking the SEC to confirm that the May ETH ETF approvals, which were premised on ETH being a commodity, meant the agency would close its Ethereum 2.0 investigation,” Consensys said.

The lawsuit followed Consensys receiving a Wells Notice from the SEC on April 10, signaling that the regulator had completed an investigation into the company.

Regulation by enforcement

The SEC has faced consistent backlash for waging a campaign of regulation-by-enforcement targeting the web3 sector, rather than adhering to its formal rulemaking process, since Gary Gensler’s appointment as SEC chair in 2021.

This culminated in Coinbase, the top U.S.-based centralized exchange, filing legal action against the SEC seeking to compel the regulator to abide by its formal rulemaking process in April 2023. The SEC is mandated to solicit public feedback on proposed rules, as opposed to the SEC’s historic record of bringing retroactive enforcement actions against crypto firms while refusing to provide clarity regarding the regulatory obligations of web3 firms.

In an appearance on the Unchained podcast that same month, Tom Emmer, the House Majority Whip, characterized Gensler as a “bad faith regulator” who is “blindly spraying the crypto community with enforcement actions while completely missing the truly bad actors.”

Still work to be done

Despite celebrating the end of the SEC’s investigation as a “momentous” achievement for Ethereum, Consensys warned that the broader web3 sector may still be in the SEC’s sights.

“The closing of the Ethereum investigation is momentous, but it’s not a cure-all for the many blockchain developers, technology providers, and industry participants who have suffered under SEC’s unlawful and aggressive crypto enforcement regime,” Consensys said.

Consensys said it would continue to pursue its legal action against the SEC, seeking a declaration its user-interface software MetaMask Swaps and Staking do not violate U.S. securities laws.

“It should not take a lawsuit to provide the much-needed regulatory clarity to allow an industry that serves as the backbone to countless new technologies and innovations to thrive – but here we are,” Consensys added.