ConsenSys challenges the SEC’s classification of ETH as a security

What’s new? Ethereum software developer ConsenSys has argued that ETH is not a security. The statement is a follow-up to a lawsuit previously filed against the US Securities and Exchange Commission (SEC) to clarify the status of the cryptocurrency. The lawsuit was in response to the SEC’s pre-trial notice of violations found in the MetaMask wallet developed by ConsenSys, particularly related to its crypto exchange and staking functions.

Material by BeInCrypto

What else is known? One argument is that back in 2018, William Hinman, then director of the SEC’s Division of Corporation Finance, stated that ETH is not a security due to its decentralized structure and actual offer and sale procedures. The SEC has not officially abandoned this position, but Gary Gensler, who headed the commission in 2021, has repeatedly conceded that ETH could be classified as a security.

Thus, the SEC’s sudden change of heart without substantial new evidence or changed circumstances seems unreasonable and calls into question previous regulatory guidance, ConsenSys states.

The second argument is that the US Commodity Futures Trading Commission (CFTC) has consistently recognized ETH as a commodity. In a recent lawsuit with crypto exchange KuCoin, the CFTC definitively confirmed this view. The lawsuit stated that the exchange offered services with crypto assets that are commodities, including bitcoin, Ethereum, and Litecoin.

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The third argument mentions Ethereum’s decentralized structure and open protocol, which is in stark contrast to securities managed by a single entity. In addition to being mentioned by an SEC official in 2018, these features of the blockchain do not meet the criteria of a security under the Howey test. Under it, an asset is recognized as such if investors expect to receive income from a company managed by third parties.

The SEC cited the blockchain’s transition from the Proof of Work (PoW) consensus algorithm to Proof of Stake (PoS) as one of the reasons for the ETH reclassification as a result of The Merge upgrade on September 15, 2022. However, ConsenSys believes that this change does not affect the core of Ethereum’s operations. The company’s representatives note that the Hinman decision of 2018 was not based on the consensus algorithm, and therefore the latter is irrelevant in this matter.

The move to PoS does not bring elements typical of securities, such as dividends or ownership of a centralized enterprise. It is merely a technical evolution that improves efficiency and sustainability without changing the underlying decentralized nature of the platform, the company stressed.

In a lawsuit against the SEC filed on April 25, ConsenSys claims that the commission is waging a “campaign to seize control over the future of cryptocurrency” and its attempts to place ETH under its jurisdiction threaten to terminate the use of the Ethereum network in the United States.

Back on April 10, the developer received a Wells notice from the SEC warning of potential enforcement actions related to the swaps feature and MetaMask’s staking service. Additionally, the SEC stated that ConsenSys was operating as an unregistered broker-dealer.