Developer Consensys, known for its popular blockchain wallet Metamask, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) last week (4/26), alleging that the SEC’s attempt to classify Ether (ETH) as a security is an “unlawful seizure” of Ethereum.
Consensys presented four main arguments to the SEC, explaining why Ethereum should not be considered a security.
Reason 1: SEC’s Past Statements and Positions
In 2018, former SEC Director of the Division of Corporation Finance, William Hinman, stated in a famous speech that Ethereum is not a security.
Hinman stated, “Bitcoin is not a security because it is decentralized; Ether is also not a security because Ethereum is decentralized as well. While the initial offering of cryptocurrencies may have started as securities, over time, once they become sufficiently decentralized, there is no need to consider them as securities and they may become more akin to commodities.”
Although this statement was ultimately considered as his “personal opinion,” it became a key factor in overturning the SEC’s classification of Ethereum as a security.
A spokesperson for Consensys pointed out that Hinman’s 2018 viewpoint remains unchanged in terms of theory and openness. The only difference now is the increase in developers and Ethereum users. Thus, the sudden change in the SEC’s stance, without any new substantial evidence or changes in circumstances, is completely unfounded and can be seen as challenging past regulatory practices.
Reason 2: Commodity Classification by the U.S. Commodity Futures Trading Commission (CFTC)
The U.S. Commodity Futures Trading Commission (CFTC), another regulatory body in the United States, is primarily responsible for overseeing the U.S. derivatives market, including futures trading. In a recent enforcement action against the cryptocurrency exchange KuCoin, the CFTC explicitly classified Ethereum as a “commodity” rather than a security.
Official documents state that KuCoin solicits and accepts orders, accepts property as margin, operates facilities for futures, swaps, leveraged, margined, or financed retail trades. This classification supports a broader market understanding and regulation of Ethereum as a commodity, further emphasizing its role and function distinct from securities.
According to Consensys, the positions and attitudes of both the SEC and the CFTC in the past have strengthened the argument that Ethereum is more suitable as a commodity than a security. Consensys also noted that the SEC has consistently stated that Ethereum is a commodity over the years. Looking at what both the CFTC and SEC have said in the past leads to the correct conclusion.
Reason 3: Decentralization and Open Protocols
One of Ethereum’s major characteristics is decentralization, which sets it apart from securities.
Securities are usually managed by a central entity and lead to information asymmetry that benefits certain insiders. Ethereum, on the other hand, operates on a platform where all information is publicly accessible, and its governance and protocol operations are not dependent on any centralized organization. This not only protects investors from the impact of information asymmetry but also serves as a significant point of differentiation from securities.
Consensys states that Ethereum has no central point of failure or group with insider information privileges, making it undoubtedly decentralized.
Reason 4: Transition of Consensus Mechanisms Has No Impact
One of the reasons the SEC classified Ethereum as a security is because the Ethereum network is continuously upgrading and transitioning from Proof of Work (PoW) to Proof of Stake (PoS) mechanism in 2022.
The SEC believes that under the PoS mechanism, the issuance of Ethereum will increase, and theoretically, there is no limit to the total supply, making it a renewable digital asset. People holding Ether can also earn rewards through staking, and the more Ether one holds, the greater their voting rights in Ethereum-related issues, which seems similar to securities.
However, Consensys argues that the transition from PoW to PoS consensus mechanism does not fundamentally change the core nature of Ethereum’s operations. The transition to PoS does not introduce elements of securities, such as dividends or ownership in centralized companies. It is merely a technological evolution that improves efficiency and sustainability without changing the platform’s foundation and decentralized characteristics.
Consensys also emphasized that Hinman’s 2018 speech did not consider PoW or PoS as relevant factors in determining whether Ethereum is a security, as the consensus mechanism is insignificant.
SEC’s Accusation: Consensys is an “Broker-Dealer”
Consensys filed the lawsuit against the SEC after receiving a “Wells Notice” on April 10, accusing MetaMask wallet of being an unregistered broker-dealer and violating securities laws.
A Wells Notice is an informal notification issued by the SEC to publicly traded companies before initiating civil proceedings. Companies have 30 days to refute the allegations and present arguments proving their innocence. The SEC has six months from the date of the notice to decide whether to file a lawsuit and take enforcement action.
After receiving the notice, Consensys quickly denied that the company acts as a broker-dealer and stated that the cryptocurrency wallet is simply a “user-friendly” interface. The team does not hold customers’ digital assets or execute any trading functions.
Consensys also warned on the community platform X that if the SEC successfully classifies Ethereum as a security, the years of work and billions of dollars of economic value created by many companies and developers will be destroyed, potentially leading to mass unemployment in the United States.
References:
beincrypto, coindesk
Proofread by: Gao Jingyuan