Consensys Suit Is Pressing The SEC On Ether’s Security Status

Ethereum developer Consensys sued the U.S. Securities and Exchange Commission Thursday to pre-empt an expected enforcement action and force the agency to clarify its position on whether the ether cryptocurrency is a security.

The maker of the popular MetaMask digital-asset wallet, a software product that allows investors to take control of their own crypto rather than have it kept in custody by third parties, was put on notice earlier this month that the SEC planned to take action against it for illegally engaging in securities broker-dealer functions and offering unregistered securities. The Consensys suit seeks to forestall that threat and also asks the federal court to prohibit the regulator from asserting jurisdiction over ether, the token with a $380 billion market value, second only to bitcoin.

Founded in 2014 by Ethereum cofounder Joseph “Joe” Lubin, Consensys was last valued at $7 billion after a $450 million Series D funding round in March 2022 with backers including Temasek, SoftBank and Microsoft.

In its complaint, filed in the district court for the Northern District of Texas, the Fort Worth, Texas-based firm disclosed that on April 10 it received a Wells Notice from the SEC stating the agency’s intent to bring an enforcement action against Consensys for allegedly violating the Securities and Exchange Act of 1933, which prohibits the sale of unregistered securities, through its MetaMask Swaps and MetaMask Staking products.

The Swaps product lets MetaMask’s 100 million users trade digital assets through integrations with decentralized exchanges. The Staking service connects to popular services on Ethereum that lock up user tokens as collateral for the right to process transactions and safeguard the network. In exchange, these users receive more ether.

“This is an action that we've been contemplating for quite a while,” says Lubin. “It appears to us that the SEC is interested in slowing, harming or destroying Ethereum and in disconnecting American developers and users from the Ethereum network. We find it bizarre that Chair [Gary] Gensler hasn't been able to say, unlike so many before him in the SEC and the CFTC, whether ether is a security. So we wonder if the court can be made to finally rule on that issue.”

An SEC spokesperson declined to comment on Consensys’ lawsuit.

Uniswap Uniswap , the world’s most popular decentralized exchange, received a Wells Notice the same day as Consensys. When a company receives such an advisory, it has an opportunity to respond to the allegations. Ultimately, the five-member commission, headed by Gensler, votes on whether to proceed with a contemplated action. While Uniswap has pledged to fight its notice, as prior recipients such as Coinbase and Kraken have done, Consensys went further by trying to force a ruling on whether ether is a security.

The legal confrontation underscores long-standing frustration with the SEC's lack of clarity ether's status, particularly as the SEC faces a May deadline to rule on applications for spot ETFs based on the currency from the likes of BlackRock BlackRock and Fidelity, due in May. In suits against Coinbase, Kraken and Binance in the past 12 months, no less than 19 tokens that trade on those exchanges have been mentioned as unregistered securities. Ether was not one of them, despite being listed by all and accounting for a sizable trading volume.

A former senior SEC official told Forbes last June following the Coinbase and Binance lawsuits, “That's not good. The obligation is to be transparent with the marketplace regarding your view of these instruments.”

An argument is also being made that the SEC and Gensler personally have flip-flopped over ether’s status in recent years. In 2018, former SEC Director of Corporate Finance William Hinman explicitly stated in a speech that while ether may have previously been a security, the network is now sufficiently decentralized to no longer meet the standards of the Howey Test, which determines which transactions qualify as an "investment contract" and would therefore be subject to U.S. securities laws. The agency also approved the listing of exchange-traded funds that track futures contracts based on the price of ether in October, which the industry argues should not have happened if the SEC felt that ether was a security, similar to the situation with bitcoin.

When Gensler was a professor at the Massachusetts Institute of Technology in 2018, he said that ether, along with bitcoin, bitcoin cash, and litecoin, was not a security. However, he has since changed his tune to hint that ether should be considered a security, although he has not explicitly said so.

“I do think this is the case where we get the answer to whether ether falls within a definition of security once and for all,” says Paul Grewal, Coinbase’s chief legal officer. “I can't imagine any way that that can be resolved other than the court entering a judgment on that basic question. And I think everybody knows the answer: ether is not a security, it's a commodity.”

The price of ether showed minimal movement in response to the lawsuit news, down 0.8% to $3,142 in the past 24 hours.