Key Points
New court filings reveal that the US Securities and Exchange Commission (SEC) and its chairman, Gary Gensler, consider Ethereum (ETH) to be an “unregistered security” under the Howey Test. The Howey Test is viewed by many crypto advocates as an outdated legal framework for regulating crypto assets. These details have emerged following a complaint filed by Ethereum software company ConsenSys against the SEC.
SEC’s View on Ethereum as an ‘Unregistered Security’
The court filings suggest that Gensler and the SEC have believed for at least a year that Ethereum has been operating as an unregistered security, thereby breaching federal regulations. The SEC’s Division of Enforcement, under the leadership of Gurbir Grewal, launched an investigation into Ethereum’s status as a security on March 28, 2023. This investigation, known as “Ethereum 2.0,” involved the enforcement staff examining individuals and entities trading ETH tokens.
If the SEC were to classify Ethereum as a security, it would contradict previous guidance provided under former SEC Chairman Jay Clayton. In June of the previous year, then-Director of Corporation Finance Bill Hinman stated that Ethereum and Bitcoin (BTC) were not considered a security. This announcement led to a 10% increase in ETH’s price. Additionally, the Commodity Futures Trading Commission (CFTC) categorized ETH, the native token of the Ethereum network, as a commodity falling under its jurisdiction.
The SEC’s investigation into Ethereum was conducted with “unusual secrecy,” with subpoena recipients required to sign confidentiality agreements. The motive behind this secrecy remains unclear, but the implications for the crypto market could be substantial if Ethereum, with its market cap of nearly $400 billion, is deemed a security.
Even before his testimony, Chairman Gensler’s reluctance to provide a definitive answer on Ethereum’s regulatory status raised concerns within the crypto industry. Some speculated that Ethereum’s transition to a “proof-of-stake” consensus mechanism in September 2022, where validators stake their Ethereum holdings, made it resemble a security more than the original “proof-of-work” mechanism used by Bitcoin. Gensler suggested that proof-of-stake tokens could trigger the Howey Test.
ConsenSys’s Lawsuit Against SEC
ConsenSys, a software company, filed a lawsuit against the SEC, accusing the agency of an “unlawful” power grab in attempting to classify ETH as a security. ConsenSys’ lawsuit against the SEC provides further insights into the ongoing investigation. Over the past year, the SEC has made multiple document requests, seeking detailed information about ConsenSys’ role in the transition to proof-of-stake and its acquisitions, holdings, and sales of ETH.
The SEC may also consider sales of ETH before The Merge, dating back to 2018, as potential securities. The investigation has intensified in recent weeks, with ConsenSys receiving additional document subpoenas and a Wells notice indicating the SEC’s intent to take enforcement action against the firm for allegedly acting as an unregistered broker-dealer offering unregistered securities, including ETH, through its MetaMask wallet.
ETH is currently trading at $3,170, down more than 4% in the last 24 hours alone, after several failed attempts to consolidate above the $3,200 price level.
