SEC seeks to regulate ETH as a security, Consensys alleges in lawsuit

Consensys, the company behind MetaMask, filed a lawsuit against the Securities and Exchange Commission in a Texas court on Thursday.

The complaint alleges regulatory overreach by the SEC.

“The US Securities and Exchange Commission seeks to regulate ETH as a security, even though ETH bears none of the attributes of a security — and even though the SEC has previously told the world that ETH is not a security, and not within the SEC’s statutory jurisdiction,” Consensys wrote in the filing.

The SEC, under Chair Gary Gensler, is allegedly attempting to make a power grab, the company argued.

“In August 2021, within months of becoming the SEC’s Chair, Gensler vowed to ‘take [the agency’s] authorities as far as they go’ in pursuit of crypto. Soon thereafter, the SEC doubled the size of its crypto enforcement unit and ramped up investigations of participants in the digital asset market,” Consensys said.

The SEC, Consensys continued, already declared that ETH was not a security in 2018. At the time, then-SEC employee William Hinman gave a speech that clarified ETH didn’t constitute a security under the regulator’s rules.

“Recognizing Ethereum’s lack of any centralized managing authority, the SEC’s director of corporation finance stated that ‘current offers and sales of Ether are not securities transactions,’” the suit said.

“Hinman’s representations about ETH reflected the considered judgment of the SEC and its leadership,” the suit claimed.

The Texas suit also reveals that Consensys was served with a Wells Notice earlier this month, revealing that the agency could take potential action against the company at a later date.

“On April 10, 2024, the SEC staff sent Consensys a ‘Wells Notice’ stating its intent to imminently recommend that the Commission bring an enforcement action against Consensys for violating the federal securities laws through its MetaMask Swaps and MetaMask Staking products,” the filing said.

The SEC has already taken action against a number of other crypto firms including Binance, Terraform, Ripple and Coinbase, among others.

The lawsuit also reveals that the SEC has issued a number of subpoenas to Consensys, including one issued “just last month.”

While parts of the filing are redacted, it reveals the company was also issued three subpoenas in 2023 which sought information on the “role of Consensys, including its software developers, in a host of Ethereum Improvement Proposals related to the Ethereum Merge, the transition from a proof-of-work to a proof-of-stake validation mechanism.”

“Despite requests for clarification, the staff has declined to explain why the SEC believes Consensys’s sales of ETH may violate securities law or why the agency believes it now has jurisdiction over ETH,” the filing alleged.

The filing is the latest in a series of developments around the SEC potentially looking into ether. Earlier this year, Prometheum said it planned to launch a custody service with ether as its first asset, kicking off the potential debate.

Consensys founder Joseph Lubin, in a blog post, said that the SEC “only has jurisdiction over securities and up until recently has declared that ether is not and should not be treated as a security.”

An SEC spokesperson declined to comment on the suit.

In March, Fortune reported that the SEC was probing crypto companies over Ethereum.

At the time, the CFTC’s Rostin Behnam, said, “how this plays obviously is very critical…the issue is if we do have any action by the SEC, essentially validating [Prometheum’s] decision constituting ether as a security it will then put our registrants or exchanges who list either as a futures contract sort of in non-compliance of SEC rules as opposed to CFTC rules.”

Consensys, in March, filed a letter to the regulatory agency, urging it to approve to spot ether ETFs.

“We urge the SEC to recognize the advanced safeguards inherent in Ethereum’s design, which not only meet but exceed the exemplary security and resilience safeguards underlying Bitcoin-based ETPs that have previously been approved by the SEC,” the firm wrote.

This is a developing story.

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