SEC Sues Ethereum, Cryptocurrency Company Asks Court to Rule Token Is Not a Security

A bitter legal battle between cryptocurrency the industry and the Securities and Exchange Commission grew more intense on Thursday when Consensys, a major backer of the Ethereum blockchain, filed a lawsuit against the agency in federal court in Texas. The complaint seeks to ward off an impending SEC lawsuit against the company over features of its popular MetaMask wallet, but it also asks the court to resolve one of the biggest legal uncertainties looming over the cryptocurrency industry by stating that the Ethereum digital token, Ether, it’s not a security.

In its 34-page legal filing, Consensys uses dramatic language to argue that the SEC’s efforts to exercise jurisdiction over Ethereum are both illegal and a threat to blockchain technology more generally.

“The SEC’s illegal seizure of authority over ETH would spell disaster for the Ethereum network and Consensys. Any holder of ETH, including Consensys, would fear violating securities laws if they transferred ETH to the network,” reads the complaint . “This would end the use of the Ethereum blockchain in the United States, crippling one of the Internet’s greatest innovations.”

The new lawsuit comes as SEC Chairman Gary Gensler pursues an aggressive enforcement campaign against leading cryptocurrency companies, including CoinBase AND Uniswap. In recent weeks, this campaign has involved a wave of subpoenas asking companies and developers for documents relating to their relationships with the non-profit Ethereum Foundation, which supports the development of the blockchain.

Gensler’s tactics have angered many in the cryptocurrency industry who have complained that the SEC has failed to provide clear rules or create a regulatory model that takes into account the distinctive characteristics of blockchain technology. Gensler disputed this, arguing that existing securities laws are clear and sufficient and that the cryptocurrency industry refuses to comply with them.

The controversy over Ethereum has been particularly heated since the SEC has signaled several times in the past that blockchain tokens, such as Bitcoin, are not securities and therefore outside its jurisdiction. This includes a key speech of 2018 in which a senior official declared that Ethereum had become “sufficiently decentralized,” as did the agency’s decision last year to allow futures trading on Ethereum, an implicit acknowledgment that Ether is a commodity. In the meantime, the video surfaced of Gensler himself, in his role as a private citizen, who told hedge funds in 2018 that Ethereum is not a security.

These precedents, however, have failed to dissuade Gensler, who appears to be using a recent feature of Ethereum, known as staking, as the basis for the recent legal campaign.

A warning and a preventative cause

Consensys’ complaint filed Thursday reveals that the SEC earlier this month issued a so-called Wells Notice, which describes a formal letter warning that the agency intends to sue a company, and often leads to a settlement soon after . The complaint added that, in a related phone call, the SEC told Consensys that MetaMask was operating as an unlicensed broker-dealer.

According to Consensys, the SEC objects to MetaMask offering users a means to stake Ethereum on their behalf. Staking is a relatively new process for Ethereum, introduced on a blockchain basis in September 2022, which replaced energy-intensive mining with a system of validators who pledge collateral to become a trusted validator.

In an interview with Fortune, Consensys founder Joe Lubin described as “absurd” the theory that staking turned Ethereum from a commodity into a security.

“The act of staking is really just putting down a deposit so you can get paid to contribute labor and resources to help run the Ethereum protocol. Now they’re trying to turn it into some sort of investment contract,” he said Lubin.

The SEC did not immediately respond to a request for comment from Fortune on the lawsuit or the agency’s view on the legal status of staking.

Lubin also said that Gensler’s legal position appeared to be an attempt to halt the overall growth of cryptocurrencies and to justify the SEC’s blocking of pending applications by companies to launch Ethereum spot ETFs following the crisis. enormous popularity of Bitcoin ETFs.

“They’re trying to regulate a technology on its own merits, which the SEC shouldn’t be doing. They are trying to stifle certain types of innovation. And they’re trying because they probably see spot Ether ETFs as a gateway that will bring a lot of capital into our ecosystem,” Lubin said.

The Consensys lawsuit was filed in Texas, and fits into the cryptocurrency industry’s broader strategy to pursue legal challenges in the U.S. Court of Appeals for the Fifth Circuit. The circuit has shown greater skepticism about agency actions than other courts, and if the industry were able to win a favorable ruling, it would likely file an appeal to the Supreme Court.

It is unclear at this time what will happen if the SEC chooses to file a lawsuit on its own to follow up on the Wells Notice instead of resolving the issues with Consensys in Texas court.

The complaint itself asks the court for a series of additional rulings beyond declaring that Ethereum is not a security. These include statements that MetaMask is not an intermediary and that the SEC is violating the Administrative Procedure Act and the Constitution’s due process guarantees. It also seeks an injunction preventing the SEC from conducting any investigation on the premise that Ethereum is a security.

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