In the field of cryptocurrency, regulatory issues have always attracted much attention. Recently, the SEC (U.S. Securities and Exchange Commission) has once again become the focus of attention, this time targeting Ethereum 2.0. It is reported that the SEC has decided to end its investigation into Ethereum 2.0 and will not accuse the sale of Ethereum of securities trading. This news immediately attracted widespread attention and heated discussions in the cryptocurrency circle.
Ethereum 2.0 has been the focus of regulation since the investigation began over the past 14 months. However, a letter from Consensys on June 7 asking the SEC to confirm that Ethereum is a commodity when the Ethereum spot ETF is approved finally prompted the SEC to decide to close the investigation. This decision is not only a big win for Ethereum developers, technology providers, and industry participants, but also marks an important shift in the regulatory environment.
As the news of the SEC's announcement of the end of the investigation came out, the market reacted quickly. On June 19, Ethereum-related projects such as LDO topped the list of gains. On June 20, ENS, LDO, RPL, Pendle, CVX, MOG, PEPE and other projects in the Ethereum ecosystem also rose, showing the market's positive attitude towards the news.
However, this is not a panacea for many blockchain developers, technology providers, and industry participants. They are still suffering under the SEC's aggressive cryptocurrency enforcement regime. Consensys emphasized that their battle continues, especially on the issue of whether MetaMask Swaps and Staking violate securities laws. They hope to win much-needed regulatory clarity for the industry through litigation to allow this innovative industry to flourish.
Against this backdrop, it is important for us to take a closer look at the SEC’s investigation and the reasons behind its decision, as well as explore the potential impact of this incident on the cryptocurrency market and regulatory environment.
SEC launches investigation into Ethereum, a dispute that concerns the entire industry
On April 25, 2024, cryptocurrency giant Consensys filed a fiercely worded lawsuit in a federal court in Texas, accusing the U.S. Securities and Exchange Commission (SEC) of "overregulation" and trying to stop the $380 billion Ethereum (ETH). The lawsuit is based on the reason that "ETH does not have any securities attributes." However, to understand the cause of the SEC's investigation into ETH, we need to go back to the early days of Ethereum nearly a decade ago.
Consensys is a major backer of the Ethereum blockchain, a "layer 1" blockchain ledger that is similar to Bitcoin, but on which other protocols and applications can be built. Ethereum users conduct transactions using ETH, which is a form of compensation paid by network users to individuals around the world who run the network, known as "miners." Consensys has made significant contributions to the construction of Ethereum's backend infrastructure and has provided financial support for many smaller projects within the ecosystem. The most well-known is the MetaMask wallet it developed, which had about 30 million monthly active users as of February this year. Consensys' success is inseparable from the success of the Ethereum network, and the way ETH is sold has been controversial since its inception.
ETH was launched in July 2014 through an initial coin offering (ICO), similar to an IPO (initial public offering) in the traditional financial market. During the ICO boom, many projects raised a lot of money through this method, which attracted the attention of regulators. In July 2017, the U.S. Securities and Exchange Commission issued an investigative report, announcing that "virtual organizations are subject to the provisions of federal securities laws when offering and selling digital assets." Since then, regulators have begun to track down and prosecute ICO projects that do not comply with securities laws, causing the ICO market to cool down rapidly. However, tokens issued before the July 2017 report, including ETH, were actually exempted and avoided prosecution by the SEC.
Although the SEC did not take action against ETH's ICO issuance, its attention to the Ethereum network has not diminished. In particular, after Ethereum switched from proof of work (PoW) to proof of stake (PoS) in 2022, regulators paid more attention to the network. The PoS system allows miners to run the network by locking (staking) their ETH in exchange for payments from network users. The SEC believes that this staking mechanism constitutes an investment contract and falls within the scope of securities law.
In this context, Consensys's lawsuit seems to be a preemptive strategy. Facing the SEC's possible prosecution, Consensys hopes to gain more regulatory clarity through litigation. However, the SEC's historical record shows that it has almost never failed in cases involving unregistered securities. Although Consensys has advantages in financial and legal resources, their chances of winning are not great at the legal level.
The SEC’s definition of Ethereum has always been vague, leaving a series of historical problems
The U.S. Securities and Exchange Commission (SEC) made a clear statement in 2018 that Ethereum (ETH) is not a security. At the time, William Hinman, director of the SEC’s Division of Corporation Finance, stated in a speech that because Ethereum has no centralized management power, “current Ethereum sales are not securities transactions.” This statement reflects the SEC and its leadership’s thoughtful judgment on Ethereum and has been widely recognized.
The following year, the chairman of the Commodity Futures Trading Commission (CFTC) also declared Ethereum a commodity and therefore under the jurisdiction of the CFTC. Subsequent CFTC successors also reiterated that Ethereum is a commodity, not a security. During this period, the SEC and CFTC have repeatedly reiterated this position in public statements, congressional hearings, enforcement actions, and regulatory measures. Overall, the regulatory consensus is clear: Ethereum is not a security.
Nevertheless, this position has begun to change subtly in recent years. In December 2023, Bloomberg analyst James Seyffart pointed out in a podcast that the SEC recently approved Ethereum futures exchange-traded funds (ETFs), which may imply that the SEC recognizes Ethereum as a commodity rather than a security. In addition, SEC Chairman Gary Gensler publicly recognized Bitcoin as a commodity, while remaining relatively silent on Ethereum, which indirectly indicates that it no longer regards Ethereum as a security.
In May 2024, the SEC approved the Ethereum spot ETF, a decision that further demonstrated the SEC's recognition of Ethereum's non-securities attributes. Bloomberg ETF analyst James Seyffart and digital asset lawyer Justin Browder both believe that this approval implies that the SEC will not regulate Ethereum as a security. However, they also pointed out that pledged ETH may still be defined as a security and may be regulated by the SEC.
In April this year, Ethereum infrastructure company Consensys received a Wells notice from the SEC for its MetaMask trading and staking services. Financial lawyer Scott Johnsson pointed out that although the SEC approved the Ethereum spot ETF, it did not explicitly confirm Ethereum's non-security status in its approval order, which means that the SEC may still take action against Ethereum on the issue of staking.
According to Fox Business, SEC Chairman Gensler has believed for the past year that ETH is an "unregistered security" that does not comply with current federal regulations. In March 2023, SEC Enforcement Director Gurbir Grewal approved a formal investigation order to investigate the securities status of Ethereum and subpoenaed individuals and entities involved in the incident.
Through these developments, it can be seen that the SEC’s attitude towards Ethereum is changing, and this controversy will have a profound impact on Ethereum and the entire cryptocurrency market.
The end of the investigation does not mean that the US regulators fully recognize the legal status of ETH, and the market outlook still needs attention
On Thursday, April 25, 2024, U.S. time, Ethereum development company ConsenSys filed a lawsuit in the U.S. District Court for the Northern District of Texas, accusing the U.S. Securities and Exchange Commission (SEC) of attempting to characterize Ethereum as a security, even though the SEC had previously stated that Ethereum does not have the attributes of a security. ConsenSys believes that the SEC's move not only exceeds its authority, but also violates the procedural justice clause.
In the lawsuit, ConsenSys revealed that on April 10, 2024, SEC staff sent ConsenSys a "Welsh Notice" stating that it was about to initiate enforcement action against ConsenSys because it violated federal securities laws through MetaMask Swaps and MetaMask Staking products. The Wales Notice is usually sent to the investigated individuals or institutions at the end of the investigation to inform them that the SEC intends to take action against them for suspected violations of securities laws and give them the opportunity to explain or refute.
ConsenSys believes that the SEC's action is based on the fact that MetaMask's Swap and Staking functions involve transactions of unregistered securities, similar to the allegations against Coinbase, Binance, KuCoin and other exchanges. However, ConsenSys is very dissatisfied with the SEC's ambiguous attitude on whether tokens are securities, and decided to file a lawsuit in court first, accusing the SEC of overstepping its authority to regulate commodities that are not securities, and arguing that MetaMask has not violated federal securities laws.
Joseph Lubin, founder of ConsenSys, said in an interview with the media that although the SEC's decision to end its 14-month investigation into Ethereum is an exciting development, it is far from enough. He emphasized that the company will continue to advance the lawsuit against the SEC and strive for more legal transparency. Lubin pointed out, "There must be a better way to regulate the market than ambush. We hope that the hostility of some US regulators to cryptocurrencies will begin to weaken, and the national investor protection strategy will move away from the current guerrilla tactics."
On June 19, 2024, ConsenSys released a statement on Twitter: “Our fight continues. In our lawsuit, we also seek a declaration that providing user interface software MetaMask Swaps and Staking does not violate securities laws. It shouldn’t take a lawsuit to provide much-needed regulatory clarity to allow an industry that serves as the backbone of countless new technologies and innovations to flourish - but it is.”
In summary, the SEC's decision to end its investigation into Ethereum marks a temporary lull in a regulatory storm, but the road ahead is still full of uncertainty. ConsenSys's counterattack is not only about its own future, but is also likely to affect the regulatory landscape of the entire cryptocurrency industry. Will Ethereum continue to exist as an innovative financial tool? How will the balance between regulators and technological innovation be achieved? These questions still need time to answer.
