SEC Labels Ethereum as Security, Consensys Sues

The U.S. Securities and Exchange Commission (SEC) has been regarding Ethereum as a security internally for more than a year, revealed through new details from a lawsuit filed by software giant Consensys against the SEC. This information came to light this morning when previously redacted sections of the lawsuit were made public.

According to the complaint, on March 28, 2023, Gurbir Grewal, the SEC’s Director of the Division of Enforcement, issued a Formal Order initiating an investigation into “Ethereum 2.0.” This order allowed SEC employees to probe and subpoena those involved in the buying and selling of ETH.

Notably, the document explicitly categorizes Ethereum as a security, stating the need to investigate “certain securities, including, but not limited to ETH, for which no registration statement was or is in effect… and for which no exemption was or is available.”

The implications of this classification are profound, as SEC Chair Gary Gensler has consistently evaded direct questions about the agency’s stance on Ethereum. Despite repeated inquiries, including as recently as last month, Gensler has declined to clarify the SEC’s position on ETH.

As news of the SEC’s internal classification of Ethereum as a security broke, the cryptocurrency’s price reacted negatively. Ethereum was trading at $3,143.69, marking a 5% decline from the previous day, though only a 1.5% decrease from last week.

The crypto community has long hoped that Ethereum, the world’s second-largest cryptocurrency and the backbone of the extensive Ethereum ecosystem, would be deemed a commodity by U.S. regulators, similar to Bitcoin. This classification would significantly ease ETH’s integration into the American economy. Previously, the Commodity Futures Trading Commission (CFTC) has openly classified Ethereum as a commodity.

The SEC’s intensified scrutiny appears to have escalated post-Ethereum’s September 2022 merge, which transitioned the network to a more energy-efficient proof of stake consensus mechanism. This new structure allows for ETH staking, providing financial incentives that the SEC views with skepticism.

Over the past year, the SEC has aggressively increased its actions against parties involved with Ethereum. In February, the Ethereum Foundation was subpoenaed by an unnamed state authority, and several American crypto companies have faced inquiries related to their interactions with the Ethereum Foundation.

In response, Consensys has launched a preemptive lawsuit against the SEC, challenging the regulator’s authority to classify Ethereum as a security, asserting that such classification is unfounded.