Ethereum
The SEC has Ethereum in its crosshairs. But does the agency think Ether is a security?
For weeks, speculation has been growing that the Securities and Exchange Commission is preparing to cross the crypto Rubicon and declare Ethereum, the second-largest cryptocurrency, a security. As the deadline for a decision on spot Ether ETFs approaches, the move appears to be the last option for an agency seemingly determined to find reasons to reject crypto products, even though previous high-ranking staffers had argued that Ether was a commodity and out of his wheelhouse. The implications would be catastrophic for the entire crypto industry, with even stalwarts like loyalty offering trading services for Ether.
Confirmation appears to have come last Thursday when Consensys, one of Ethereum’s early developers and the company behind the popular MetaMask wallet –deposit a lawsuit against the SEC, revealing that it received a Wells Notice and was the subject of a year-long investigation into the security state of Ethereum. And then, on Monday, Consensys refiled its complaint, removing some sections that suggested the SEC officially believed Ether was a security. The compelling evidence, it turned out, was a formal order to initiate an investigation, signed by Enforcement Director Gurbir Grewal in April 2023, into possible offers and sales of “certain securities, including including, but not limited to, ETH.”
The long-awaited evidence was explosive. SEC Chairman Gary Gensler refused to take a position on Ether’s security status, including during questioning from House Financial Services Committee Chairman Patrick McHenry (R-N.C.) , just a few days after the formal secret order, as well as when I interviewed him last November. Despite this lack of clarity, the SEC authorized the launch Ether futures ETFs last October, implying that Ether is not an unregistered security. Additionally, despite launching a number of lawsuits against crypto companies since April 2023, the agency has never named Ether as collateral in its complaints. Predictably, the revelation sparked the ire of the crypto industry and beyond, with McHenry Tweeter that Gensler “knowingly misled Congress.”
The whole situation seemed strange, even by the bizarre standards of the SEC versus crypto war, where reality is often obscured behind layers of bluster and exaggerations. Why would the SEC privately take such an inflammatory stance and share it with one of its main targets, while publicly contradicting itself?
Part of the confusion arises from the importance of a formal order which, according to the SEC, application manual, commission staff plans must be reviewed by the Director of Law Enforcement and are the necessary first step in an investigation that authorizes staff to subpoena witnesses and collect evidence. As Lowenstein Sandler partner Christopher Gerold confirmed, formal orders are not “conclusive,” meaning they do not represent legal conclusions. Rather, it would be part of a Wells notice, which notifies potential defendants of the conclusion of an investigation.
In other words, just because the formal order appears to indicate that the SEC considers ETH to be a security at the start of the investigation does not mean that is the agency’s official position . This would also provide a more generous explanation for why Gensler did not take a position on the status of ETH in April 2023 – this was early in the investigation, with the agency deciding whether it would deviate from the point of view of previous commissions. And, according to a person close to it, the Wells notice received by Consensys last April contained no mention that ETH was a security.
Of course, this could change if and when the SEC files a lawsuit against Consensys, which will focus on MetaMask’s status as an unregistered broker, as well as its staking products. The complaint could very well name ETH as one of the unregistered securities offered by MetaMask. And, as Lee Reiners, a professor at the Duke Financial Economics Center, told me, all indications are that the SEC is designating ETH as an unregistered security to justify rejecting Ether ETFs.
Yet, contrary to popular opinion in the crypto industry, the agency has yet to take a position. “It is premature and inaccurate to claim that the SEC has decided anything at this point,” Reiners said. But don’t be surprised if we finally get an answer in the coming weeks.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
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