Consensys Pursues Regulatory Clarity to Ensure the U.S. Remains at the Forefront of the Web3 Revolution

The SEC has no jurisdiction to regulate ether. The SEC’s regulatory powers are limited to securities, not commodities. Ether is a commodity, as confirmed by the CFTC, and the Ethereum blockchain is an internet protocol, not an investment scheme. As recently as October 2023, the SEC endorsed the CFTC’s classification of ether as a commodity by green-lighting ether ETFs tied to commodity futures that are regulated by the CFTC. This action by the SEC not only underscores the legal status of these ether futures contracts but also affirms ether’s standing as a commodity, aligning with the CFTC’s view. While ether is a commodity in which one can invest (like oil), it has far broader technological applications relating to the Ethereum blockchain.

The problem is, although the SEC affirmed the CFTC’s view of ether by publicly approving the ETFs in October 2023, in private the SEC has secretly been building an enforcement action to assert that ether is a security. It is taking two completely contradictory positions.

Furthermore, the SEC has also been covertly building a case to shut down applications that people around the globe rely upon to access and use the Ethereum blockchain – such as our MetaMask wallet. We aim to show that MetaMask is not a securities intermediary (i.e., a broker).

The facts are clear, the SEC has no jurisdiction to regulate Ether (a commodity), software interfaces built on Ethereum, or the Ethereum blockchain in general. Its attempt to do so is just the latest case of aggressive regulatory overreach by the agency, with the SEC trying to impose its own politicized agenda onto sectors far beyond U.S. capital markets.

This case is a response to a pattern of unwarranted SEC’s scrutiny of Consensys and its offering, but it does highlight broader SEC action that we feel showcases a clear ideological war on crypto.

In February of this year, Lejilex and the Crypto Freedom Alliance of Texas brought a complaint against the SEC on grounds of gross regulatory overreach. And in March, the DeFi Education Fund joined with Beba in a case against the SEC that, amongst other complaints, challenged the SEC’s “unwritten policy” on crypto rules as a violation of the Administrative Procedure Act. The case Consensys brings is the first to address the status of ether; this is a critically important component as ether has the potential to be a significant driver of the U.S. economy of the future. Unlawful SEC regulation, however, threatens to jeopardize this potential and impede the U.S.’s ability to use blockchain technology as the basis for countless new innovations and technologies.

The sector has had enough of the SEC’s aggressive regulatory overreach, and we are pleased to join others in standing up for the industry, other enterprises, and what is right.

Our complaint is about the SEC’s gross regulatory overreach when it comes to interfering with the cryptocurrency and digital asset space. But ether’s status is a core component of the case. While long taking the position publicly that ether is a commodity, the SEC has secretly been targeting blockchain companies, including Consensys, and software developers in an investigation focused on Ethereum. It’s an abuse of power for a financial regulator to use its investigatory powers to mount an attack on technology, and we need the judicial branch to compel this rogue agency to follow the law.

The CFTC recognizes ether as a commodity, a stance the SEC validated as recently as October 2023. And given ether is a commodity, the applications that people around the globe rely upon to access and use the Ethereum blockchain – such as our MetaMask wallet – are not securities intermediaries (brokers).

Therefore, the SEC has no jurisdiction to regulate ether (a commodity), software interfaces built on Ethereum, or the Ethereum blockchain in general.

SEC regulation of Ethereum would jeopardize the U.S.’ ability to use blockchain technology as the basis for countless new innovations, technologies, and products that this next generation of the Internet will unleash.

Consensys’ lawsuit seeks a declaration that (i) ether is not a security and that, accordingly, the SEC’s investigation into ether and Ethereum and any resulting enforcement actions exceed its regulatory authority; (ii) any enforcement action against Consensys premised on ether being a security or ether transactions being securities transactions would violate due process and fair notice; (iii) Consensys neither acts as a broker nor offers or sells securities through the Swaps and Staking functionality of its MetaMask wallet software; and (iv) any investigation or enforcement action against Consensys premised on it acting as a broker or offering and selling securities through its MetaMask software would exceed the SEC’s authority. Consensys further seeks an order enjoining the SEC from continuing to investigate or bringing an enforcement action with respect to its sales of ether and as to MetaMask.

The U.S. has been a standard-bearer for technological innovation and regulation since the breakout of the internet in the 1990s. Through its illegal overreach, the SEC risks destroying America’s position as a global technological leader by essentially ceding to foreign states the opportunity to use blockchain to contribute to an economy built off of a technological evolution of the internet.

Other regulators around the globe are approaching crypto and blockchain innovation in a far more pragmatic and optimistic manner than the U.S. BRICS countries are trying to move away from the Dollar by creating a new blockchain-based payment system and, in June 2023, the European Commission published a draft legislative proposal to develop a digital euro—potentially based on blockchain—as the eurozone central bank’s digital currency. On April 15, it was announced that Hong Kong regulators approved the launch of spot bitcoin and ether exchange-traded funds (ETFs).