The SEC approved Ether futures ETFs in October 2023 despite its ongoing investigation into whether ETH comprises a security.
Newly published court filings from Consensys’s legal challenge against the U.S. Securities and Exchange Commission appear to undermine the SEC’s bid to classify Ether as a security.
An unredacted version of Consensys’s complaint against the SEC published on April 29 reveals that Gurbir Grewal, the head of the SEC’s Division of Enforcement, approved a formal order of investigation into whether Ethereum comprises a security on March 28, 2023.
The “Ethereum 2.0” investigation was approved by a five-member SEC commission on April 13, 2023, authorizing SEC staff to subpoena entities involved in the ETH trading, including Consensys, the company behind the popular MetaMask Ethereum wallet.
However, the SEC then greenlit nine Ether futures exchange-traded funds (ETFs) on an accelerated basis — requiring that the regulator consider the “public interest and the protection of investors. As such, web3 advocates believe the SEC’s decision to approve the ETFs after several months of investigating Ether’s potential status as a security precludes the regulator from now claiming that ETH is in fact a security.
“[The SEC] internally claimed to be reviewing ETH as a security prior to the approval date,” tweeted Adam Cochran, an investor at Cinneamhain Ventures. “That means: ETH is a commodity, Gensler knows this and still goes after it for political gain, or, the SEC is so poorly run they accelerated ETFs for an unregistered [Security Futures Product] on an unregistered security while investigating it.”
Tom Emmer, a Congressman and House Majority Whip, also criticized Gary Gensler, the chairman of the SEC, for refusing to state whether Ether comprises a security during a congressional hearing roughly one week after the Ethereum 2.0 investigation was launched.
“Newly released court documents show that the SEC’s enforcement team was directed, just weeks before Gensler’s congressional testimony, to proceed as though ETH is a security,” Emmer said. “This regulatory dishonesty is reprehensible – it’s tainting our great capital markets, harming investors, and threatening U.S. global leadership.”
SEC vs Ethereum
Consensys sued the SEC last week in a bid to obtain a court ruling that Ether does not comprise a security. The move followed the SEC sending Consensys a Wells Notice — which precedes a formal complaint — on April 10.
The legal battle seeks to bring the SEC’s crusade against Ethereum under Gensler to an end, with Gensler arguing that tokens issued by Proof of Stake blockchains comprise securities in recent years. However, Gensler’s assertion concerning Ether contradicts the SEC’s previous stance regarding Ether.
In June 2018, Jay Clayton, the then-chairman of the SEC, said that Ethereum and Bitcoin were “sufficiently decentralized” and thus do not comprise securities. In 2019, the Commodity Futures Trading Commission followed up by stating that Ether is a commodity and falls under its regulatory jurisdiction.
In its lawsuit, Consensys noted that its business was built against the backdrop of those regulatory pronouncements.
Unusual Secrecy
According to a report from Fox Business citing unnamed “sources with direct knowledge of the matter,” the SEC’s Ethereum 2.0 investigation was conducted with abnormal secrecy.
The sources claim subpoena recipients were instructed to sign confidentiality agreements before receiving information concerning the progress of the investigation, with one source comparing such to a non-disclosure agreement.
