Consensys Sues SEC to Protect US Ethereum Users; Crypto Community Rallies

Consensys has taken legal action against the United States (US) Securities and Exchange Commission SEC via a 25 April filing in the US District Court for the Northern District of Texas, challenging what it perceives as an overreach of authority regarding Ethereum.

The company seeks a federal court ruling asserting that ETH is not a security.

Consensys pointed to the SEC's historical stance in its complaint, including statements from Chair Gary Gensler, affirming that ETH was not considered a security as far back as 2018:

"The U.S. Securities and Exchange Commission … seeks to regulate as a security, even though ETH bears none of the attributes of a security — and even though the SEC has previously told the world that ETH is not a security, and not within the SEC's statutory jurisdiction."

Consensys CEO Joseph Lubin expressed that the company is "fighting back against its [SEC] overzealous regulatory overreach.”

Lawyers at the company also echoed the same sentiments.

The company cautioned against the consequences of any reversal in the SEC's position, particularly for businesses that have structured their operations in alignment with established regulatory precedent.

It added:

"The SEC's unlawful seizure of authority over ETH would spell disaster for the Ethereum network, and for Consensys. holder of ETH, including Consensys, would fear violating the securities laws if he or she were to transfer ETH on the network. And the ability of anyone new to acquire ETH to use Ethereu's repository of decentralized applications and services would be extinguished. This would bring use of the Ethereum blockchain in the United States to a halt, crippling one of the internet's greatest innovations."

It argues that any investigation based on this premise would infringe upon its fifth amendment rights and the Administrative Procedures Act.

Additionally, Consensys contends that MetaMask does not qualify as a broker under federal law and that its staking service complies with securities regulations.

The company is seeking an injunction https://consensys.io/crypto-regulations/defend-ethereum to prevent the SEC from investigating or taking enforcement action related to MetaMask's Swaps or Staking functions.

Consensys Received Wells Notice from SEC

Consensys claimed that the SEC had focused its attention on the company's MetaMask wallet software, a platform enabling users to self-custody ETH and various other cryptocurrencies.

In their filing, Consensys disclosed receiving a Wells notice from the SEC on 10 April, signalling possible enforcement actions regarding its MetaMask Swaps and MetaMask Staking features.

Moreover, the SEC purportedly indicated during a phone conference that Consensys was functioning as an unregistered broker-dealer.

SEC Chair Gary Gensler's Inconsistent Stance on Ether

In its lawsuit, Consensys aimed not only at all five SEC commissioners in their official roles but also at Chair Gary Gensler for his inconsistent stance on Ether.

Despite asserting in 2018, during his tenure as a university professor, that Ether wasn't a security, Chair Gary Gensler avoided clarifying its regulatory status during an April 2023 hearing.

Consensys disclosed receiving three subpoenas in 2023 concerning information about ETH-related acquisitions, holdings, and sales.

The company stressed that the SEC's attempts to label Ether as a security undermine firms striving to comply with regulatory standards in good faith.

It sought legal redress by urging the court to declare "ETH is not a security under the Securities Act and that Consensys's sales of ETH are not sales of securities."

The complaint highlights the contradiction within the SEC's stance regarding Ethereum, asserting that its expanding jurisdiction contradicts previous statements acknowledging Ethereum as a commodity, not a security.

It cites former director Bill Hinman's 2018 speech and underscores the Commodity Futures Trading Commission's (CFTC) authority over Ethereum and its derivative products.

Consensys pointed out that CFTC Chair Rostin Behnam has said ether is a commodity.

And Joseph reiterated in a statement https://consensys.io/blog/consensys-suing-sec-to-defend-ethereum-ecosystem:

"We have time and time again witnessed the current SEC contradict itself with ever-changing views on the blockchain, consistently mischaracterizing this technology and what is built on it as a shallow and doomed investment scheme, rather than as the breakthrough technology it is."

Additionally, the lawsuit invokes the "major questions doctrine," a Supreme Court precedent that restricts federal regulators from overstepping their Congressional mandates.

While two judges have previously dismissed arguments related to the applicability of crypto under this doctrine in cases involving Terraform Labs and Coinbase, Consensys remains steadfast in its assertion of regulatory overreach.

Crypto Community Rallies and Shows Support

Paul Grewal, Chief Legal Officer at cryptocurrency exchange Coinbase, voiced his support for the lawsuit against the SEC.

Blockchain Association's CEO Kristin Smith chimed in as well.

Many others rallied too.