Blockchain

Consensys, the target of the SEC’s assault on ETH, is fighting back

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Consensys, a major backer of the Ethereum network, claims that the US Securities and Exchange Commission (SEC) is attempting to seize power over Ethereum (ETH), the second largest blockchain by market capitalization. And so, naturally, the Ethereum development company sued, citing overregulation.

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“The U.S. Securities and Exchange Commission seeks to regulate ETH as a security, even though ETH has none of the attributes of a security – and even though the SEC has previously told the world that ETH is not a security, and does not fall within the statutory limitations of the SEC. jurisdiction,” according to the lawsuit filed Thursday in a Texas court.

The Consensys lawsuit is the growing trend of U.S. crypto companies and organizations willing to fight back against what they see as overzealous regulation. There are many unanswered questions regarding cryptocurrency law, and going on the offensive – perhaps even taking a case to the Supreme Court – would be one way to get answers.

Coinbase, for example, is spending heavily to contest a case brought by the SEC, and has itself turned to the courts to sue the agency seeking to gain clarity on key issues of cryptocurrency law. Kraken AND Uniswapalso facing lawsuits at the SEC, vowed to fight back — and LBRY, now defunct, literally fought until the end.

“Consensys joins some of the industry’s leading companies in a broad industry backlash against regulation through enforcement that is destructive to the future of the Internet. This is the responsibility of every Web3 company that has the capital and experience to navigate the power structures of the United States,” Lex Sokolinfounder of Generative Ventures and former Consensys employee, told CoinDesk in an interview.

“It is invigorating to see the best players in our field engaging with regulators to seek clarity in our exponentially growing industry,” dYdX Foundation CEO and former Consensys lawyer Charles d’Haussy told CoinDesk.

A key argument of Consensys’ lawsuit is that the SEC had already declared that ETH is not a security, as far back as 2018, when then-SEC Director William Hinman gave a speech stating so. He confirmed this position in 2021, when the first ETH futures were launched in the United States, placing the asset under the purview of the Commodities Futures Trading Commission (CFTC).

It can be argued that the SEC has had a fresh start in revaluing Ethereum after abandoning proof-of-stake mining. However, some experts note that the SEC approved additional futures products after this occurred, once again dampening the argument that ETH is a security.

When news first broke that the SEC was possibly investigating the nonprofit Ethereum Foundation and subpoenaing companies for information related to Ethereum’s development, many experts interviewed by CoinDesk agreed that it would be illegal to reverse course after so long . An entire multi-billion dollar industry has already been built based on the knowledge that ETH is a commodity.

It’s “the whole ‘you can’t just arbitrarily change your mind and hurt people hundreds of billions of dollars after a decade’ argument and also how the CFTC is likely to react,” Austin Campbell, an assistant professor at Columbia Business School and former advisor to stablecoin issuer Paxos, told CoinDesk in an interview at the time.

“The case we filed today is intended to preserve access for the thousands of developers, market participants and institutions that have a stake in the world’s second largest blockchain,” Joe Lubin, co-founder of Ethereum and CEO of Consensys, said in a statement. “The SEC cannot be allowed to arbitrarily expand its jurisdiction.”

According to the complaint, Consensys is trying to make three particular points: first, that ETH is a commodity; secondly, that the most popular Ethereum wallet, developed by Consensys, is not a broker; and finally obtain an injunction to leave the developers alone and preemptively prevent the SEC from suing the company.

In addition to receiving numerous subpoenas in 2023 and in recent weeks, Consensys court documents also revealed that the company received a Wells Notice on April 10, or an indication that the SEC is working to build a case. According to Bill Hughes, Senior Counsel and Director of Global Regulatory at Consensys, the company complied with “voluntary” requests for information.

Notably, the SEC asked for information not only about Consensys itself – including questions about its ETH holdings and government bond sales, and whether it contributed to the Ethereum (EIP) enhancement proposals that led to Ethereum’s move to proof of participation – but also questions about open source developers.

“The fact that they’re targeting open source protocol developers, certainly with the goal of building a case to apply, really struck us as out of bounds,” Hughes said, adding that Consensys was asked to provide lists of programmers and their GitHub repositories. “To some extent, they are redefining their regulatory jurisdiction and becoming a regulator of the Internet.

“This is not something we necessarily like to do or want to do. But to a large extent it is necessary to defend the use and development of Ethereum and all programmable blockchains in the United States,” she added.

While championing open source development may be a motivating factor, Hughes suggested that the company was forced to move by what they saw as a “notable acceleration in their aggressiveness with respect to Ethereum” and by their interactions with the agency that “has made it clear that they saw [Consensys] as the target of an Ethereum enforcement action.”

“If unopposed, they could do significant harm to our company in particular and the broader ecosystem. You get to a point where you can’t wait any longer,” she said.

“The ultimate goal of the lawsuit is to get the judge to agree and issue an order finding that Ethereum is a commodity, that the SEC acted beyond its statutory authority and in violation of the procedures it is required to maintain comply, and that is equal to The peer software that people use to read and transact with themselves on the blockchain is not a broker,” said Hughes.

But other CoinDesk experts spoke to say the case could have an even more ambitious vision.

“This Consensys lawsuit is a really big deal. They are positioning themselves to challenge the SEC’s authority to regulate cryptocurrencies,” University of Kentucky law professor Brian Frye said in an interview, noting that the case was filed in the 5th Circuit, which is “notoriously anti-government and anti-regulation. “

In other words, Consensys may be trying to build a case worth taking to the Supreme Court. Frye noted that this particular SCOTUS would likely be willing to “revisit and narrow” the scope of the Howey test, one of the ways the SEC determines whether something is a security and the basis for most of its litigation against crypto firms .

“Consensys hired Wachtell, which is the most expensive law firm in the world. That means they’re really, really serious,” Frye said. It’s worth noting that Consensys recently moved to Texas (its new listed address is at Let’s work) from New York, which would make it easier to establish jurisdiction in the 5th Circuit. “If that happens, there’s just no way SCOTUS won’t take the case,” Frye added.

For his part, Hughes denied the claim, saying Texas is business-friendly and home to a thriving crypto scene. (CoinDesk’s Consensus 2024 conference will be held in Austin in May, for example.) “In contrast, New York was getting a little colder,” he said.

In any case, Consensys’ legal maneuver certainly changes the dynamic between the company and the would-be regulator. His lawsuit doesn’t necessarily stop the SEC from making its own case, or from unilaterally declaring ETH a security (which it has been reluctant to do thus far), which would essentially make it illegal to spend ETH in the U.S.

But the situation is “significantly different” now that Consensys is a plaintiff rather than a mere target. At the very least it’s a way to show the world that the SEC’s Enforcement Division, and probably the leadership, “considers Ethereum to be safe” without having the courage to say so directly.

“We believe our action is appropriate because we believe we need to get the right answer and we are happy to raise the issue,” Hughes said.

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