SEC sued over Ethereum, crypto firm asks court to state token is not a security

In its 34-page legal filing, Consensys uses dramatic language to argue that the SEC’s efforts to exercise jurisdiction over Ethereum are both illegal and pose a threat to blockchain technology more generally.

“Illegal seizure of the SEC’s authority over ETH would be a disaster for the Ethereum network and for Consensys. Every ETH holder, including Consensys, would fear violating securities laws if they moved ETH onto the network,” the complaint states. “This would end use of the Ethereum blockchain in the United States, crippling one of the internet’s greatest innovations.”

The new lawsuit comes as SEC Chairman Gary Gensler leads an aggressive enforcement campaign against major crypto companies, including Coinbase and Uniswap. In recent weeks, that campaign has resulted in a wave of subpoenas demanding documents from companies and developers related to their dealings with the nonprofit Ethereum Foundation, which supports blockchain development.

Gensler’s tactics have angered many in the crypto industry who have complained about the SEC’s failure to provide clear rules or create a regulatory model that accounts for the distinct characteristics of blockchain technology. Gensler disputed this, saying existing securities laws are clear and sufficient and the crypto industry refuses to comply with them.

The controversy over Ethereum has been particularly heated since the SEC has repeatedly signaled in the past that blockchain tokens, like Bitcoin, are not securities and therefore do not fall under its jurisdiction. This includes a landmark 2018 speech in which a top official said Ethereum had become “sufficiently decentralized” as well as the agency’s decision last year to allow Ethereum futures trading – an implicit acknowledgment that Ether is a commodity. Meanwhile, a video surfaced of Gensler himself, in his role as a private citizen, telling hedge funds in 2018 that Ethereum is not a security.

These precedents, however, have failed to deter Gensler, who appears to be using a recent feature of Ethereum, known as staking, as a motive for his recent legal campaign.

A warning and a preventive trial

The Consensys complaint filed Thursday reveals that the SEC earlier this month issued a so-called Wells Notice, which describes a formal letter warning that the agency intends to sue a company, and often leads to a settlement shortly thereafter. The complaint added that, in a related phone call, the SEC told Consensys that MetaMask was operating as an unlicensed broker-dealer.

According to Consensys, the SEC objects to MetaMask offering users a way to stake Ethereum on their behalf. Staking is a relatively new process for Ethereum, introduced blockchain-wide in September 2022, which replaced energy-intensive mining with a system of validators who pledge collateral in order to become a trusted validator.

In an interview with Fortune, Consensys founder Joe Lubin called the theory that staking transformed Ethereum from a commodity into a security “absurd.”

“The act of staking is actually putting down a bond so that you can get paid to contribute labor and resources to help run the Ethereum protocol. Now they’re trying to turn this into some sort of investment contract,” Lubin said.

The SEC did not immediately respond to a request for comment from Fortune on the lawsuit or the agency’s view on the legal status of staking.

Lubin also said that Gensler’s legal position appeared to be an attempt to stop the overall growth of crypto and justify the SEC’s blocking of pending applications from companies to launch spot ETFs for Ethereum following the huge popularity of Bitcoin ETFs.

“They are trying to regulate a technology on its merits, which is something the SEC should not be doing. They try to stifle certain types of innovation. And they’re trying to do that because they probably view Ether spot ETFs as a floodgate that’s going to bring a lot of capital into our ecosystem,” Lubin said.

The Consensys lawsuit was filed in Texas, part of a broader strategy by the crypto industry to launch possible appeals to the United States Court of Appeals for the Fifth Circuit. The Circuit has been more skeptical of the agency’s actions than other courts, and if the industry can secure a favorable ruling, it would likely launch an appeal to the Supreme Court.

It is not yet clear what would happen if the SEC chose to file a lawsuit itself to address the Wells opinion instead of resolving issues with Consensys in Texas court.

The complaint itself asks the court for a number of additional rulings beyond the declaration that Ethereum is not a security. These include statements that MetaMask is not a broker-dealer and that the SEC is violating the Administrative Procedure Act and the Constitution’s due process. It also seeks an injunction prohibiting the SEC from conducting investigations based on the premise that Ethereum is a security.