Consensys sues SEC, seeks court declaration that Ethereum is not a security

Consensys filed a lawsuit against the US Securities and Exchange Commission (SEC) on April 25 over allegations that the watchdog has overstepped in its authority in trying to regulate Ethereum (ETH).

The lawsuit alleges that the SEC aims to unlawfully regulate Ethereum through enforcement actions against various companies, including Consensys, constituting “aggressive and unlawful” overreach.

Consensys intends to prove that the SEC does not have legal authority to regulate ETH, user-controlled software interfaces, or the Ethereum blockchain more broadly.

Consensys wants the court to declare that Ethereum is not a security and that the firm neither acts as a broker nor sells securities by operating MetaMask. It also wants the court to declare that legal action or investigations based on those grounds would exceed the SEC’s authority.

Furthermore, Consensys is seeking an injunction that prevents a continued SEC investigation of, or future enforcement action against, its MetaMask wallet and related ETH sales. The SEC warned Consensys of potential legal action through a Wells notice and phone conference on April 10. Metamask’s staking and swap features are areas of concern.

Three-prong argument

The lawsuit has three prongs. Consensys first asserted that the SEC only has jurisdiction over securities and has previously agreed ETH is not a security.

Consensys secondly asserted that the SEC’s approach wrongly classifies non-financial platforms as financial applications. It argued that ETH supports applications on Ethereum and, therefore, has non-financial utility separate from its role as a commodity. The firm also said the SEC has no authority to regulate the internet’s technological development in such a way.

Finally, Consensys asserted that MetaMask and other applications are not securities brokers but rather allow users to buy, sell, and transfer ETH through broader access.

The case, filed in the US District Court for the Northern District of Texas, names the SEC and its chair, Gary Gensler, as defendants.

Broader implications

Whether the SEC considers Ethereum a security is a long-standing issue, and the matter is relevant to the compliance efforts of any company or project that handles ETH.

Fortune reported on March 20 that the SEC had subpoenaed numerous crypto companies that have engaged with the Ethereum Foundation. The Ethereum Foundation itself seemingly received a subpoena from an unknown state authority at the time of the report.

One company in the Ethereum ecosystem, Uniswap, received a Wells notice on April 10, warning of potential charges. However, it is unclear if the SEC’s potential charges against Uniswap are directly related to ETH.

Whether the SEC treats ETH as a security could also impact the approval of spot Ethereum ETFs. SEC chair Gary Gensler identified Bitcoin as a non-security commodity upon the approval of spot Bitcoin ETFs in January and emphasized that the current decision only applied to the asset.

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