SEC Has Secretly Considered Ethereum An Unregistered Security For A Year, New Filing Reveals

According to unredacted portions of a lawsuit lodged by Consensys against the U.S. Securities and Exchange Commission, the top securities regulator has internally viewed Ethereum, the world’s second-largest cryptocurrency, as an unregistered security for at least a year.

SEC Has Long Believed Ether Is A Security

Consensys’ suit has uncovered more information about the SEC’s stance on the regulatory status of Ethereum.

Citing court documents filed by Consensys, FOX Business reported on Monday that the Securities and Exchange Commission and its Chairman Gary Gensler “appear to have believed for at least a year” that Ethereum was an “unregistered security trading out of compliance with current federal regulations.”

The filings emerged from a complaint initiated by Ethereum software giant Consensys last week, which is contesting the SEC’s efforts to recategorize Ethereum as a security.

The complaint reveals that on March 28, 2023, Gurbir Grewal, the Commission’s Director of the Division of Enforcement, approved a formal order of investigation into “Ethereum 2.0,” authorizing SEC staff to probe and subpoena parties involved in the trading of Ether.

The FOX report states that the SEC was determined to keep the investigation a secret, with one source likening their experience to being forced to sign nondisclosure agreements. The parties who were sent the subpoenas were asked to keep them quiet if they wanted to access more information about the investigation. 

Unsurprisingly, Consensys was one of the companies that received subpoenas from the SEC. After filing a preemptive lawsuit against the SEC last week, the firm revealed it had also received a Wells notice from the agency earlier this month. 

How Ether Saga Could Affect Crypto

The disclosure that the five-member commission has secretly deemed ETH a security since 2023 is quite interesting, given Gensler has repeatedly deferred answering definitively on the commission’s position on the issue. He also refused to answer whether or not ETH is a security after Congressman Patrick McHenry asked him during a congressional hearing in April 2023. It’s worth mentioning that the SEC approved the “Ethereum 2.0” probe just days, five days before the hearing. 

Notably, shortly after Ethereum switched to a proof-of-stake (PoS) algorithm in 2022, Gensler indicated that PoS blockchains, which pay users token rewards for locking up their coins to secure the network, qualify as investment contracts and could be categorized as securities—albeit he did not cite ether specifically.

Under Gensler’s leadership, the SEC has lodged enforcement actions against several crypto exchanges, including Coinbase, Kraken, and Binance, for allegedly selling unregistered securities like Cardano’s ADA and Solana’s SOL to U.S. customers. Ethereum, however, has never been named outright as a security in any SEC lawsuit.

As to why the SEC is now seeking to class ether as a security, many believe it’s a strategic move to support its case for rejecting much-awaited spot ETH exchange-traded funds (ETFs).

Being the second-biggest blockchain by market value ($386.56 billion at today’s prices) and the home of the majority of decentralized finance (DeFi), DAOs, and non-fungible tokens (NFTs), reclassifying ETH as a security would definitely wreak havoc on the digital asset industry. With such a huge move, it’s difficult to predict where the cards will ultimately fall accurately.