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Ethereum

Ethereum Regulatory Saga: Court Filings Expose SEC Chair Gensler’s Stand

Ronaldo Marquez
by Ronaldo Marquez
1 year ago
·
Posted in Ethereum
Trusted Editorial content, reviewed by leading industry experts and seasoned editors. Ad Disclosure

Newly disclosed court filings have shed light on the belief of the US Securities and Exchange Commission (SEC) and its chairman, Gary Gensler, that Ethereum (ETH) is an “unregistered security” under the Howey Test, which is considered by the vast majority of crypto advocates to be an outdated legal framework for regulating crypto assets.  

According to a recent Fox Business report, the details emerged following Ethereum software company ConsenSys’s filing of an unredacted complaint against the SEC.

Is Ethereum An ‘Unregistered Security’?

According to the court filings, SEC Chair Gensler and the agency seem to have held the belief for at least a year that Ethereum was operating as an unregistered security, thereby violating federal regulations. 

The SEC’s Division of Enforcement, led by Gurbir Grewal, initiated a formal order of investigation into Ethereum’s status as a security on March 28, 2023. This investigation, known as “Ethereum 2.0,” involved the enforcement staff probing individuals and entities buying and selling ETH tokens.

Related Reading: Stagflation Vs. Crypto: Can Bitcoin And Ether Weather The Storm?

If the SEC were to classify Ethereum as a security, it would contradict previous guidance provided under former SEC Chairman Jay Clayton. In June of the preceding year, then-Director of Corporation Finance Bill Hinman stated that Ethereum and Bitcoin (BTC) were not considered a security. This announcement led to a 10% increase in ETH’s price. 

Moreover, the Commodity Futures Trading Commission (CFTC) classified ETH, the native token of the Ethereum network, as a commodity falling under its jurisdiction. 

Proof-Of-Stake Mechanism At Center Of Regulatory Debate

According to the report, the SEC’s investigation into Ethereum was conducted with “unusual secrecy,” with subpoena recipients required to sign confidentiality agreements. 

The motive behind this secrecy remains unclear, but the implications for the crypto market could be substantial if Ethereum, with its market cap of nearly $400 billion, is deemed a security.

Even before his testimony, Chairman Gensler’s reluctance to provide a definitive answer on Ethereum’s regulatory status raised concerns within the crypto industry. 

Some speculated that Ethereum’s transition to a “proof-of-stake” consensus mechanism in September 2022, where validators stake their Ethereum holdings, made it resemble a security more than the original “proof-of-work” mechanism used by Bitcoin. Gensler alluded to this notion, suggesting proof-of-stake tokens could trigger the Howey Test.

ConsenSys Takes On SEC

As Bitcoinist reported, software company ConsenSys filed a lawsuit against the SEC, accusing the agency of an “unlawful” power grab in attempting to classify ETH as a security. 

ConsenSys’ lawsuit against the SEC provides further insights into the ongoing investigation. Over the past year, the SEC has made multiple document requests, seeking detailed information about ConsenSys’ role in the transition to proof-of-stake and its acquisitions, holdings, and sales of ETH. 

Fox Business’s report further suggests that the SEC may also consider sales of ETH before The Merge, dating back to 2018, as potential securities. 

Related Reading: BlackRock Spot Bitcoin ETF Grinds To A Halt, Records Longest Stretch Without Inflows

The investigation has intensified in recent weeks, with ConsenSys receiving additional document subpoenas and a Wells notice indicating the SEC’s intent to take enforcement action against the firm for allegedly acting as an unregistered broker-dealer offering unregistered securities, including ETH, through its MetaMask wallet.

Ethereum
The 1-D chart shows ETH’s price trending downward over the past few days. Source: ETHUSD on TradingView.com

ETH is trading at $3,170, down more than 4% in the last 24 hours alone, after several failed attempts to consolidate above the $3,200 price level. 

Featured image from Shutterstock, chart from TradingView.com

Editorial Process for bitcoinist is centered on delivering thoroughly researched, accurate, and unbiased content. We uphold strict sourcing standards, and each page undergoes diligent review by our team of top technology experts and seasoned editors. This process ensures the integrity, relevance, and value of our content for our readers.
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Ronaldo Marquez

Ronaldo Marquez

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Ronaldo is a seasoned crypto enthusiast with over four years of experience in the field. He is passionate about exploring the vast and dynamic world of decentralized finance (DeFi) and its practical applications for achieving economic sovereignty. Ronaldo is constantly seeking to expand his knowledge and expertise in the DeFi space, as he believes it holds tremendous potential for transforming the traditional financial landscape.

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