Consensys, the parent company of the MetaMask wallet, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) last week in an attempt to prevent the SEC from classifying Ethereum as a security. A spokesperson for Consensys presented four main reasons on the 28th to support the argument that Ethereum should not be considered a security.
1. SEC’s historical position on Ethereum: In 2018, former Director of the SEC’s Division of Corporation Finance, William Hinman, stated that Ethereum is not a security. The SEC has not officially retracted this stance, and changing its view without substantial new evidence or changes in the environment appears baseless and contradictory to previous regulatory guidance.
2. CFTC’s classification of Ethereum as a commodity: The U.S. Commodity Futures Trading Commission (CFTC) has consistently regarded Ethereum as a commodity. In a recent civil enforcement action against the cryptocurrency exchange KuCoin, the CFTC explicitly classified Ether as a commodity. This classification reinforces the understanding and regulatory treatment of Ethereum as distinct from securities.
3. Decentralization and open protocols: The essence of Ethereum’s architecture lies in decentralization. Unlike typical securities that are managed by centralized entities, allowing insiders to profit from information asymmetry, Ethereum operates on a platform where all information is publicly accessible.
4. Irrelevance to the transition in consensus mechanism: Ethereum recently transitioned from proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism. This transition is cited as a potential reason for the SEC to reclassify Ethereum. However, this change does not affect the core nature of Ether or its classification as a non-security. The shift to PoS is merely a technological evolution that enhances efficiency and sustainability without altering the platform’s underlying decentralized characteristics.
If Ethereum is deemed a security, it could have a significant impact. Consensys warned that classifying Ethereum as a security could result in the abandonment of the work and efforts of many companies and developers, leading to the loss of billions of dollars in economic value and potentially causing mass unemployment in the United States.
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