Consensys filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) on April 25 following allegations that the watchdog overstepped its authority in trying to regulate Ethereum (ETH).
The lawsuit alleges that the SEC aims to illegally regulate Ethereum by taking enforcement action against various companies, including Consensys, which constitutes an “aggressive and unlawful” attack.
Consensys intends to prove that the SEC does not have the 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 company does not act as a broker or sell securities by operating MetaMask. She also wants the court to declare that a lawsuit or investigation based on these grounds would exceed the SEC's authority.
Additionally, Consensys is seeking an injunction that prevents further SEC investigation or future enforcement action against its MetaMask portfolio and associated ETH sales. The SEC warned Consensys of possible legal action through a Wells Notice and an April 10 conference call. Metamask's staking and trading features are areas of concern.
Three-pronged argument
The trial has three parts. Consensys initially claimed that the SEC only had jurisdiction over securities and had previously agreed that ETH was not a security.
Consensys then claimed that the SEC's approach incorrectly classifies non-financial platforms as financial applications. He argued that ETH supports applications on Ethereum and therefore has a non-financial utility separate from its role as a commodity. The company also said the SEC has no authority to regulate the technological development of the Internet in this way.
Finally, Consensys claimed 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 U.S. District Court for the Northern District of Texas, names the SEC and its chairman, Gary Gensler, as defendants.
Wider implications
Whether the SEC considers Ethereum to be a security is a long-standing question, and the question is relevant to the compliance efforts of any company or project that manages ETH.
Fortune reported on March 20 that the SEC had subpoenaed numerous crypto companies that engaged with the Ethereum Foundation. The Ethereum Foundation itself appears to have received a subpoena from an unknown state authority at the time of writing.
A company in the Ethereum ecosystem, Uniswap, received a Wells Notice on April 10, warning of potential fees. However, it is unclear whether the SEC's potential charges against Uniswap are directly related to ETH.
The fact that the SEC treats ETH as a security could also impact the approval of Ethereum spot ETFs. SEC Chairman Gary Gensler identified Bitcoin as an insecure product when approving spot Bitcoin ETFs in January and emphasized that the current ruling only applied to the asset.