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SEC's year-long investigation into ETH revealed in recent court filings

The US Securities and Exchange Commission (SEC) has been examining Ethereum’s possible classification as a security for more than a year, according to new court documents revealed on Monday.

Consensys, the company that sued the SEC recently, claims the SEC has been silently building a case against ether since early 2023. This move by the SEC seems to retract its prior public statement that the asset is a commodity.

The crypto company states that, in March 2023, Gurbir Grewal, the SEC’s enforcement director, authorized an official investigation into ether transactions. These official investigations enable the agency to issue subpoenas and gather sworn statements from witnesses.

Consensys, MetaMask, and the Ether debate

The timeline explains why SEC Chairman Gary Gensler declined to classify ether as a commodity or a security during his Congressional testimony in April 2023.

According to the legal complaint, Consensys got a Wells notice from the SEC. This notice indicated that the SEC intended to take action against them for allegedly violating securities laws, specifically with their MetaMask Swaps and Staking products.

The critical point to note here, however, is that this Wells notice does not expressly state any charges against Consensys related to ETH.

The SEC has singled out specific tokens, labeling them as securities in legal suits against exchange platforms. This happened in June 2023, when the SEC filed lawsuits against Coinbase and Binance. Each lawsuit listed over ten tokens as securities, but neither mentioned ETH specifically.

SEC’s stance on Ethereum

Consensys’ lawsuit asserts that the SEC officially stated that ETH was not a security back in 2018, with former SEC Director William Hinman confirming this. The stance was issued when ETH futures launched in the US, overseen by the Commodities Futures Trading Commission (CFTC).

Some argue that the SEC took another look at Ethereum after it switched to proof-of-stake. But, it’s important to note that the SEC permitted extra futures products after this switch. This seems to weaken the claim that ETH is a security.

When it was first revealed that the SEC might be probing an Ethereum non-profit organization, and asking companies for information about Ethereum’s development, many experts agreed that changing this stance now would be unlawful. This is because an industry has already been established based on the belief that ETH is a commodity.

Consensys’ complaint raises three main concerns: First, it asserts that ETH is a commodity, not a security. Second, it steadfastly maintains that its widely utilized Ethereum wallet does not function as a broker. Lastly, it requests a court order to shield developers and prevent potential lawsuits from the SEC.

Consensys received numerous subpoenas in 2023 and even more recently. According to their court documents, Consensys also received a Wells Notice on April 10. This means that the SEC is constructing a case against them. Consensys’ Senior Counsel and Director of Global Regulatory, Bill Hughessaid the company provided the information the SEC asked for.

Significantly, the SEC has not only sought information on Consensys, such as details about its ETH assets and treasury sales and its possible contribution to the changes that brought about Ethereum’s shift to proof-of-stake, but also about open-source developers.

The investigation of open-source protocol developers has caught the attention of many, with Hughes pointing out that the SEC seems to be building an enforcement case. This move strays significantly from their usual bounds.

Hughes shared that Consensys had been requested to present lists of coders along with their GitHub repositories.

This action suggested to Hughes and others that the SEC was expanding and redefining their regulatory sphere to become a regulator of the Internet. The speaker regretted their actions, clarifying that they weren’t driven by personal desire but saw them as necessary steps to safeguard Ethereum and other programmable blockchains in the US.