Doubts Surface About SEC’s Candidness on Ethereum

Back in April 2023, Securities and Exchange Commission chair Gary Gensler raised a ruckus by refusing at a congressional hearing to offer an opinion on whether Ethereum, a popular cryptocurrency, is a security. But was Gensler playing coy? The SEC’s view on this matters a great deal to crypto investors, and new reporting indicates Gensler has been hiding the agency’s true feelings on the question from the public for a while.

First, the distinction between commodities and securities may seem esoteric to casual observers, but it carries major significance in the financial world. Specifically, if what you own is a commodity – generally physical goods such as oil or gold – you don’t need to register it with the SEC. Securities, on the other hand, get stringent regulation from the agency in terms of financial reporting and trading obligations.

The classification of cryptocurrencies in general has defied easy explanation. But emerging information in a lawsuit involving the SEC and Ethereum software company Consensys suggests a consensus formed long ago around the agency that the digital token is a security. If true, it would lend support to the idea that the agency has been gaslighting the public about Ethereum’s status.

The hubbub about the SEC’s position relates to an internal document issued by Gurbir Grewal, the director of the SEC Division of Enforcement, in March 2023 announcing the launch of an investigation into Ethereum. The investigation was to cover “certain securities, including, but not limited to ETH, as to which no registration statement was or is in effect… and for which no exemption was or is available.” Grewal’s order came days before Gensler testified at a hearing of the House Financial Services Committee and dodged multiple questions about whether Ethereum is a security. The latest revelation prompted North Carolina Republican Patrick McHenry, who chairs the Financial Services Committee, to accuse Gensler of misleading Congress during the 2023 hearing.

Contrast Grewal’s depiction of Ethereum with comments in 2018 from Bill Hinman, then director of the SEC Division of Corporate Finance, who explicitly stated transactions involving Ethereum tokens “are not securities transactions.” So what might have changed the SEC’s stance? In 2022, Ethereum became a proof-of-stake crypto. This means users can tie their Ethereum coins to the Ethereum network. In doing so, participants can gain rewards, and the reasonable expectation of profits that arises would seem to check one of the boxes of the Howey test used to determine if an asset is a security.

All signs now point to the SEC bringing an enforcement action against Consensys, which filed the lawsuit in question as a pre-emptive strike against any efforts by the SEC to regulate Ethereum. By uncovering Gensler’s cageyness about Ethereum’s status, the software company would seem to have succeeded in muddying the waters for the SEC’s case.

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