The bitter legal battle between the crypto industry and the Securities and Exchange Commission intensified Thursday when Consensys, a major backer of the Ethereum blockchain, filed a lawsuit against the agency in Texas federal court. The complaint seeks to head off an upcoming SEC lawsuit against the company over the features of its popular MetaMask wallet, but also asks the court to resolve one of the biggest legal uncertainties looming over the crypto industry by declaring that Ethereum’s digital token, Ether, is not valuable. paper.
In its 34-page legal document, Consensys uses strong language to argue that the SEC’s efforts to assert jurisdiction over Ethereum are both illegal and a threat to blockchain technology more broadly.
“The SEC’s illegal takeover of ETH will be disastrous for the Ethereum network and Consensys. Every ETH holder, including Consensys, would fear a violation of securities laws if he or she transferred ETH to the network,” the complaint states. “This will lead to the end of use of the Ethereum blockchain in the United States, damaging one of the greatest innovations on the Internet.”
The new lawsuit comes as SEC Chairman Gary Gensler wages an aggressive enforcement campaign against leading companies in the crypto sector, including Kinbase and Uniswap. In recent weeks, the campaign has prompted a wave of subpoenas asking firms and developers to produce documents related to their relationships with the Ethereum Foundation, a nonprofit that supports blockchain development.
Gensler’s tactics angered many in the crypto industry, who complained that the SEC had failed to provide clear rules or create a regulatory model that took into account the distinctive features of blockchain technology. Gensler disputed this, saying that existing securities laws are clear and sufficient and that the crypto industry refuses to comply with them.
The controversy over Ethereum has especially intensified after the SEC has repeatedly signaled in the past that blockchain tokens like Bitcoin are not securities and are therefore outside its jurisdiction. This includes a landmark 2018 speech in which a senior official said Ethereum had become “sufficiently decentralized,” as well as the agency’s decision last year to allow trading in Ethereum futures—an implicit acknowledgment that Ether is a commodity. Meanwhile, a video has emerged of Gensler himself, as a private citizen, telling hedge funds in 2018 that Ethereum is not a security.
These precedents, however, have failed to dissuade Gensler, who appears to be using Ethereum’s recent feature known as staking as the basis for a recent legal campaign.
Warning and preventive action
Consensys’ complaint, filed Thursday, shows that earlier this month the SEC issued a so-called Wells Notice, which describes a formal letter warning the agency of its intent to sue the firm, which often quickly leads to a settlement. The complaint added that during the call, the SEC told Consensys that MetaMask was operating as an unlicensed broker-dealer.
According to Consensys, the SEC objects to MetaMask offering users the ability to stake Ethereum on their behalf. Staking is a relatively new process for Ethereum, introduced across the entire blockchain in September 2022, which replaced energy-intensive mining with a system of validators who provide collateral to be a trusted validator.
In an interview with LuckConsensys founder Joe Lubin called the theory that the stake turned Ethereum from a commodity into a security “ridiculous.”
“Staking is really just putting up collateral so you can get paid for the labor and resources needed to run the Ethereum protocol. Now they are trying to turn it into some kind of investment contract,” Lubin complained.
The SEC did not immediately respond to a request for comment. Luck about the lawsuit or the agency’s view of the legal status of betting.
Lubin also stated that Gensler’s legal position appeared to be an attempt to stop the cryptocurrency’s overall growth and justify the SEC blocking companies’ pending applications to launch spot ETFs for Ethereum following the massive popularity of Bitcoin ETFs.
“They are trying to regulate technology on its own merits, which the SEC should not do. They try to stifle certain types of innovation. And they’re trying to do that because they probably see Ether spot ETFs as a gateway that will bring a lot of capital into our ecosystem,” Lubin said.
Consensys’ lawsuit was filed in Texas, part of a broader strategy by the crypto industry to pursue potential legal appeals in the U.S. Court of Appeals for the 5th Circuit. The court has shown more skepticism of the agency’s actions than other courts, and if the industry can win a favorable decision, it will likely appeal to the Supreme Court.
It is unclear what would happen if the SEC decided to file a lawsuit on its own to enforce the Wells Notice, rather than resolve the issues with Consensys in Texas court.
The complaint itself asks the court to make a number of additional decisions beyond the declaration that Ethereum is not a security. These include claims that MetaMask is not a broker-dealer and that the SEC is violating the Administrative Procedure Act and constitutional guarantees of due process. He also demands that the SEC be prohibited from conducting any investigations on the grounds that Ethereum is a security.