David Vs. Goliath? Crypto Firm Consensys Sues SEC Over Ethereum Regulation

Consensys, a prominent Ethereum development company, has fired the latest salvo in the ongoing battle between the crypto industry and the US Securities and Exchange Commission (SEC). The company filed a lawsuit on April 25th, accusing the SEC of an “unlawful seizure of authority” over Ethereum, the world’s second-largest cryptocurrency by market capitalization.

The lawsuit centers around the SEC’s recent actions towards Consensys, particularly its popular MetaMask wallet product. MetaMask allows users to store, manage, and trade cryptocurrencies, including Ethereum (ETH). However, the SEC appears to be taking aim at specific features within MetaMask, like its staking and swap functionalities.

Consensys Pushes Back On Security Classification

The company is seeking a definitive court ruling that declares ETH is not a security. This classification is crucial, as securities regulations can significantly impact how cryptocurrencies are traded and offered. Consensys argues that Ethereum, with its decentralized network and lack of a central issuer, doesn’t meet the traditional definition of a security.

The case also explores MetaMask’s functionality. According to the firm, the wallet is just an interface and not a broker. By asserting that MetaMask never retains user assets nor handles transaction execution directly, they effectively distance themselves from any possible infraction of securities regulations.

According to Joe Lubin, co-founder of Ethereum and founder/CEO of Consensys:

We don’t take this step lightly, but we feel compelled to act. Ethereum is for everyone.

Consensys Cites Inconsistent Regulatory Landscape

Further complicating the situation is the SEC’s seemingly contradictory stance on Ethereum. The lawsuit references a 2018 speech by former SEC director Bill Hinman, where he classified Ethereum as a commodity, not a security.

Additionally, the firm argues that the SEC’s sister agency, the Commodity Futures Trading Commission (CFTC), already oversees derivative products tied to Ethereum. This perceived overlap in regulatory jurisdiction strengthens Consensys’ argument against the SEC’s recent actions.

The lawsuit also invokes the “major questions doctrine,” a legal principle that limits the power of federal agencies when their actions have broad economic or political implications. Consensys argues that the SEC’s attempt to regulate Ethereum falls under this doctrine and requires explicit Congressional authorization. However, the effectiveness of this argument remains uncertain, as two judges have already rejected similar claims from other crypto companies.

The Consensys lawsuit is a significant development with potential ramifications for the entire crypto industry. A court ruling in favor of Consensys could establish a clearer regulatory framework for Ethereum and similar cryptocurrencies. Conversely, a victory for the SEC could empower the agency to exert greater control over the crypto space, potentially leading to stricter regulations and increased scrutiny for companies like Consensys.

Featured image from Zachary Fruhling, chart from TradingView