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How Year-Long ETH Security Probe Paints SEC Into a Corner

DailyCoinDailyCoin2024/04/30 20:13
By:DailyCoin
  • The ConsenSys case against the SEC has unearthed stunning new details about the market regulator’s Ethereum probe.
  • According to market observers, these new details bring into question the integrity of the SEC.
  • The debacle comes as crypto observers anticipate a decision on pending spot Ethereum ETF applications.

A new twist emerges in the ongoing debacle over the SEC’s unclear asset classification of Ethereum .

On Thursday, April 25, Ethereum-focused crypto infrastructure provider ConsenSys took a page from Coinbase ‘s playbook to go on the offensive after receiving a Wells Notice from the SEC suggesting that the federal agency could launch enforcement actions against it for crypto staking and swap services offered through its MetaMask wallet.

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ConsenSys sued the SEC for what it described as regulatory overreach, requesting a court order to force the agency to declare that ETH is not a security and cease now and in the future planned enforcement efforts against its MetaMask wallet and ETH sales. As the stage for what could be a years-long legal showdown comes into view, a recent filing from the crypto infrastructure provider has brought to light polarizing new details about the SEC’s ongoing ETH probe, calling into question the agency’s integrity.

SEC’s Year-Long Ethereum Probe Unveiled

As of 2018, the SEC’s stance on Ethereum seemed pretty straightforward: Ethereum was not a security. At least, this was the view alluded to in speeches from then-SEC Director of Corporation Finance Bill Hinman and then-SEC Chair Jay Clayton. But at some point, after present SEC Chair Gary Gensler took office, the agency’s stance on Ethereum has become unclear, to say the least.

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It has become clear in recent weeks that the agency is conducting a probe of the asset, suggesting that they could now see it as an unregistered security. However, according to a Monday, April 29 filing from ConsenSys, this probe did not just start weeks ago but has been ongoing for over a year. 

The filing disclosed that on March 28, 2023, SEC Director of the Division of Enforcement Gubir Grewal signed off on a formal order of investigation into Ethereum, granting staff permission to investigate and subpoena entities involved in buying and selling ETH. These entities included ConsenSys.

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For many observers, the sticking point is that, as highlighted in the ConsenSys’ filing, the SEC still went ahead to grant accelerated approval for the trading of Ethereum futures ETFs on commodity exchanges just months later, in October 2023, without so much as mentioning the investigation.

“Gensler Can’t Have It Both Ways”

Responding to the revelation , Cinneamhain Ventures Partner Adam Cochran asserted that SEC’s decision to approve ETH futures ETFs on an accelerated basis in line with the CFTC’s commodity designation painted it into a corner.

"Gensler can't have it both ways. Either Ethereum is not a security, or he failed at protecting the American people, by *ACCELERATING* the approval of an ETF, that the SEC should have had two different levels of approval over," the VC partner wrote.

Cochran was one of many who expressed these sentiments. Van Buren Capital General Partner Scott Johnsson also called out the SEC’s perceived inconsistent stance.

Reminder also for everyone in the back:
The SEC allowed these futures ETFs to go effective AND accelerated their effectiveness, which required the SEC to have "due regard to the public interest and the protection of investors". How can you have due regard here while believing ETH… https://t.co/2SoEBJCebq pic.twitter.com/uT4nKmwVUf

— Scott Johnsson (@SGJohnsson) April 29, 2024

These arguments come as the SEC’s continued investigation into ETH suggests that the agency OK’d products it believed could pose risks to the American public, lacking proper filings and regular disclosures as required for tradable securities.

“I can see a justification of ‘we were still investigating so therefore did not have a sufficient basis to say no’ but that’s really weak sauce,” former SEC Branch Enforcement Chief James Farrell wrote on X .

A Boon for Spot ETH ETFs?

The SEC’s approval of ETH futures ETFs has long been used as a focal argument for why the agency should approve pending spot ETF applications. These arguments have been strengthened by Grayscale’s August 2023 legal win over the SEC, successfully arguing that Bitcoin futures ETFs approved by the SEC have the same risks as spot Bitcoin ETFs consistently denied by the regulator.

For some, the recent potential inconsistency should only serve as an additional arsenal for applicants seeking approval, as the SEC could risk humiliation in court should applicants seek legal recourse if they are denied, as many believe they will be in May 2024. But experts are not so sure.

While suggesting that there’s a slight chance that the SEC may approve spot Ethereum ETFs to avoid taking damage in court, Van Buren Capital’s Johnsson indicated that it was more likely that the agency did not care and was willing to gamble in court.

On the Flipside 

  • The SEC’s investigation into ETH remains ongoing as the agency has yet to declare its stance on the asset’s classification openly.
  • The SEC has not followed up its Wells Notice against ConsenSys with a lawsuit.

Why This Matters

Ethereum is the second largest crypto asset in terms of market capitalization. The SEC’s stance on the asset’s classification will undoubtedly have broader market implications. The recent ConsenSys filing, however, highlights the inconsistencies in the market regulator’s actions and how they affect businesses trying to build around the technology.

Read this for more on the Ethereum security debate:
SEC Pushes for Ethereum Security Label, Killing Ether ETF Hopes

Learn about last week’s crypto fund flows:
Crypto Funds Extend Outflow Streak for 3rd Week with $435M

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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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