Newly disclosed court filings have shed light on the belief of the US Securities and Exchange Commission (SEC) and its chairman, Gary Gensler, that Ethereum (ETH) is an “unregistered security” under the Howey Test, which is considered by the vast majority of crypto advocates to be an outdated legal framework for regulating crypto assets.  

According to a recent Fox Business report, the details emerged following Ethereum software company ConsenSys’s filing of an unredacted complaint against the SEC.

According to the court filings, SEC Chair Gensler and the agency seem to have held the belief for at least a year that Ethereum was operating as an unregistered security, thereby violating federal regulations. 

The SEC’s Division of Enforcement, led by Gurbir Grewal, initiated a formal order of investigation into Ethereum’s status as a security on March 28, 2023. This investigation, known as “Ethereum 2.0,” involved the enforcement staff probing individuals and entities buying and selling ETH tokens.

If the SEC were to classify Ethereum as a security, it would contradict previous guidance provided under former SEC Chairman Jay Clayton. In June of the preceding year, then-Director of Corporation Finance Bill Hinman stated that Ethereum and Bitcoin (BTC) were not considered a security. This announcement led to a 10% increase in ETH’s price. 

Moreover, the Commodity Futures Trading Commission (CFTC) classified ETH, the native token of the Ethereum network, as a commodity falling under its jurisdiction. 

According to the report, the SEC’s investigation into Ethereum was conducted with “unusual secrecy,” with subpoena recipients required to sign confidentiality agreements. 

The motive behind this secrecy remains unclear, but the implications for the crypto market could be substantial if Ethereum, with its market cap of nearly $400 billion, is deemed a security.

Even before his testimony, Chairman Gensler’s reluctance to provide a definitive answer on Ethereum’s regulatory status raised concerns within the crypto industry. 

Some speculated that Ethereum’s transition to a “proof-of-stake” consensus mechanism in September 2022, where validators stake their Ethereum holdings, made it resemble a security more than the original “proof-of-work” mechanism used by Bitcoin. Gensler alluded to this notion, suggesting proof-of-stake tokens could trigger the Howey Test.

As Bitcoinist reported, software company ConsenSys filed a lawsuit against the SEC, accusing the agency of an “unlawful” power grab in attempting to classify ETH as a security. 

ConsenSys’ lawsuit against the SEC provides further insights into the ongoing investigation. Over the past year, the SEC has made multiple document requests, seeking detailed information about ConsenSys’ role in the transition to proof-of-stake and its acquisitions, holdings, and sales of ETH. 

Fox Business’s report further suggests that the SEC may also consider sales of ETH before The Merge, dating back to 2018, as potential securities. 

The investigation has intensified in recent weeks, with ConsenSys receiving additional document subpoenas and a Wells notice indicating the SEC’s intent to take enforcement action against the firm for allegedly acting as an unregistered broker-dealer offering unregistered securities, including ETH, through its MetaMask wallet.

ETH is trading at $3,170, down more than 4% in the last 24 hours alone, after several failed attempts to consolidate above the $3,200 price level. 

Featured image from Shutterstock, chart from TradingView.com

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