Security or Not: SEC Chair Gary Gensler Faces Scrutiny Over Ethereum’s Classification

In a 29 April court filing by Consensys, it was revealed that the Securities and Exchange Commission (SEC), under the leadership of Gary Gensler, initiated an investigation into Ethereum's security status last year.

The filing disclosed that Gurbir Grewal, Director of the Division of Enforcement, authorised the Formal Order of Investigation regarding 'Ethereum 2.0' in March 2023.

This Formal Order granted broader investigative powers to SEC staff to probe and subpoena individuals and entities involved in ETH transactions.

It added:

"The Formal Order predicates this delegation on the SEC's information showing possible offers and sales, since at least 2018, of '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.'"

Consequently, the SEC has issued subpoenas to numerous individuals and entities with investments in Ethereum, including Consensys.

Interestingly, this revelation emerged shortly after Consensys filed a legal action against the SEC on 25 April, arguing that the SEC's attempt to classify Ethereum as a security represented regulatory overreach.

Consensys warned that such a designation could stifle innovation and have adverse effects on developers, investors, and entities utilising Ethereum's decentralised infrastructure.

Citing court documents filed by Consensys, Fox Business producer Eleanor Terret noted that the SEC and Gensler "appear to have believed for at least a year" that Ether was an "unregistered security trading out of compliance with current federal regulations."

What is the "Ethereum 2.0" investigation?

The SEC's investigation into "Ethereum 2.0" reportedly stems from its suspicion that potential unregistered offerings and sales of Ether have been occurring since at least 2018.

If the Gensler-led SEC determines Ether to be a security, it would stand in contrast to previous SEC guidance provided under former Chair Jay Clayton.

Back in June 2018, then-Director of Corporation Finance Bill Hinman articulated the SEC's position in a speech, stating that Ether, along with Bitcoin, was not deemed a security.

The recent filings revealed that the five-member commission authorised the Division of Enforcement's "Ethereum 2.0" investigation on 13 April 2023, just five days prior to Gensler's appearance before the House Financial Services Committee.

During this appearance, Gensler notably declined to provide definitive answers to repeated inquiries regarding whether the SEC considered Ether to be a security.

Regulatory Status of Ethereum

Ethereum's regulatory classification has presented an ongoing challenge for the SEC in recent years.

Back in 2018, Gensler stated during a lecture at the Massachusetts Institute of Technology that ETH was not considered a security.

However, it appears Gensler's perspective may have evolved, especially in light of Ethereum's shift to proof of stake.

Despite this evolution, he has refrained from definitively addressing ETH's status despite repeated inquiries from stakeholders, including members of Congress.

While Gensler has remained tight-lipped on the issue, supporters within the crypto community have pointed to statements from former SEC officials like Bill Hinman, as well as legal filings from financial regulatory bodies such as the Commodities Futures Trading Commission (CFTC), to argue that Ethereum does not meet the criteria for classification as a security.

Misled or Misunderstood: Gensler's Indecisive Stance on Ethereum's Status

Gensler faces allegations of misleading Congress from Rep Patrick McHenry, head of the House Financial Services Committee.

McHenry contends that the SEC was aware of its classification of Ethereum's ether as a security before Gensler's appearance at a hearing, where he chose not to provide a clear answer on the matter.

McHenry stated:

“Classifying Ether as a security contradicts previous statements of the SEC and Chair Gensler – yet another example of the arbitrary and capricious nature of the agency's regulation by enforcement approach to digital assets.”

Newly revealed court documents suggest a deliberate effort to obscure the Commission's position.

#ICYMI: New court filings indicate that @SECGov Chair Gary Gensler knowingly misled Congress when pressed on the classification of #ETH at a @FinancialCmte hearing to conduct oversight of his agency.

📖 Read my full statement 👇 pic.twitter.com/8osMpbY6Iur/>— Patrick McHenry (@PatrickMcHenry) April 30, 2024r/> a

McHenry criticises the SEC for its "arbitrary and capricious" enforcement methods, advocating instead for legislative action.

He promotes the "FIT for the 21st Century Act," which aims to establish a comprehensive regulatory framework for cryptocurrencies to bolster consumer protections.

This intentional ambiguity contrasts sharply with earlier SEC communications, which consistently distinguished Ethereum from typical security classifications.