Crypto Strikes Back: Consensys, Advocate Groups Sue U.S. SEC

Consensys Sues SEC Over Ethereum Regulation and Overreach

Consensys, a major player in the Ethereum ecosystem and the company behind the MetaMask wallet, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) and its five commissioners, challenging the agency's stance on Ethereum's native Ether (ETH) token.

Consensys believes the SEC's regulation of Ethereum constitutes an "unlawful power grab" and argues this overreach jeopardizes the United States' ability to capitalize on the next generation of the internet, potentially losing countless innovations, products, and jobs to foreign competitors.

The debate hinges on whether the SEC should regulate ETH as a security or if it aligns more appropriately with the Commodity Futures Trading Commission's (CFTC) classification as a commodity. This distinction is crucial as it determines the regulatory framework ETH would fall subject to, carrying significant implications for its usage, development, and the legal obligations of those who work with and exchange digital assets.

In its April 25 filing, Consensys argued that ETH's inherent characteristics—the decentralized nature of the Ethereum network lacking a central authority and ETH's role as the platform's transactional token—fundamentally distinguish it from securities. Unlike traditional securities, which represent investments in companies with profit expectations, ETH serves a utilitarian function within the Ethereum ecosystem:

"ETH has none of the features of a security. ETH represents no claim on the proceeds or revenues of the Ethereum network. ETH provides no interest in the profits or assets of any enterprise. Nor is the value of ETH driven by the efforts of any promoter or organization."

In 2018, then-SEC Director William Hinman publicly stated that initial sales of ETH did not constitute securities transactions. This position aligned with the CFTC's classification of Ethereum derivatives as commodities. However, Consensys noted the SEC's inconsistent statements, pointing to an April 10 Wells Notice as evidence. The notice shows the SEC's intent to pursue enforcement action against the blockchain firm for alleged violations of securities laws via its MetaMask wallet. ConsenSys contests the SEC's characterization of MetaMask as a securities broker, arguing that the popular wallet functions merely as an interface that facilitates user interaction with the Ethereum network and does not hold or manage users’ digital assets.

Consensys also invoked the Major Questions Doctrine, a legal principle preventing federal regulators from exceeding their authority granted by Congress. The doctrine's use is being debated in the SEC vs. Kraken lawsuit, and recently, a court dismissed Coinbase's attempt to use the MQD defense line.

Crypto groups sue SEC over new dealer regulation

Another lawsuit filed with the Northern District of Texas two days prior also challenges the SEC's perceived regulatory overreach. On April 23, the Blockchain Association (BA) and the Crypto Freedom Alliance of Texas (CFAT) filed a lawsuit against the SEC in the Northern District of Texas. BA and CFAT are challenging the SEC's recently adopted "Dealer Rule," which expands the definition of a "dealer" to cover digital asset activities.

The BA, a prominent crypto industry trade group, and CFAT, a vocal crypto activist organization, argue that the rule expansion is an overreach of the SEC's authority and a departure from fair and transparent rulemaking.

The lawsuit alleges that the SEC exceeded its statutory authority by broadening the definition of "dealer" to encompass ordinary digital asset trading and activities beyond traditional securities. According to the BA and CFAT, this expansion constitutes arbitrary and capricious rulemaking, as the SEC failed to adequately address public concerns raised during a limited comment period (39 days in 2022) and neglected to assess the potential negative impacts of the rule on the broader crypto industry.

The lawsuit also claims the SEC violated the Administrative Procedure Act (APA) by failing to provide clear and transparent regulations. This lack of clarity hinders the ability of industry participants to operate effectively and raises concerns about the rule's uncertain application to decentralized finance (DeFi) protocols and other emerging technologies within the crypto space.

In a statement, Kristin Smith, CEO of the BA, condemned the new Dealer Rule as "the latest example of the SEC's blatant attempts to unlawfully regulate outside its authority." Smith further highlighted the SEC's alleged disregard for stakeholder concerns, stating

"The Dealer Rule advances the SEC's anti-digital asset crusade and unlawfully redefines the boundaries of its statutory authority granted to it by Congress, threatening to drive U.S. companies offshore and incite fear in American innovators."

On February 6, the SEC adopted two new rules to broaden the definition of a "dealer" to include those who regularly buy and sell securities to provide liquidity or earn revenue from trading activities. This expands on the historical distinction between dealers (buying/selling for a business) and individual traders.

Republican SEC commissioners Mark Uyeda and Hester Peirce ("Crypto Mom") opposed the expansion, expressing concerns over its vast scope and potential overreach​.

Stuart Alderoty, Chief Legal Officer at Ripple, has been a stringent critic of the SEC under Chair Gary Gensler's leadership and noted the high frequency of lawsuits challenging the SEC's rulemaking powers during Gensler's tenure. Alderoty said the SEC had been sued more frequently for abusing its rulemaking authority in Gensler's first three years than in the previous decade, covering three long-serving chairs' tenures.