Consensys Says Ethereum 2.0 Is Safe From the U.S. SEC, but Ripple’s CLO Says ‘Questions Remain’

On June 19, Consensys announced that the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) had formally notified the company that it was closing its investigation into Ethereum 2.0. However, Ripple’s CLO says “questions remain.”

On 20 March 2024, Fortune reported that the SEC issued subpoenas to several companies as part of its efforts to classify ETH as a security. In response, Consensys filed a lawsuit against the SEC on April 25, 2024, targeting both the agency and its five commissioners. ConsenSys alleges that the SEC is attempting “to seize control over the future of cryptocurrency” by regulating Ether as a security.

According to Cointelegraph, the lawsuit, filed in the U.S. District Court for the Northern District of Texas, claims that the SEC has been waging a campaign to enforce this classification. Consensys pointed to the SEC’s historical stance, including statements from Chair Gary Gensler, that ETH was not considered a security as early as 2018. The company highlighted the significant implications of a potential shift in the SEC’s position, emphasizing that many firms have built their businesses based on the existing regulatory framework.

Consensys, a leading blockchain technology company founded by Joseph Lubin, who is also a co-founder of Ethereum, was established in 2014 to develop decentralized software products and tools for the Ethereum ecosystem.

The company is renowned for creating a variety of blockchain-based solutions, including:

• MetaMask: A widely-used browser extension and mobile app that serves as an Ethereum wallet, enabling users to interact with decentralized applications (dApps).
• Infura: A scalable infrastructure service providing developers with access to Ethereum and IPFS (InterPlanetary File System) networks.
• Truffle: A development environment, testing framework, and asset pipeline for Ethereum.
• Quorum: An enterprise-focused version of Ethereum designed for privacy and permissioned networks.
• Codefi: A suite of blockchain-based commerce and finance applications for enterprises.

On June 19, Consensys announced a major victory for the Ethereum community on the social media platform X (formerly known as Twitter). According to Consensys, the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) formally notified the company that it is closing its investigation into Ethereum 2.0, the network’s major upgrade. This decision means the SEC will not pursue charges alleging that sales of ETH, the native cryptocurrency of the Ethereum network, constitute securities transactions.

Consensys revealed that the SEC’s decision came in response to a letter the company sent on June 7, requesting confirmation that the agency would close its Ethereum 2.0 investigation. The request was based on the premise that the SEC’s approval of Ethereum ETFs in May indicated the agency considered ETH to be a commodity.

While acknowledging the significance of the SEC’s decision to close the Ethereum investigation, Consensys emphasized that this development does not resolve all the challenges faced by blockchain developers, technology providers, and industry participants who have been subjected to what the company describes as the SEC’s “unlawful and aggressive crypto enforcement regime.”

Consensys highlighted its ongoing commitment to fighting for regulatory clarity, mentioning that the company’s lawsuit against the SEC seeks a declaration affirming that offering user interface software like MetaMask Swaps and Staking does not violate securities laws. The company expressed its belief that the industry, which serves as the backbone for numerous new technologies and innovations, should not have to resort to legal action to obtain much-needed regulatory clarity. However, Consensys acknowledged that this is the reality they are currently facing.

In conclusion, Consensys reiterated the importance of its continued efforts to advocate for the blockchain industry and push for a more transparent and supportive regulatory environment that fosters innovation and growth in the sector.

On the same day that Consensys announced the closure of the SEC’s investigation into Ethereum 2.0, Stuart Alderoty, Ripple’s Chief Legal Officer, expressed his skepticism on the social media platform X. Alderoty acknowledged the significance of the decision for Consensys, describing it as a “big win,” but he raised several important questions that remain unanswered. He questioned whether the SEC’s decision implies that the offers and sales of ETH by Consensys are not considered securities transactions or if it means that ETH itself is not classified as a security.

Alderoty also wondered how SEC Chair Gary Gensler would respond if asked about this issue now and what the implications are for MetaMask and staking services offered by Consensys. His comments suggest a critique of the SEC’s regulatory approach, implying that such critical regulatory matters should not be left ambiguous or handled inconsistently.

In a similar vein, Pro-XRP lawyer Bill Morgan took to X to provide his perspective on the announcement. Morgan pointed out the difference between the SEC’s letter to Consensys and a judicial ruling on whether a token is a security. He suggested that while a letter from the SEC provides some clarity to one company, a definitive legal ruling would have a broader impact and establish a clearer precedent. Morgan argued that Gensler’s continued reluctance to directly address whether Ethereum is a security highlights a fundamental issue with the SEC’s regulatory strategy. He contrasted this with the situation faced by Ripple, noting that Gensler cannot avoid the question of XRP’s status in the same way, as Ripple’s case is likely to result in a clear judicial determination.

To provide some context for Morgan’s comments, it is worth remembering that on 13 July 2023, Hon. Analisa Torres, a district judge at the United States District Court for the Southern District of New York, issued her ruling in the SEC vs. Ripple Labs lawsuit, which was initiated in December 2020. In her decision, Judge Torres clarified the status of the XRP token, stating: “XRP, as a digital token, is not in and of itself a ‘contract, transaction[,] or scheme’ that embodies the Howey requirements of an investment contract.”

Both Alderoty and Morgan are emphasizing the need for greater regulatory clarity and consistency from the SEC. They suggest that the current approach leaves too many questions unanswered, leading to uncertainty for blockchain companies and investors. Their comments reflect broader concerns within the cryptocurrency industry about the SEC’s enforcement tactics and the lack of clear guidelines regarding the classification of digital assets as securities.