SEC's Investigation into Ethereum's Security Status Unveiled: Consensys Legal Battle Unearths Regulatory Scrutiny

Fresh details have surfaced from the Consensys legal battle with the SEC, revealing that the regulator commenced its investigation into Ethereum's security classification last year. According to a court filing made by Consensys on April 29, the Securities and Exchange Commission (SEC), under the leadership of Gary Gensler, initiated the probe into Ethereum's security status.

The filing disclosed that Gurbir Grewal, Director of the Division of Enforcement, authorized a Formal Order of Investigation regarding 'Ethereum 2.0' in March 2023. This Formal Order empowered SEC staff with broader authority to scrutinize and issue subpoenas to individuals and entities involved in ETH transactions.

It stated:

"The Formal Order bases this authorization on the SEC's findings of potential offerings and sales, dating back to at least 2018, of 'certain securities, including, but not limited to ETH, for which no registration statement was or is in effect... and for which no exemption was or is available.'"

Consequently, the SEC has subpoenaed numerous individuals and entities with Ethereum investments, including Consensys.

This disclosure came shortly after Consensys filed a lawsuit against the SEC on April 25, arguing that the SEC's move to classify Ethereum as a security constituted regulatory overreach. The company cautioned that such classification could impede innovation and negatively impact developers, investors, and entities leveraging Ethereum's decentralized infrastructure.

The regulatory status of Ethereum has been a persistent concern for the SEC in recent years.

In 2018, Gensler asserted during a lecture at the Massachusetts Institute of Technology that ETH did not fall under the category of a security.

However, Gensler's position appears to have evolved, particularly following Ethereum's transition to proof of stake. Despite this, he has refrained from definitively addressing Ethereum's status, despite numerous inquiries from stakeholders, including members of Congress.

While Gensler has chosen to remain silent on the issue, proponents 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, to argue that Ethereum does not meet the criteria for classification as a security.