Last week blockchain firm Consensys filed a redacted lawsuit against the Securities and Exchange Commission (SEC), arguing that the SEC is unlawfully claiming that Ethereum’s Ether token is a security. Yesterday the unredacted version was published, revealing that most of the excluded words related to the SEC’s Formal Order of Investigation in the matter of “Ethereum 2.0”. The timeline is highly relevant.
According to the legal filing, Consensys alleges that the SEC approved the Order on April 13, 2023 stipulating that Ether was a security, six days before SEC Chair Gary Gensler gave Congressional testimony. The SEC Chair failed to directly answer very specific questions on the topic.
As context, in 2018 SEC Director William Hinman made a statement in which he declared that Ether was not a security. By making the statement, Mr Hinman classified Ether differently from other cryptocurrencies. One may or may not expect the SEC to take a clear position on other tokens. However, if it has changed its position on a specific previous statement, then avoiding clarity on the matter seems unacceptable.
If you watched the Congressional testimony below from April 2023, Gensler appeared cagey because it depends on the specific circumstances of a token. Financial Services Committee Chair Patrick McHenry seems a little aggressive.
However, if the Consensys timescale allegation is true, then Chair Gensler ducked a direct question from the Committee Chair, which was asked not just once but five times.
Gensler sidesteps Congressional Ether questions
Talking about commodities versus securities, Chair McHenry asked, “So how would you categorize Ether then?”
Chair Gensler started to respond about laws in the nineteen thirties.
“I’m asking you, sitting in your chair now to make an assessment under the laws as exist, is Ether a commodity or a security?” asked Congressman McHenry. Chair Gensler proceeded to answer by referencing 10-12,000 tokens.
“I’m asking you a specific question Chair Gensler. I said this in private. This should be no shock to you I’m asking this question. Is Ether a commodity or a security?”
Chair Gensler responded, “It depends on the facts and the law and if there’s a group of individuals…,” starting to reference the Howey Test.
“I’m asking you about the facts and the law sitting in your seat and the judgment you are making,” said Congressman McHenry.
Mr. Gensler said “You would not want me to prejudge.”
“But you have prejudged on this,” said Congressman McHenry talking about Wells notices on a variety of digital assets. “I’m asking you a very simple question about the second largest digital asset. What is your view?”
Again Mr Gensler responded with the Howey Test, “My view is if there’s a group of individuals in the middle that the public is…” and Congressman McHenry interrupted him, now clearly frustrated after asking the question five times.
McHenry asks if uncertainty serves innovation
He moved on. “Do you think it serves the market for an object to be viewed by the commodities regulator as a commodity and by the securities regulator to be viewed as a security? Do you think that provides safety and soundness for the product? Do you think that provides consumer protection? Do you think it serves the value of innovation? I think ‘no’ should be a very simple answer for you here. That uncertainty is bad, is it not?”
Gensler said he was answering generically to avoid speaking about one set of facts. That response may have been valid had Hinman not made the 2018 statement that Ether was not a security.
A good look for the SEC?
Meanwhile, Consensys claimed it redacted parts of its legal filing because the SEC’s order was not public information. However, the redactions attracted far more attention to these issues than would otherwise have been the case, perhaps deliberately.
In several cases, the cryptocurrency community has criticized the SEC for simply doing its job. Consensys claims that the SEC had established that Ether was a security prior to Chair Gensler’s testimony. IF that is accurate, then this passage is not a good look for the SEC, no matter what your stance is on cryptocurrency.
