Four Reasons Why Ethereum Is Not a Security: Consensys

full version at beincrypto

Ethereum has come under scrutiny from the Securities and Exchange Commission (SEC), which has hinted at classifying it as a security. This move by the SEC has sparked controversy, especially after a clear stance in 2018 that Ethereum did not meet the criteria of a security.

Blockchain software company Consensys has firmly positioned itself against the SEC‘s reconsideration in light of these events. Here are four compelling reasons supporting why Ethereum should not be deemed a security.

1. Historical SEC Stance on Ethereum

In 2018, William Hinman, then Director of the Division of Corporation Finance at the SEC, made a significant speech indicating that Ethereum was not considered a security.

“Putting aside the fundraising that accompanied the creation of [Ethereum], based on my understanding of the present state of [Ethereum], the Ethereum network and its decentralized structure, current offers and sales of [Ethereum] are not securities transactions,” Hinman said.

This historical stance by the SEC forms a cornerstone of the argument against its current reclassification efforts. The SEC has not formally retracted this position, leading to a strong presumption favoring Ethereum’s current non-security status.

“Based on Director Hinman’s point in 2018, there is no difference between now and 2018. Today, in terms of the theories and openness, if anything, the number of people who develop and work on Ethereum and have adopted it is even broader than it was before,” a Consensys spokesperson told BeInCrypto.

Therefore, the sudden shift in perspective by the SEC, without substantial new evidence or changed circumstances, appears unfounded and capriciously challenges previous regulatory guidance.

2. CFTC’s Classification as a Commodity

The Commodity Futures Trading Commission (CFTC), another regulatory authority in the US, has consistently recognized Ethereum as a commodity. Most recently, in civil enforcement action involving the cryptocurrency exchange KuCoin, the CFTC definitively classified Ethereum as commodity.

“KuCoin solicited and accepted orders, accepted property to margin, and operated a facility for the trading of futures, swaps, and leveraged, margined, or financed retail transactions involving digital assets that are commodities including Bitcoin (BTC), Ether (ETH), and Litecoin (LTC),” the compliant read.

This classification supports Ethereum’s broader market understanding and regulatory handling, further emphasizing its role and function distinct from securities. According to the Consensys spokesperson, the dual recognition by the SEC, historically, and the CFTC fortifies the argument that Ethereum operates within the regulatory framework applicable to commodities, not securities.

“The SEC has definitively declared over a number of years that Ethereum is a commodity. So I don’t think you need to actually look any further than what the CFTC has continuously said and what the SEC has said in the past to reach the correct results in this case,” the Consensys spokesperson added.

3. Decentralization and Open Protocol

The essence of Ethereum’s architecture lies in its decentralization. Unlike securities, which a central entity typically governs to benefit insiders with asymmetric information, Ethereum operates on a platform where all information is openly accessible.

The network’s governance and operational protocols do not depend on a centralized group. Therefore, it negates the primary rationale for security classification to protect investors from information asymmetry.

“There’s just no question that Ethereum is decentralized. There’s no core issue or group, there’s no core development group that has privileged insider information, which is the sort of common enterprise that would have to exist for there to be a security,” the Consensys spokesperson told BeInCrypto.

This fundamental attribute of Ethereum aligns with the principles that initially guided the SEC’s decision in 2018.

4. Irrelevance of the Consensus Mechanism Shift

Ethereum’s recent transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism has been cited by the SEC as a potential reason for reclassification. However, this change does not inherently affect Ethereum’s operation’s core nature or its non-security classification.

“If you look at director Hinman’s speech in 2018 when he said that Ethereum was not a security, he didn’t base that on PoW or PoS. The consensus mechanism is irrelevant,” the Consensys spokesperson concluded.

The transition to PoS does not introduce elements typical of securities, such as dividends or ownership rights in a centralized enterprise. It is merely a technical evolution, enhancing efficiency and sustainability without altering the foundational, decentralized character of the platform.

In conclusion, the SEC’s reconsideration of Ethereum as a security does not hold under scrutiny, especially when considering the platform’s historical regulatory treatment, classification by other regulatory bodies, decentralized nature, and irrelevance of its internal consensus mechanism to securities law.