ConsenSys has refuted the Securities and Exchange Commission's (SEC) assertion that Ethereum may be considered a security following the transition to a proof-of-stake consensus mechanism.
The software company founded by Ethereum co-founder Joe Rubin has filed a lawsuit against the SEC in federal court in Texas, accusing the regulator of misapplying federal securities laws.
Proof of Stake does not make Ethereum a security
The dispute began when the SEC issued a Notice of Wells to ConsenSys stating that it plans to sue the company. The notice was part of a broader SEC investigation called “Ethereum 2.0” that began on March 28, 2023. This formal investigation order was approved by Gurbir Grewal, head of the SEC's Enforcement Division, and allows for the subpoena of parties involved in Ethereum 2.0. Ethereum trading.
Despite Ethereum's large market presence and widespread adoption, the SEC's investigation focuses on Ethereum's proof-of-stake model. Regulators say this move to a consensus mechanism could meet the criteria of the Howie test, which determines whether an asset functions as an investment contract and qualifies as a security.
ConsenSys argues that the SEC's approach is inconsistent with previous guidance. In 2018, Bill Hinman, then the SEC's Director of Corporate Finance, stated that Ethereum is not a security.
“Aside from raising funds for the establishment, [Ethereum]Based on my understanding of the current situation, [Ethereum]the Ethereum network and its decentralized structure, current offers and sales [Ethereum] It’s not a securities transaction,” Hinman said.
However, current SEC Chairman Gary Gensler has suggested that proof-of-stake tokens could be the trigger for securities classification. The position reflects a shift from the agency's previous stance and creates uncertainty for the $2 trillion cryptocurrency industry.
ConsenSys alleges in its lawsuit that the SEC's current actions are an illegal overreach. The company emphasizes that Proof-of-Stake allows for wider participation in network verification and maintenance, promoting decentralization.
This contradicts the idea that control can be centralized, which is often a feature of securities.
“Proof of stake, or merge upgrades, is really kind of a hook for the SEC to try to say that Ethereum is a security. But I think that’s just the surface point. “I think comparing Proof-of-Stake itself to Proof-of-Work doesn't make Ethereum a security. It's really just an explanation to the SEC,” said a ConsenSys spokesperson. told BeInCrypto.
Read more: Proof of Work and Proof of Stake Explained
The SEC has not commented publicly on ongoing litigation and has remained tight-lipped amid industry scrutiny. Meanwhile, ConsenSys expects the court to provide a final resolution to the debate over Ethereum's regulatory status. This is an issue with far-reaching implications for the future of cryptocurrency regulation.
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