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

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As a long-time crypto investor with a keen interest in regulatory developments, I’m thrilled to see Consensys announce the closure of the SEC’s investigation into Ethereum 2.0. This is a significant step forward in clarifying the regulatory landscape for blockchain companies and their offerings. However, as Stuart Alderoty, Ripple’s Chief Legal Officer, rightly pointed out, there are still unanswered questions regarding the implications of this decision for Consensys and Ethereum more broadly.

On June 19th, Consensys disclosed that the U.S. Securities and Exchange Commission (SEC) Enforcement Division had concluded their investigation into Ethereum 2.0 without finding any violations. Yet, Ripple‘s Chief Legal Officer has stated that there are still unanswered queries.

On March 20, 2024, Fortune revealed that the Securities and Exchange Commission (SEC) served subpoenas to various businesses in relation to its plans to categorize ETH as a security. In retaliation, ConsenSys initiated a lawsuit against the SEC on April 25, 2024, naming both the commission and its five commissioners as defendants. ConsenSys asserts that the SEC aims to “grab the reins of cryptocurrency’s future” through its proposed regulations of Ether as a security.

Based on Cointelegraph’s report, Consensys, in a lawsuit filed in the U.S. District Court for the Northern District of Texas, alleges that the Securities and Exchange Commission (SEC) has been actively enforcing the classification of Ethereum (ETH) as a security. Consensys refers to the SEC’s earlier stances, such as Chair Gary Gensler’s statements dating back to 2018, which indicated that ETH was not classified as a security. The company underscores the potential consequences of a change in the SEC’s stance, emphasizing that numerous businesses have been established relying on the current regulatory framework.

Established in 2014, Consensys is a prominent blockchain technology firm helmed by Joseph Lubin, a co-founder of Ethereum. The company specializes in creating decentralized applications and tools to enhance the Ethereum network’s functionality.

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 shared exciting news with the Ethereum community via X, formerly known as Twitter. According to Consensys, the US Securities and Exchange Commission (SEC) Enforcement Division has concluded its investigation into Ethereum 2.0, Ethereum’s significant upgrade. This development indicates that the SEC will not initiate legal action against ETH, the native cryptocurrency of Ethereum, for alleged securities transactions.

As a crypto investor, I’ve kept a close eye on Consensys’ announcement regarding the SEC’s decision. According to their statement, they sent a letter on June 7th asking for confirmation that the SEC would indeed wrap up its investigation into Ethereum 2.0. The rationale behind this request was rooted in the belief that the SEC’s approval of Ethereum ETFs back in May pointed towards ETH being classified as a commodity.

Despite welcoming the SEC’s decision to end its investigation into Ethereum, Consensys underscores that this event does not eliminate all the hurdles confronting blockchain creators, tech suppliers, and market players who have previously encountered what Consensys deems as the SEC’s “unjustified and forceful crypto regulatory actions.”

Consensys reaffirmed its dedication to advocating for regulatory certainty, noting that its ongoing legal battle with the SEC aims to establish that providing software like MetaMask Swaps and Staking does not infringe upon securities regulations. The firm emphasized that the tech industry, which underpins many groundbreaking technologies and inventions, should not be compelled to engage in litigation to secure regulatory guidance. Nevertheless, Consensys acknowledged that this is the present situation they find themselves in.

To summarize, ConsenSys underscores the need for their ongoing advocacy in promoting the blockchain sector and pushing for regulations that ensure transparency, support, and encouragement for groundbreaking innovations and economic expansion within the industry.

Following our June 7th letter to the SEC, their decision to confirm that ETH was treated as a commodity in the May ETF approvals carries significant implications. Namely, it may signal the end of the Ethereum 2.0 investigation.— Consensys (@Consensys) June 19, 2024

On the very same day that Consensys revealed the termination of the SEC’s investigation into Ethereum 2.0, Stuart Alderoty, Ripple’s top legal officer, voiced his doubts on social media platform X. Alderoty acknowledged the importance of this development for Consensys, calling it a “significant victory.” However, he posed some critical questions that remain unanswered. He pondered whether the SEC’s decision exempts the transactions involving ETH sold by Consensys from being classified as securities deals or if it means that Ethereum itself is no longer considered a security.

As a crypto investor, I’ve been pondering over how SEC Chair Gary Gensler would react if pressed about the current regulatory uncertainty surrounding decentralized finance (DeFi) tools like MetaMask and staking services provided by Consensys. It seems clear that this situation raises important questions about the consistency and clarity of regulatory frameworks in this space. I believe it’s crucial for regulators to provide definitive guidance, rather than leaving matters ambiguous or open to interpretation. This would help foster a more stable and predictable environment for investors and innovators alike.

A significant triumph for ConsenSys, yet some doubts persist. Does this imply that the SEC considers ConsenSys’ sale and distribution of Ether (ETH) as exempt from securities transactions or that ETH itself is not classified as a security? What would Gensler respond if queried further? How does this ruling affect MetaMask and staking activities?— Stuart Alderoty (@s_alderoty) June 19, 2024

In the same line of thought, attorney Bill Morgan weighed in on the recent announcement through X, expressing his viewpoint. Morgan emphasized the distinction between the SEC’s letter to Consensys and a court decision regarding the classification of a token as a security. He posited that while an SEC letter offers guidance for one entity, a definitive judicial ruling carries more weight and sets a clearer precedent. Morgan contended that Gensler’s ongoing refusal to explicitly answer whether Ethereum is a security underscores a significant challenge with the SEC’s regulatory approach. Conversely, he compared this predicament to Ripple’s situation, suggesting that Gensler cannot dodge the XRP status query in the same manner, as Ripple’s case is expected to yield a definitive judicial resolution.

As an analyst, I would put it this way: “From my perspective, receiving a company-specific letter or obtaining a court ruling declaring that a token itself is not classified as a security each have their unique merits. Relying on the former provides clarity within a particular organizational context, while the latter establishes a broader industry precedent. However, it’s important to note that Ethereum founder Gary Gensler continues to remain tight-lipped about its classification as an SEC chair, in stark contrast to his stance regarding Ripple (XRP).”— bill morgan (@Belisarius2020) June 19, 2024

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.”

Experts Alderoty and Morgan advocate for more definitive regulations and uniformity from the Securities and Exchange Commission (SEC). They argue that the present regulatory framework fails to provide satisfactory answers, creating ambiguity for blockchain businesses and their investors. Their statements echo wider apprehensions within the cryptocurrency sector about the SEC’s enforcement actions and the absence of clear-cut instructions concerning the categorization of digital assets as securities.

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2024-06-20 14:23