Software Tech Company Sues SEC Seeking Declaration that Ethereum Is Not a Security
Commentary by Rachael Hashmall
A blockchain software technology company ("company") sued the SEC to prevent it from declaring Ethereum ("ETH") a security. The company argued that the SEC is trying to "seize control over the future of cryptocurrency" and that the agency plans to designate Ethereum as a security.
In the Complaint, filed in the U.S. District Court for Northern Texas, Fort Worth Division, the company argued that the SEC seeks to regulate ETH as a security, even though (i) ETH bears none of the attributes of a security, and (ii) the SEC previously communicated to the public that ETH is not a security, and not within the SEC’s statutory jurisdiction. The company said that in 2018, the SEC definitively declared that ETH is not a security (see related coverage) and, in 2019, the CFTC announced “that ether is a commodity and therefore would fall under our jurisdiction” (see related coverage.)
According to the Complaint, the SEC notified the company that it would pursue an enforcement action for offering a wallet software, which would make it an unregistered broker-dealer. The company argued that the software is "simply an interface — like a web browser — that allows digital asset holders to seamlessly interact with the Ethereum network, including all other users and applications participating on the network." The company stated that the software "neither holds customers’ digital assets nor carries out any transaction functions" and "no court has found anything like [the wallet software] to be a securities broker."
The company is seeking declarations that (i) ETH is not a security and the company's sales of ETH are not securities transactions; (ii) any investigation or enforcement action against the company premised on ETH being a security or ETH transactions being securities transactions would exceed the SEC’s regulatory authority and violate the fair notice requirement of the Due Process Clause; (iii) the company neither acts as a broker, nor offers or sells securities, through the Swaps and Staking functionality of its wallet software; and (iv) any investigation or enforcement action against the company premised on it acting as a broker or offering and selling securities through its software would exceed the SEC’s authority. The company is further seeking an order enjoining the SEC from investigating or bringing an enforcement action either with respect to its sales of ETH or as to wallet software.
Commentary
If the SEC officially declared ETH to be a security, it would have significant implications for the entire crypto industry, affecting projects, investors and overall market dynamics. Numerous businesses have been built based on regulatory precedent that ETH is not a security. Further, if the SEC truly believes that ETH is a security, then it should have taken a proactive stance years ago and provided clear guidance to the industry. Choosing silence and leaving the industry to interpret the SEC's ambiguous signals does not align with the SEC's core mission of investor protection.
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