SEC closed the book on its Ethereum 2.0 investigation, but legal questions remain

The Securities and Exchange Commission's move to close its "Ethereum 2.0" investigation of Consensys raises the question: So, is ether not a security? 

Sources say that's still not entirely clear.

Consensys announced on Tuesday that the SEC's enforcement division notified the blockchain and web3 development company that it was closing its investigation into Ethereum 2.0 in a "major win" and said that it meant that the SEC "would not bring charges alleging that sales of ETH are securities transactions." This comes after the firm sent a letter in June asking the agency to confirm that the spot ether exchange-traded fund approvals in May meant that it would end its investigation into "Ethereum 2.0." 

In a letter sent June 18 to Consensys from the SEC's Chicago Regional Office, the agency said it had "concluded the investigation in the above-referenced matter."

"While we do not with this notice, or otherwise, agree with the factual statements or legal conclusions set forth in the June 4 Letter, based on the information we have as of this date, we do not intend to recommend an enforcement action by the Commission against your client, Consensys Software Inc. with respect to this investigation," the SEC said. 

Consensys previously said the SEC's Director of the Division of Enforcement, Gurbir Grewal, approved the investigation into "Ethereum 2.0" in March 2023 to investigate individuals and entities buying and selling ether. 

The question of whether ether is a security or a commodity has been up in the air for a while. The SEC's Chair, Gary Gensler, has not explicitly stated that ether is a security. Meanwhile, at the SEC's sister agency, Commodity Futures Trading Commission Chair Rostin Behnam has asserted that ether is a commodity.

The SEC's move to close its investigation does tip the scales into ether being treated as a commodity, said Teresa Goody Guillén, a partner at BakerHostetler law firm and former litigation counsel for the SEC, in an email.

"The SEC reportedly closing its investigation into ether does not mean that this Commission is definitely concluding that ether is not a security," she said. "But it does provide another data point that this Commission has concluded not to bring an action alleging that ether is a security at this time."

A former SEC enforcement attorney who asked not to be named said the SEC could have decided to throw out the investigation either because it has decided that ether is not a security or because it was too much of a litigation risk for the agency to take. 

The lawyer said in an interview with The Block that the SEC could also decide to hedge future statements on whether ether is a security.  

"It's possible that they'll come out and say, well, you know Consensys' issuance of eth is not a securities transaction, but it's possible in some other formation eth could be issued as a security, or maybe they'll make some more definitive statement," the former SEC attorney said. "I think the important thing to remember is that I don't think closing this case necessarily means that they have decided that there is no security here. It just could be that they've decided they don't want to risk litigating it." 

Next steps

Consensys has said it still plans to pursue its lawsuit against the SEC. The firm sued the agency in April over its approach to regulating Ethereum and said at the time that the SEC "trained its sights" on the firm's MetaMask software. In the complaint, the firm also said it received a Wells notice, meaning a formal notice that the agency plans to bring an enforcement action against them. 

The firm is seeking relief for MetaMask and for the SEC to say that Consensys is not acting as a broker-dealer or participating in the sale of securities through its MetaMask Swaps and MetaMask Staking products. The SEC has to respond to Consensys' complaint by July 1. 

The SEC's Wells notice means that the agency is still likely pursuing Consensys, said Marc Fagel, former regional director at the SEC, in an interview. 

"At this point, there's no basis to conclude they're changing their stance on aggressive enforcement actions in the crypto space," Fagel said. 

The agency's decision to close its investigation doesn't set policy, Fagel said. However, the SEC is unlikely to bring cases involving Ethereum in the future, he added.  

"This pretty strongly suggests that the SEC is not going to keep pursuing any cases involving sales of these, whether it's the issuer of the asset or exchanges that are facilitating trades," Fagel said.  

As for whether the close of Ethereum 2.0 means anything for spot Ethereum ETFs, BakerHostetler's Teresa Goody Guillén says it could lend support.

"The closing of the SEC’s investigation lends more support for the position that ether is a commodity," she said. "Each ETF’s registration statements are still under review through a separate process and any delays would likely be unrelated to ether being treated as a security, particularly given that each ETF’s registration statement was amended to preclude staking of ether received or managed by the ETF."

The SEC approved 19b-4 forms for eight spot Ethereum ETFs last month, but those products still need the agency greenlight for registration forms as part of a two-step process. Some ETF issuers received comments from the SEC last week on their S-1 forms with a deadline of Friday to turn them around, according to reporting from The Block . 

Danny Park contributed reporting.