Four reasons why Ethereum is not a security: ConsenSys

Ethereum is under investigation by the U.S. Securities and Exchange Commission (SEC) for suggesting that it be classified as a security. The SEC's move sparked controversy, especially after it clearly stated in 2018 that Ethereum did not meet the standards for a security.

Blockchain software company Consensys has taken a firm stance against the SEC's review of the case. Here are four compelling reasons why Ethereum should not be considered a security.

1. Past SEC position on Ethereum

In 2018, William Hinman, then director of the SEC's Corporate Finance Division, made a significant statement that he did not consider Ethereum a security.

“Putting aside the financing involved in the creation of [Ethereum], and based on my understanding of the current state of [Ethereum] and the Ethereum network and decentralized structure, the current offers and sales of [Ethereum] are not securities transactions,” Hinman said. “ He said .

This historical position of the SEC forms the cornerstone of its argument against current reclassification efforts. The SEC has not officially retracted this position, leading to a strong presumption in favor of Ethereum's current non-security status .

“As Director Hinman pointed out in 2018, there is no difference between 2018 and now. Today, in terms of theory and openness, the number of people developing, working on, and adopting Ethereum is much greater than ever before,” a Consensys spokesperson told BeInCrypto.

Therefore, the SEC's sudden shift in perspective, without substantive new evidence or changed circumstances, appears to be unfounded and a capricious challenge to previous regulatory guidance.

2. CFTC classification of products

Another US regulator, the Commodity Futures Trading Commission (CFTC), has consistently recognized Ethereum as a commodity. Most recently, in a civil enforcement case involving cryptocurrency exchange KuCoin , the CFTC finally classified Ethereum as a commodity .

“KuCoin solicits and accepts orders for futures, swap, leverage, margin, and financial retail transactions related to digital assets, such as Bitcoin (BTC), Ether (ETH), and Litecoin (LTC), and margins assets. received and operated the facility,” the compliance clause states.

This classification supports broader market understanding and regulatory treatment of Ethereum and further highlights its roles and functions that distinguish it from securities. According to a ConsenSys spokesperson, the historically dual perception of the SEC and CFTC strengthens the argument that Ethereum operates within a regulatory framework that applies to products rather than securities.

“The SEC has clearly declared over the years that Ethereum is a commodity. Therefore, we do not believe we need to look beyond what the CFTC has consistently said and what the SEC has said in the past to reach the right outcome in this case,” the ConsenSys spokesperson added.

3. Decentralization and open protocols

The essence of Ethereum architecture is decentralization. Unlike securities, which are typically managed by a central authority to benefit insiders with asymmetric information, Ethereum operates on a platform where all information is publicly accessible.

The network's governance and operating protocols do not rely on any centralized group. This therefore defeats the main rationale of security classification, which is to protect investors from information asymmetries.

“There is no doubt that Ethereum is decentralized. There is no core issue or group, no core development group with privileged inside information, like the kind of regular enterprise that has to exist for security to exist,” a Consensys spokesperson told BeInCrypto.

These fundamental properties of Ethereum are consistent with the principles upon which the SEC originally made its decision in 2018.

4. Inadequacy of consensus mechanism transition

The SEC cited Ethereum's recent switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism as a potential reason for reclassification. However, these changes do not inherently affect the core characteristics of Ethereum's operations or its non-securitization classification.

“If you look at Hinman's speech in 2018 where he said Ethereum is not a security, he wasn't basing it on proof-of-work or proof-of-stake. The consensus mechanism is not relevant,” a ConsenSys spokesperson concluded.

The transition to proof-of-stake does not introduce typical elements of securities, such as dividends or ownership, in a centralized corporation. This is simply a technological evolution that improves efficiency and sustainability without changing the fundamental, decentralized nature of the platform.

Read more: Ethereum Merge : Everything You Need to Know

In conclusion, considering Ethereum's past regulatory treatment, classification by other regulators, decentralized nature, and relevance of its internal consensus mechanism to securities laws, classifying Ethereum as a security does not warrant careful consideration.