Consensys: 4 reasons why Ethereum is not a security

Ethereum has come under scrutiny from the SEC (U.S. Securities and Exchange Commission), which has hinted that it will classify Ethereum as a security.

The move has sparked controversy, especially since the SEC stated in 2018 that Ethereum did not meet securities standards.

In light of these events, blockchain software company Consensys strongly opposes the SEC’s decision to classify Ethereum as a security. Here are four reasons:

1. The SEC’s historical stance on Ethereum

In 2018, William Hinman, then director of the SEC’s Division of Finance, delivered an important speech in which he made it clear that Ethereum is not considered a security.

Hinman once said: Putting aside the fundraising when Ethereum was born, based on my understanding of the current state of Ethereum, the Ethereum network and its decentralized structure, the current quotations and sales of Ethereum should not be classified as securities transactions.

The SEC has not formally retracted this position, which has led to a strong presumption of Ethereum’s current “non-security” status.

A Consensys spokesperson added: “Based on Director Hinman’s opinion in 2018, there is no difference now or then.”

“If anything, there are more people developing and working on Ethereum than ever before.”

Therefore, the SEC’s sudden change of view without sufficient new evidence is unwarranted and a willful challenge to prior regulatory guidance.

Second, the classification of commodities by the CFTC (Commodity Futures Trading Commission)

Another US regulator, the CFTC, has long acknowledged that Ethereum is a commodity. Most recently, in a civil enforcement action involving the crypto asset exchange KuCoin, the CFTC explicitly classified Ethereum as a commodity.

“KuCoin solicits and accepts orders, accepts property deposits, and operates facilities for futures, swaps, and leveraged, margined, or financed retail transactions involving digital assets such as BTC, ETH, and LTC,” the compliance document reads.

This classification supports broader market understanding and regulatory treatment of Ethereum, further emphasizing its role and function as distinct from securities.

According to a Consensys spokesperson: “The dual approval from both the SEC and CFTC historically reinforces the argument that Ethereum is more suited as a commodity than a security.”

The Consensys spokesperson also added: “The SEC has clearly declared for many years that Ethereum is a commodity. So I think in this case, you just need to look at what the CFTC has been saying and what the SEC has said in the past to come to the correct conclusion.”

3. Decentralization and open protocols

The essence of Ethereum architecture lies in decentralization. Unlike securities, Ethereum runs on a platform and all information is public.

The management and operation of the network’s protocol does not rely on a central group. Therefore, it negates the main rationale for security classification, which is to protect investors from information asymmetry.

“Ethereum is unquestionably decentralized,” a Consensys spokesperson explained. “There are no core issues or groups on Ethereum, and no core group of developers with privileged insider information, which is a common enterprise that must exist for security.”

This fundamental property of Ethereum is consistent with the principles that originally guided the SEC’s decision in 2018.

4. The irrelevance of the consensus mechanism transformation

Ethereum’s recent transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism was cited by the SEC as a potential reason for reclassifying Ethereum.

However, this change does not inherently affect the core nature of Ethereum’s operation or its non-security classification.

“Looking at Director Hinman’s 2018 speech, when he said Ethereum was not a security, he did not use PoW or PoS as a basis, and the consensus mechanism was irrelevant,” the Consensys spokesperson concluded.

The transition to PoS does not introduce typical elements of securities, such as dividends or ownership of a central enterprise. It is simply a technological evolution that improves efficiency and sustainability without changing the fundamental, decentralized nature of the platform.

In summary, the SEC’s reclassification of Ethereum as a security does not stand up to scrutiny, especially given the SEC’s historical regulatory approach, classifications by other regulators, the decentralized nature of Ethereum, and the irrelevance of its internal consensus mechanism to securities laws.

This article is sourced from the internet: Consensys: 4 reasons why Ethereum is not a security

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