The cryptocurrency industry received a significant jolt of clarity and optimism when the U.S. Securities and Exchange Commission (SEC) concluded its investigation into Ethereum 2.0, announcing that it would not take any enforcement action. The decision marks an significant victory for Ethereum and could serve as a critical benchmark in the treatment of digital assets under U.S. securities law.

Ethereum is not a security

In 2018, the SEC made a key distinction that Ether is not a security. However, by 2023, due to the evolution of functionality and the transition to Ethereum 2.0, the SEC revised this position again, indicating possible regulatory oversight. This change led to increased scrutiny and uncertainty within the Ethereum community, culminating in a lawsuit filed by Consensys on April 25, 2024. The lawsuit sought to confirm ETH’s classification as a commodity, arguing that the SEC lacked jurisdiction over its trading and management.

In a key response dated June 7, 2024, Consensys urged the SEC to recognize Ethereum-based ETF approvals issued earlier in May that were based on the assumption that ETH is a commodity. Consensys argued that this should finally end the SEC’s investigation into Ethereum 2.0.

SEC Enforcement Division officially he replied on June 18, 2024, as announced in a letter addressed to Kevin S. Schwartz, Consensys representative. The letter said: “We are writing to inform you that we have completed our investigation into the above-mentioned matter […] Based on the information we have at this date, we do not intend to recommend that the Commission take enforcement action.”

Importantly, the SEC underlined that this closure should not be viewed as an exoneration or that the staff’s investigation may ultimately result in no action. Nevertheless, Laura Brookover, an attorney at Consensys, emphasized the importance of this development, stating: “The SEC sent us today a final letter regarding its Ethereum 2.0 investigation. Since we filed our lawsuit against the SEC in late April, the situation has changed extremely rapidly, culminating in today’s developments.”

This resolution can be seen as a critical moment for the broader crypto industry, particularly in the classification and regulation of digital assets. Paradigm’s Alexander Grieve noted the tone of the SEC’s notice, commenting: “They are quite cautious/evasive in their notices, BUT it is relatively uncommon for the SEC to specifically emphasize to a company that it has closed an investigation. “

Closing this investigation without enforcement action could set a precedent for how other cryptocurrencies are treated by regulatory agencies, potentially facilitating the regulatory environment for digital assets.

While the immediate threat of enforcement action has been reduced, Consensys and the broader crypto industry are seeking further clarification from regulatory policy. In its lawsuit, Consensys also asks a federal court to rule on its business, arguing that it does not act as a broker-dealer or issue securities through its software such as MetaMask Swaps and Staking.

As stated in the lawsuit, “Consensys relies on the creation of software that allows people around the world to use and build the Ethereum network, and is entitled to conduct its business without the costs, burdens and uncertainty of unlawful enforcement actions.”

At press time, the price of ether (ETH) has reacted positively to the SEC’s decision, showing a significant augment of 3.3%, bringing it to the current trading price of $3,561.

Featured image created with DALL·E, chart from TradingView.com