Four reasons why Ethereum is not a security

Ethereum has come under scrutiny from the U.S. Securities and Exchange Commission (SEC), which has hinted at classifying it as a security. The SEC’s move sparked controversy, especially after it became clear in 2018 that Ethereum did not meet securities standards.

In light of these events, blockchain software company Consensys firmly opposes the SEC’s reconsideration. Here are four compelling reasons why Ethereum should not be considered a security.

1. SEC’s historical stance on Ethereum

In 2018, William Hinman, then Director of the SEC’s Corporate Finance Department, delivered an important speech stating that Ethereum They are not considered securities.

“Putting aside the fundraising efforts during Ethereum’s creation, based on my understanding of the current state of Ethereum, the Ethereum network, and its decentralized structure, Ethereum’s current offers and sales are not securities deal,” Hinman said.

This historical position of the SEC forms the cornerstone of arguments against its current reclassification efforts. The SEC has not officially withdrawn this stance, leading to strong presumptions in favor of Ethereum’s current unsafe status.

“According to Hinman’s 2018 point, there is no difference between now and 2018. Today, in terms of theory and openness, the number of people developing and working on Ethereum and adopting it is, if anything, It’s broader,” a Consensys spokesperson told BeInCrypto.

Thus, without substantial new evidence or a change in circumstances, the SEC’s abrupt shift in view appears unwarranted and capriciously challenges previous regulatory guidance.

2. CFTC’s classification of commodities

The Commodity Futures Trading Commission (CFTC), another U.S. regulatory agency, has always recognized Ethereum as a commodity. Most recently, the U.S. Commodity Futures Trading Commission (CFTC) ultimately classified Ethereum as a commodity in a civil enforcement action involving cryptocurrency exchange KuCoin.

“KuCoin solicits and accepts orders, accepts assets on margin, and operates futures, swaps, and facilities for leveraged, margined, or financed retail trades involving digital assets, including Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC),” Compliance wrote.

This classification supports broader market understanding and regulatory treatment of Ethereum, further emphasizing its separate role and functionality from securities. A Consensys spokesperson said the historical dual endorsements from the SEC and CFTC strengthen the argument that Ethereum operates within a regulatory framework that applies to commodities rather than securities.

“The SEC has clearly declared Ethereum to be a commodity over the years. So I don’t think you really need to go beyond what the CFTC keeps saying and what the SEC has said in the past. With further knowledge, the correct outcome can be reached in this case,” the Consensys spokesperson added.

3. Decentralization and Open Protocol

The essence of the Ethereum architecture lies in its decentralization. Unlike securities, which are typically managed by central entities 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 centralized organizations. It therefore negates the main rationale for security classification to protect investors from information asymmetries.

“There is no doubt that Ethereum is decentralized. There is no core problem or team, no core development team with privileged inside information, this is a common enterprise that must exist for security,” Consensys a spokesperson told BeInCrypto.

This fundamental attribute of Ethereum is consistent with the principles originally guided by the SEC’s 2018 decision.

4. Irrelevance of Consensus Mechanism Change

Ethereum’s recent shift from Proof of Work (PoW) to Proof of Stake (PoS) consensus mechanism is considered by the SEC as a potential reason for reclassification. However, this change does not materially affect the core nature of Ethereum’s operations or its non-security classification.

“If you look at Hinman’s 2018 speech, when he said Ethereum was not a security, he was not basing it on PoW or PoS. The consensus mechanism is irrelevant,” a Consensys spokesperson concluded.

The transition to PoS does not introduce typical security elements, such as dividends or ownership in centralized businesses. It is simply a technological evolution that increases efficiency and sustainability without changing the fundamental, decentralized character of the platform.

In summary, the SEC’s reconsideration of Ethereum as a security has not been subject to rigorous scrutiny, particularly given the platform’s historical regulatory treatment, classification by other regulators, decentralized nature, and its internal The consensus mechanism has nothing to do with securities laws.

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