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Joe Lubin is in a fight with the Securities and Exchange Commission. Not only is the financial regulator waging war against Ethereum, he claims, but making a grab for jurisdiction over the future of the Internet. So Lubin has decided to punch back.
In 2015, Lubin was part of the team that created Ethereum, the computer network home to the world’s second largest cryptocurrency, known as ETH. Later that year, Lubin founded Consensys, with the loose ambition to support the development and adoption of Ethereum and built software products on top of the network. In April, Consensys received an unwelcome missive—known as a Wells Notice—from the SEC, informing the company that it was about to be sued. The regulator’s grievance, Consensys was told, had to do with one of the software products in its stable: MetaMask, a crypto wallet that lets users store crypto coins and interact with Ethereum-based apps.
Consensys claims that the SEC notice, which has not been made public, states that MetaMask has made the company into an unregistered securities broker. Specifically, the SEC takes issue with two MetaMask features: one that allows users to trade between different tokens and another that lets them lock up their tokens in exchange for a regular reward, in a process called staking.
On April 25, Consensys filed a lawsuit of its own against the SEC. The complaint accuses the regulator of an “unlawful seizure of authority over ETH,” which “bears none of the attributes of a security”—the specific type of financial instrument over which the SEC has dominion. The SEC having its way “would spell disaster for the Ethereum network,” the complaint alleges.
In its Wells Notice, the SEC stopped short of calling ETH itself a security, says Consensys, focusing instead on the MetaMask features. But according to Consensys, the agency has long been quietly conducting an investigation into Ethereum, in the view that ETH should be reclassified as such.
That’s not fair, claims Consensys, because an SEC director has previously described ETH as a commodity, not a security, and the Commodity Futures Trading Commission, a separate US financial regulator, has made the same contention. “Consensys built its business against the backdrop of this regulatory consensus,” the lawsuit says.
In bringing the lawsuit, Consensys hopes to drag itself and Ethereum out from underneath the SEC, by clarifying the limits of its jurisdiction, and embolden the rest of the crypto industry to retaliate against what it describes as “aggressive and unlawful SEC overreach.” An SEC spokesperson declined to comment on the specific allegations made by Consensys, saying only that “noncompliance with the securities laws deprives investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosures, segregation of customer assets, safeguards against conflicts of interest, oversight by a self-regulatory organization, and routine inspection by the SEC. It’s investors who get hurt and the American financial markets that may suffer.”
The following Q&A has been edited for brevity and clarity.
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WIRED: What would be the implications for Ethereum if the SEC were to classify ETH as a security?
JOE LUBIN: If the SEC is able to make it stick, it will have a chilling effect on users of Ethereum across America.
What do you mean by “chilling effect”?
If ETH is declared a security, people wouldn’t be able to acquire it legally in the US. Software developers wouldn’t be able to develop Ethereum further or build applications on top of the protocol.
If the US has its way, it might use its long arm of the law to reach into different countries around the world and create pressure to reduce access to decentralized protocols and financial disintermediation.
We don’t want to feel like we are being pushed out by an irrational or imprudent regulator. We need to stand our ground.
What are you trying to achieve in bringing the lawsuit against the SEC?
The SEC’s style is uncharacteristic of a public regulator. Many over the last few years have complained that the SEC has been regulating through enforcement actions instead of open dialogue and clear rulemaking.
Our action relates to MetaMask. But it stands alone, too. The SEC has been gaslighting the industry for quite a while, essentially declaring internally that ETH is a security and enforcing that secret notion. It would continue to do that, I believe, unless we brought an independent action that stands alone on its own merits and gets at the heart of the matter: the SEC wants to reclassify ETH.
It’s hard to land a technological paradigm shift into a society that feels like everything is operating just fine. In past decades, internet technology caused confusion and required lots of dialogue and open-mindedness. In the US, safe harbors were created to enable web technology to flourish, which had a profoundly transformative effect.
This time around, I’m pretty sure it’s going to work out fine. But we’re in that really painful stage where there is resistance.
So, are you hoping the lawsuit will help to establish a safe zone, of sorts, for Ethereum?
A great outcome of this would be that we get clarity that ETH is a commodity and the SEC is forced, some time in 2025, to approve ETH spot exchange-traded funds (ETFs). [ETH spot ETFs are a new breed of financial product awaiting approval in the US that would let people invest in ETH through a regular brokerage, as if it were a stock, thereby avoiding the friction and perils associated with storing cryptocurrency themselves.]
Just as bitcoin spot ETFs opened giant gateways from massive pools of capital into the Bitcoin ecosystem, the same thing will happen for Ethereum. More money means more attention. Decentralized finance [DeFi] will mature further. People will gain more access to DeFi.
That’s the big change we are looking to see in the near term: the floodgates opening.
These kinds of cases can roll on for years. Will that uncertainty hamstring Consensys in the interim?
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We’ve been operating under a cloud of regulatory uncertainty for a long time. That cloud is getting thicker. It’s not likely to change until there are decisions from the courts or Congress.
It sounds like the SEC was particularly interested in The Merge when it subpoenaed Consensys last year. Can we assume the SEC is investigating whether ETH looks more like a security post-Merge?
It’s a plausible theory that the SEC is going to hang their hat on the idea that ETH is a different kind of instrument post-Merge. But that’s simply not true.
The network is more decentralized and more secure. It has a better mechanism for achieving consensus that allows people to stake ETH as a guarantee they will devote resources and labor to helping the protocol. Any compensation they get should be seen as income. There is no investment contract.
Consensys’ lawsuit alleges that the SEC is making an unlawful land grab in its pursuit of jurisdiction over Ethereum. But to what end?
Conspiracy theory is my domain. My sense is that the US government likes the way things are, as do big banks. They have worked for decades to position themselves with their hands on levers of power.
The US operates via intermediaries—often financial intermediaries—around the world. Our technology is about disintermediation. It’s about replacing old systems with better systems that give more people and communities direct financial and political agency.
They don’t want a world where people have direct access to financial innovation. It’s less about an SEC land grab and more about trying to kill or slow this new technology.
The question for Consensys was: Do we continue to operate in this gaslit limbo for many years, or force clarity?
