The SEC decides to end the investigation into Ethereum 2.0, is this good news for ETH's spot ETF?

In the cryptocurrency field, regulatory issues have always attracted significant attention. Recently, the SEC (U.S. Securities and Exchange Commission) has once again become the focus, this time targeting Ethereum 2.0. It is reported that the SEC has decided to end its investigation into Ethereum 2.0 and will not charge that the sale of Ethereum constitutes a securities transaction. This news immediately sparked widespread attention and discussion within the cryptocurrency community.
For the past 14 months, Ethereum 2.0 has been a focal point of regulation. However, a letter sent by Consensys on June 7 requested the SEC to confirm that the approval of the Ethereum spot ETF was predicated on Ethereum being classified as a commodity, which ultimately prompted the SEC to decide to end the investigation. This decision is not only a significant victory for Ethereum developers, technology providers, and industry participants but also marks an important shift in the regulatory environment.
As the news of the SEC's decision to end the investigation broke, the market reacted swiftly. On June 19, Ethereum-related projects, such as LDO, topped the gainers' list. On June 20, projects within the Ethereum ecosystem, including ENS, LDO, RPL, Pendle, CVX, MOG, and PEPE, also saw significant increases, reflecting the market's positive attitude towards this news.

However, for many blockchain developers, technology providers, and industry participants, this is not a panacea. They continue to suffer under the SEC's aggressive cryptocurrency enforcement regime. Consensys emphasized that their fight is ongoing, particularly regarding whether MetaMask Swaps and Staking violate securities laws. They hope to achieve much-needed regulatory clarity through litigation to allow this innovative industry to thrive.
In this context, it is essential to delve into the details of the SEC's investigation and the reasons behind its decision, as well as to explore the potential impact of this event on the cryptocurrency market and regulatory environment.

SEC's Investigation into Ethereum: A Saga That Grips the Entire Industry

On April 25, 2024, cryptocurrency giant Consensys filed a strongly worded lawsuit in the federal court of Texas, accusing the SEC of "overregulation" in an attempt to classify Ethereum (ETH), with a market cap of $380 billion, as a security. This lawsuit is based on the premise that "ETH does not possess any securities characteristics." However, understanding the origins of the SEC's investigation into ETH requires a look back nearly a decade to the early days of Ethereum's establishment.
Consensys is a major supporter of the Ethereum blockchain, which is a "Layer 1" blockchain ledger similar to Bitcoin but allows for the building of other protocols and applications on top of it. Ethereum users transact using ETH, which is the form of payment made to individuals (known as "miners") who run the network globally. Consensys has made significant contributions to the backend infrastructure of Ethereum and has provided funding support for many small projects within the ecosystem. Most notably, it developed the MetaMask wallet, which had approximately 30 million monthly active users as of February this year. The success of Consensys is closely tied to the success of the Ethereum network, and the manner in which ETH has been sold has been controversial since its inception.
ETH was launched in July 2014 through an Initial Coin Offering (ICO), similar to an Initial Public Offering (IPO) in traditional financial markets. During the ICO boom, many projects raised substantial funds through this method, drawing the attention of regulators. In July 2017, the SEC released an investigative report stating that "virtual organizations offering and selling digital assets must comply with federal securities laws." Subsequently, regulators began to investigate and prosecute ICO projects that did not comply with securities laws, leading to a rapid cooling of the ICO market. However, tokens issued before the July 2017 report, including ETH, were effectively exempted from SEC prosecution.
Although the SEC did not take action against the ICO issuance of ETH, its scrutiny of the Ethereum network has not diminished. Particularly after Ethereum transitioned from Proof of Work (PoW) to Proof of Stake (PoS) in 2022, regulators have become increasingly focused on this network. The PoS system allows miners to run the network by locking (staking) their ETH in exchange for payments from network users. The SEC believes that this staking mechanism constitutes an investment contract and falls under the purview of securities laws.
In this context, Consensys's lawsuit appears to be a preemptive strategy. Faced with the possibility of SEC prosecution, Consensys hopes to gain more regulatory clarity through litigation. However, the SEC's historical record shows that it has rarely lost cases involving unregistered securities. Despite Consensys's advantages in financial and legal resources, their chances of success on legal grounds are not high.

SEC's Definition of Ethereum Remains Ambiguous, Leaving a Series of Legacy Issues

In 2018, the SEC explicitly stated that Ethereum (ETH) is not a security. At that time, William Hinman, the director of the SEC's Division of Corporation Finance, pointed out in a speech that because Ethereum does not have centralized management, "current sales of Ethereum are not securities transactions." This statement reflected the SEC and its leadership's thoughtful judgment regarding Ethereum and was widely recognized.
The following year, the chairman of the Commodity Futures Trading Commission (CFTC) also declared that Ethereum is a commodity, thus falling under the jurisdiction of the CFTC. Subsequent CFTC successors reiterated that Ethereum is classified as a commodity rather than a security. During this period, the SEC and CFTC repeatedly reaffirmed this position in public statements, congressional hearings, enforcement actions, and regulatory measures. Overall, the regulatory consensus was clear: Ethereum is not a security.

However, this position began to subtly shift in recent years. In December 2023, Bloomberg analyst James Seyffart pointed out in a podcast that the SEC recently approved Ethereum futures exchange-traded funds (ETFs), which may imply that the SEC acknowledges Ethereum as a commodity rather than a security. Additionally, SEC Chairman Gary Gensler publicly recognized Bitcoin as a commodity while remaining relatively silent on Ethereum, indirectly indicating that he no longer views Ethereum as a security.
In May 2024, the SEC approved the Ethereum spot ETF, further demonstrating the SEC's recognition of Ethereum's non-security status. Bloomberg ETF analyst James Seyffart and digital asset attorney Justin Browder both believe that this approval implies the SEC's stance of not regulating Ethereum as a security. However, they also noted that staked ETH may still be defined as a security and could be subject to SEC regulation.
In April of this year, Ethereum infrastructure company Consensys received a Wells notice from the SEC regarding its MetaMask trading and staking services. Financial attorney Scott Johnsson pointed out that although the SEC approved the Ethereum spot ETF, it did not explicitly confirm Ethereum's non-security status in its approval order, meaning the SEC may still take action regarding staking issues.
According to Fox Business reports, SEC Chairman Gensler has believed for the past year that ETH constitutes "unregistered securities" and does not comply with current federal regulations. In March 2023, Gurbir Grewal, head of the SEC's enforcement division, approved a formal investigation order to investigate Ethereum's securities status and subpoenaed individuals and entities involved in the matter.
These developments indicate that the SEC's attitude towards Ethereum is changing, and this controversy will have far-reaching implications for Ethereum and the entire cryptocurrency market.

The End of the Investigation Does Not Mean Full Recognition of ETH's Legal Status by U.S. Regulators; Future Market Needs Attention

On April 25, 2024, ConsenSys filed a lawsuit in the Northern District of Texas, accusing the SEC of attempting to classify Ethereum as a security, despite the SEC's prior declaration that Ethereum does not possess securities characteristics. ConsenSys argues that the SEC's action is not only overreaching but also violates principles of procedural justice.
In the lawsuit documents, ConsenSys revealed that on April 10, 2024, SEC staff sent a "Wells notice" to ConsenSys, stating that it would soon take enforcement action against ConsenSys for allegedly violating federal securities laws through its MetaMask Swaps and MetaMask Staking products. A Wells notice is typically sent to individuals or entities under investigation at the conclusion of an investigation, informing them that the SEC intends to take action against them for suspected violations of securities laws and providing them an opportunity to explain or rebut.
Consensys believes that the SEC's action is based on the involvement of MetaMask's Swap and Staking functions in trading unregistered securities, similar to the accusations against exchanges like Coinbase, Binance, and KuCoin. However, Consensys is very dissatisfied with the SEC's ambiguous stance on whether tokens are securities and has decided to preemptively file a lawsuit to accuse the SEC of overreaching in regulating non-security commodities and assert that MetaMask has not violated federal securities laws.

Joseph Lubin, founder of ConsenSys, stated in a media interview that while the SEC's decision to end its 14-month investigation into Ethereum is an encouraging development, it is far from enough. He emphasized that the company will continue to pursue litigation against the SEC to seek greater legal transparency. Lubin noted, "There must be better ways to regulate the market than ambushes. We hope that some U.S. regulatory agencies' hostility towards cryptocurrencies begins to wane, and the national investor protection strategy will move away from its current guerrilla tactics."
On June 19, 2024, ConsenSys issued a statement on Twitter: "Our fight continues. In our lawsuit, we also seek a declaration that the user interface software MetaMask Swaps and Staking does not violate securities laws. We should not have to provide urgently needed regulatory clarity through a lawsuit to allow an industry that serves as a pillar of countless new technologies and innovations to thrive—but that is the reality."
In summary, the SEC's decision to end its investigation into Ethereum marks a temporary easing of a regulatory storm, but the future path remains fraught with uncertainty. ConsenSys's counteraction not only concerns its own future but may also influence the regulatory landscape of the entire cryptocurrency industry. Will Ethereum continue to exist as an innovative financial tool? How will the balance between regulatory agencies and technological innovation be achieved? These questions will take time to answer.