Consensys Lawsuit Over Ethereum Won’t Deter SEC, Former Regulator Says – Decrypt

A preemptive lawsuit filed in Texas federal court aims to definitively determine Ethereum’s regulatory status. But the move by blockchain software company Consensys in its home state may be far from the final legal showdown over crypto’s second-top coin, as the Securities and Exchange Commission (SEC) has national reach.

“The SEC can bring a case anywhere in the country,” Christopher Gerold, a partner at Lowenstein Sandler LLP told Decrypt. “They can just as easily file a lawsuit today and allege sale of unregistered securities in a jurisdiction that they find favorable: California, New York, [or Washington] D.C.”

In its complaint, the MetaMask maker claimed the Securities and Exchange Commission (SEC) has internally viewed Ethereum as a security for over a year. (Disclosure: Consensys is one of 22 investors in Decrypt.) Among other rulings related to MetaMask’s features, Consensys seeks a judicial declaration that Ethereum is not a security.

Ethereum co-founder and Consensys CEO Joe Lubin said Thursday that the firms’ lawsuit is aimed at “getting clarity from U.S. courts.” But the legal tussle, despite being in Texas, probably won’t bring clarity about on its own, according to Gerold, who previously served as the chief of the New Jersey Bureau of Securities. 

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“You have a lot of judges [in Texas] that are concerned about the expansion of federal agencies and the role they play,” Gerold said. “If you’re anti-regulation […], that’s where you bring your case.”

Consensys may have made a strategic choice in filing its lawsuit in the U.S. District Court for the Northern District of Texas, where “judge shopping” has proved contentious. But that doesn’t preclude the SEC from picking its own favorable legal turf if it decides to move forward with a separate lawsuit, Gerold explained.

If the SEC wanted to find that Ethereum was a security publicly, they don’t have to do it through the Consensys lawsuit, he continued. And depending on how higher courts rule as those cases are appealed, Ethereum could be considered a security in one part of the U.S. but not the other.

“Something could be legal in New Jersey and illegal in Texas,” Gerold said, noting that federal circuit courts are not bound by the decisions of other federal circuit courts.

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A patchwork of case law could become cemented if the Supreme Court then decides not to take up the question of whether Ethereum is a security. Of course, Congress could step in at any moment with new laws that ultimately determine how digital assets are treated, Gerold said.

The SEC has not filed any charges related to the Ethereum-centered investigation that Consensys alleges is occurring. And Gerold expects the agency will first seek to dismiss the case without telegraphing its internal thoughts on Ethereum’s legal status.

A lawsuit from the SEC could then follow, which would build upon a Wells Notice issued to Consensys, as is usually the case, Gerold said. A Wells Notice from the SEC typically precedes formal charges. It could still be years until the regulatory matter over Ethereum is fully settled, coming to a head in several different courtrooms along the way.

“There’s different paths [that this] could go.” Gerold said. “But this idea that Consensys’ lawsuit is going to answer the question [of] whether Ethereum is a security or not—and that’s the only forum that has that ability right now—is a fallacy.”

Edited by Ryan Ozawa.

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