‘It Can Be Said With Confidence the SEC Is Investigating Ethereum’: Consensys’ Bill Hughes Talks Crypto Law

Last month, news broke that the U.S. Securities and Exchange Commission (SEC) had subpoenaed the Ethereum Foundation in a seeming first move in preparing a potential lawsuit. At this point, all the world knows, really, is that some “state authority” had made contact, the organizing force behind the creation of second-largest cryptocurrency ether (ETH), according to the missing “canary” on the for-profit foundation.

Consensys, the Fort Worth, Texas-based incubator that has developed a number of core tools for the Ethereum ecosystem, including the largest non-custodial wallet MetaMask, node infrastructure service Infura as well as clients like Besu and Teku. To a large extent, Ethereum wouldn’t be what it is today without Consensys.

Bill Hughes is a speaker at this year’s Consensus Festival in Austin, Texas, May 29-31.

“What I’ll say is: Consensys likes to walk the walk and not just talk the talk,” Consensys Senior Counsel and Director of Global Regulatory Matters Bill Hughes, who is speaking at CoinDesk’s upcoming Consensus 2024 conference in May, said in an interview. The firm has spun out a number of projects built internally to be privately run or governed by their users. “It’s a tricky thing going from centralized to decentralized,” Hughes said.

If the SEC is building a case to declare a ETH a security — like it has for similar blockchain projects like Solana (SOL), Cardano (ADA) and Ripple (XRP) — it may consider Consensys’ outsized role in the ecosystem. There are a lot of reasons why it doesn’t make sense to redefine ETH as a security; notably, there is a multi-billion dollar economy that has already been built on it under the implicit understanding that it isn’t.

But that isn’t the only argument the agency could make. Unlike Bitcoin, Ethereum’s creator Vitalik Buterin is still around. There’s the open question of whether the ETH token launch was an “investment contract.” Plus the aforementioned Ethereum Foundation, which still plays an active role in coordinating development. The question is whether “there is a common enterprise” building Ethereum, and whether investors expect to practice from their work.

It’s a tricky legal subject, not made easier by the SEC’s reluctance to provide clear guidance regarding crypto. In fact, the securities watchdog may even be deploying backdoor strategies to try to sow confusion, like issuing a special purpose broker dealer license to a trading platform that intends to list ETH as a security or lying to a court to freeze a small blockchain project’s funds.

CoinDesk reached out to Consensys’ Bill Hughes to get an overview of the ETH securities issue, Consensys’ role in the ecosystem and whether specially licensed broker dealer Prometheum may be used as a wedge to deny approval of spot ether exchange-traded funds.

Are crypto lobbyists doing a good job?

I think they are. It’s hard because the policy space is pretty confusing. The subject matter is pretty confusing. Many people they need to talk to just don’t care one way or another. I mean, I’m biased, I’m on the board of Blockchain Association, but it does a really good job of keeping its membership informed, educating them about the Hill and and coming up with smart plans on how to pursue what we view as productive policy ends. Crypto lobbyists aren’t some monolith. But there are people who are very effective both because they know the Hill and because they understand fundamentally what the technology is, what it can do and how we can figure out how public policy can be brought to bear to address some of the risks.

How much of your role at Consensys is educating people in D.C.

Not too much. It depends on what’s going on. If we need to do it, I’m probably the guy to do it or coordinate it. But it’s ebbed and flowed over time. Consensys is not some bureaucratic behemoth where roles have existed for decades. I have to make decisions as to what needs to be done and how to go about doing it, and sometimes that requires me to pay more attention to policy discussions and engage with legislators or other policy folks in and around D.C. and sometimes it doesn’t.

So, I would say over time, I’ve certainly focused more of my attention internally. I’ve been wearing two hats in that regard. As the company has expanded, and our offerings have gotten more diverse, and the regulatory picture has sort of evolved globally, more and more and more of my attention over time has been focused internally on advising the company or product teams.

Two related questions: Do you think the SEC is possibly building a case against the Ethereum Foundation? And also, what is the best argument that ETH is not a security?

So with respect to the first question I wouldn’t make that argument specifically. I wouldn’t say that the SEC is looking to bring a case against any particular party related to Ethereum. The way they’ve typically gone about declaring a token a security is generally going after some third party, and in the course of that case, calling some other token a security [like naming SOL or ADA in the Coinbase suit]. There are instances in which they’ve gone after the putative security token issuer [like Ripple], but they don’t need to do that. I do think the reporting is robust enough that it can be said with confidence that the SEC is investigating Ethereum.

It’s likely they will flip flop as to [ETH’s] categorization under the investor protection laws. I will note that as recently as October 2023, the SEC permitted Ethereum-based futures ETFs to be traded on securities exchanges. That implied the asset the futures contract was based on was not a security. So something has happened between then and now, which appears to have caused the SEC to flip positions.

It’s certainly reasonable for the market to be very alarmed at this in part because a lot of people are invested in this ecosystem. The SEC completely changing tracks like this would undo years of established fact about what Ethereum was, at least as the market conceived of it, and is dangerously disruptive to all of it. So it’s going to be something that should be closely watched.

What do you think is happening with Prometheum? Is this an example of the SEC picking winners?

I was just reading a law article blog last night about Prometheum. And it noted that this entity with a special purpose broker dealer license does not require the SEC’s formal approval for how it operates. Further, there was some guidance put out about four years ago, and that’s about it — that there’s only one special purpose broker dealer in four and a half years really tells you how effective this regulatory program has been.

If Prometheum says Ethereum is a security, the SEC doesn’t need to specifically approve that, but it may present an opportunity for the SEC, not to have to declare one way or another on its own, but just sort of as a result change its position. The SEC would then be required to engage the CFTC, which it appears they have not done, and come to some process through which products which are only overseen by the CFTC today — futures products — would somehow morph into products which are traded on platforms overseen by both agencies. The law blog identified at least some precedent for that, but it raises a whole host of questions.

So with respect to your initial question: It is amazingly coincidental that the SEC is appearing to take a different at least rhetorical and tactical approach to Ethereum and that happens to coincide with the first ever SPDB materializing essentially out of nowhere, and being brought to the forefront of the political consciousness in terms of the crypto debate in D.C.

If you look up who’s sitting with Prometheum at congressional hearings, you see these very oddly associated lobbyists. And you’re like, “How does somebody from New York running an SPDB know this former Democratic chairman from Tennessee?” It’s not crazy to say there’s some backroom politics being played. I’m not one for conspiracy theories, but there’s a lot that stinks about what’s been going on with Prometheum.

We’ll see what if anything follows from them declaring that Ethereum will be the first asset that they custody. I would bet that you will see that fact somewhere in a rejection of the spot Ethereum ETFs.

Do you think Metamask will launch a token? And is there a regulatory reason why they wouldn’t or is it purely functional?

What I’ll say is: Consensys likes to walk the walk and not just talk the talk. Metamask is the best, most trusted, most useful wallet for the ecosystem that it operates in. It’s expanding as Snaps is doing well. At the end of the day, the goal is not just to create a new type of internet browser that we control wholly, but from Joe [Lubin] on down, the company really fervently believes in a new paradigm for how projects like this can be owned and maintained and sustained over time.

It’s a tricky thing going from centralized to decentralized. I’m not announcing anything with respect to MetaMask generally, but it’s safe to say that something as big as MetaMask shouldn’t just be owned and operated by Consensys. It should be owned and operated by the community. Mechanisms to decentralize things oftentimes include tokens. But how or when that would happen — nothing to report in that regard.

Are there any similarities between working at Consensys versus working at the White House?

I think yes. I’ve worked at two White Houses, which tend to be pretty hierarchical. Consensys is too, to some degree. But in terms of where ideas can come from, in terms of how we solicit feedback, come up with new ideas and work and lead and collaborate with each other — it’s much more flat. White House’s are all about the President’s agenda, whereas Consensys there’s an agenda created through consensus. We have our own mission, we have a vision and values, which are well communicated across the company. The things we believe in dictate what we focus on.

Consensys is very much a family atmosphere. You don’t get that family atmosphere at a White House. People are very transient at a White House. There’s a lot of zero sum games politically at a White House.

But it’s the same in the sense that they both have leaders throughout the organization who stand apart in their influence because they have a singular vision to achieve. Whether it be the White House or Consensys, or any other organization, there are those who I think the crowd listens to more closely when they are sharing their ideas or expressing their view as to what to do next.

Anything you’re looking forward to at Consensus?

To tease our panel for Consensus, the news just came out that apparently Uniswap received a Wells Notice. I think it is safe to predict that this is the first shot in the new front of the war against crypto for the SEC. And so by the time our panel rolls around, we’re probably going to have a sizable chunk of SEC related news that me and the other panelists will be able to really sink our teeth into.

You’re referring specifically to decentralized exchanges as the new front for the SEC?

No, just that Fortune is reporting that Uniswap just got a Wells Notice, meaning that a suit against Uniswap from the SEC is pending. And my point is I don’t think that’s going to be a one off item.

Yeah, probably not. Who do you think is likely to follow?

I will say that the SEC in practice has generally — barring truly fraudulent behavior, not just a registration violation — then generally their move has been to sue somebody in that same category and move on to another category. Binance they had to sue for all of the fraud related reasons. They did sue Coinbase and Kraken. We’ll see if they sue other DEXes. But they could just stop on a DEX basis with Uniswap.

If Uniswap didn’t run its own website — the major portal into the Uniswap protocol — would that be a legal protection for them?

We’ll see. The SEC is very imaginative in the ways that you can be violating their rules and whether they point at the Uniswap front end as the problem or whether they point at anything Uniswap Labs may be doing with respect to upgrading or updating or maintaining or marketing the protocol generally.

I suspect, to the extent these reports are accurate, that it’ll be at least both, if not other theories as well. It’s hard to say with any certainty, but I don’t expect Uniswap to tuck tail in such a circumstance. I would expect them to fight.

CORRECTION (APRIL 18): Consensys is no longer based in Brooklyn, New York.