While everyone was still paying attention to the final statement of the SEC (U.S. Securities and Exchange Commission) on the ETH ETF, the SEC suddenly took action and filed a formal lawsuit against Consensys, a blockchain technology company and the parent company of Metamask, on June 29, accusing MetaMask's Swap and pledge products of violating securities laws, and naming Lido and Rocket Pool's liquidity pledge tokens stETH and rETH as unregistered "securities."

As soon as the news came out, it caused an uproar in the industry. According to the TrendX sentiment index data, the Lido and Metamask sentiment indicators dropped sharply. Among them, Lido dropped by 30, from 21 to a minimum of -9; Metamask dropped by more than 100, from the original 33 to a drop to -69, and the sentiment also changed from relatively positive to very negative.

The decline in sentiment also caused fluctuations in the price of the currency. According to Coinmarketcap data, on the day the SEC's lawsuit was announced, the price of Lido fell from a high of $2.43 to a low of $1.86, a drop of more than 23%.

As the Metamask wallet with the highest popularity in the web3 industry, and Lido, which plays an important role in the ETH Stake Restake sector, the lawsuit will inevitably cast a shadow on the development of its project and the entire industry.

ConsenSys vs. SEC: A long-running legal dispute

On Thursday, April 25, U.S. time, blockchain technology company ConsenSys filed a lawsuit in the U.S. District Court for the Northern District of Texas because the U.S. Securities and Exchange Commission (SEC) attempted to classify Ethereum (ETH) as a security. This incident has attracted widespread attention. ConsenSys pointed out in the lawsuit that the SEC attempted to regulate ETH as a security, although ETH does not have the attributes of a security and the SEC has previously made it clear that ETH is not a security and does not fall within the SEC's statutory jurisdiction.

Origin of the incident

On April 10, 2024, SEC staff sent a "Wells Notice" to ConsenSys, stating that it was about to recommend that the Commission bring enforcement actions against ConsenSys on the grounds that ConsenSys violated the federal securities laws through its MetaMask Swaps and MetaMask Staking products. A Wells Notice is a formal notice issued by the SEC before initiating an enforcement action, notifying the investigated individual or institution that the SEC intends to recommend enforcement action against it for suspected violations of securities laws. This notice allows the person notified to provide written statements or oral defenses to explain or refute the SEC's preliminary findings before the SEC makes a final decision.

Litigation Focus

The SEC’s legal position is that MetaMask’s related Swap and other functions involve transactions in unregistered securities, thus violating federal securities laws. ConsenSys’ logic is that the SEC is ambiguous on whether these tokens are considered securities, so it decided to file a lawsuit in court. ConsenSys believes that Ethereum should not be considered a security, and MetaMask’s functions do not involve securities transactions, so they do not violate federal securities laws. The SEC’s prosecution is usually based on the following aspects:

  • Unregistered Securities Offering: The SEC may allege that Consensys failed to comply with the registration requirements of U.S. securities laws in the issuance of certain tokens. Under U.S. law, any asset deemed to be a security must be registered with the SEC before it is issued or must meet certain exemptions.

  • Misleading Investors: The SEC could claim that Consensys misled investors in its token offering or failed to provide adequate disclosures, resulting in investors not fully understanding the risks and nature of their investments.

Impact and concerns

If the court rules that Ethereum is a security, then any sale of Ethereum in the United States will need to follow procedures similar to those for stocks, which will have a significant impact on exchanges and institutions that hold large amounts of Ethereum, as well as the approval of Ethereum ETFs. ConsenSys believes that the SEC’s illegal usurpation of power over ETH will spell disaster for the Ethereum network as well as ConsenSys.

The SEC’s lawsuit against Consensys could have wide-ranging implications:

  • Impact on Consensys: If the SEC's allegations are proven, Consensys may face huge fines, compensation for investor losses, and requirements to rectify its business model. This will have a significant impact on the company's operations and reputation.

  • Impact on the crypto industry: This lawsuit may become an important landmark event in the industry, indicating that the SEC will enforce stricter supervision on cryptocurrency and blockchain companies. This may trigger other companies in the industry to re-examine their business compliance, prompting more companies to seek cooperation with the SEC to avoid similar legal risks.

  • Market reaction: This incident may cause short-term volatility in the cryptocurrency market, especially projects and tokens related to Consensys. Investors may have concerns about regulatory risks, which may affect market sentiment.

The intensification of contradictions

In an earlier lawsuit, ConsenSys expressed doubts about the SEC, and the SEC gave an ambiguous statement on June 18: "Although we do not agree with the facts or legal conclusions stated in the June 4 letter in this notice or in any other case, based on the information we have to date, we do not intend to recommend to the Commission that enforcement action be taken against ConsenSys Software Inc. " However, this statement does not mean that the SEC has given up its investigation into ConsenSys.

Statement from Legal Counsel

In response to the lawsuit, ConsenSys' legal counsel Laura Brookover said that the entire investigation (not just against ConsenSys) has ended. The letter stated that no charges would be filed against ConsenSys, but this does not mean that there will be no lawsuits against others who provide or sell Ethereum.

Different opinions

However, there are opponents who believe that the SEC's letter does not clearly state that the investigation is "over." For example, Enumma founder David Barrera believes that this only means that the SEC will not bring charges against other people who offer or sell Ethereum, but according to the SEC's enforcement manual, the conclusion of the investigation does not mean that the investigation is completely over.

Industry Impact

At present, the SEC's prosecution of ConsenSys seems to be a foregone conclusion, but industry observers are more concerned about whether this will affect Liquid Staking and Restaking such as Lido, as well as the final approval of the ETH ETF. Laura believes that the SEC's investigation into these activities belongs to another independent investigation and does not affect the end of the Ethereum 2.0 investigation.

Summarize

Although more details about the lawsuit have not yet been disclosed, it is certain that Web3 is becoming increasingly integrated with the real world, and it is difficult for relevant policies, regulations or policy groups to exclude Web3. We should have full confidence in this.

The conflict between the SEC and ConsenSys reflects the legal and regulatory complexity of the cryptocurrency industry. As more regulations and policies are introduced, how to find a balance between innovation and compliance will be an important challenge for the entire industry. We look forward to the final outcome of this case and hope that it can provide useful reference for the healthy development of the industry.

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