On Friday, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Consensys, a prominent Ethereum software provider, specifically targeting its popular MetaMask service.
The action, taken in the Eastern District of New York, accuses MetaMask of acting as an unregistered broker, thus allegedly engaging in the offering and sale of securities without the necessary registrations. This marks a significant development in the regulatory scrutiny of cryptocurrency services.
Allegations of Unregistered Securities Program
According to the SEC, not only has MetaMask been operating without proper registration, but it has also promoted an unregistered securities program through its staking services.
The federal agency alleges that MetaMask supported liquid staking services for Lido (LDO) and Rocket Pool (RPL), treating these arrangements as investment contracts, which under U.S. law, are considered unregistered securities.
This is part of a broader interpretation by the SEC that seeks to bring cryptocurrency offerings within the fold of traditional financial regulation.
In its detailed press release, the SEC elaborated that since at least January 2023, Consensys has facilitated the sale of tens of thousands of unregistered securities.
Source: SEC
These transactions were conducted on behalf of Lido and Rocket Pool, which issue liquid staking tokens—specifically stETH and rETH—in exchange for staked assets.
The appeal of these tokens lies in their liquidity; unlike standard staked tokens, which are locked and non-tradable, liquid staking tokens can be freely bought and sold.
The lawsuit further highlights that MetaMask Swaps—a feature within the MetaMask ecosystem—allowed investors to exchange digital assets through Consensys’ software infrastructure.
For providing these services, Consensys collected transaction fees and, over the past four years, facilitated more than 36 million crypto transactions.
Interestingly, the SEC points out that at least 5 million of these transactions involved what it terms “crypto asset securities,” which include prominent cryptocurrencies such as Polygon (MATIC), Mana (MANA), Chiliz (CHZ), the Sandbox (SAND), and Luna (LUNA).
Many of these digital assets have been implicated in previous SEC actions, where they were named as unregistered securities.
Roles and Accusations Against Consensys
In its comprehensive complaint, the SEC accuses Consensys of assuming roles typically associated with traditional securities markets. It alleges that Consensys has acted as an unregistered broker and underwriter concerning MetaMask Swaps.
Specifically, the complaint states that Consensys has sold tens of thousands of securities for issuers like Lido and Rocket Pool, effectively underwriting these securities and participating in their distribution.
Joseph Lubin, CEO of Consensys. Source: Lift conference
According to the SEC, through these activities, Consensys has accrued more than $250 million in fees. By operating without the appropriate registrations, the SEC contends that Consensys has circumvented legal safeguards designed to protect investors, thus exposing them to potentially higher risks.
As a result, the SEC is seeking a permanent injunction to prevent further violations, alongside significant civil penalties and other equitable remedies to address these alleged breaches of U.S. securities laws.
Broader Implications for the Cryptocurrency Industry
This lawsuit comes on the heels of an earlier indication from the SEC that, although it had concluded its investigations related to Ethereum, it might still pursue enforcement actions on other fronts.
Notably, the SEC’s recent communications with Consensys did not explicitly mention MetaMask, suggesting that this legal action might have been unexpected.
This legal challenge underscores the SEC’s ongoing efforts to regulate staking services, which involve locking cryptocurrencies to enhance the security and operations of blockchain networks.
These staking activities not only confirm transactions and generate new blocks but also provide validators with rewards, creating a stream of passive income.
This is part of a broader regulatory endeavor, as seen with other entities like Kraken and Coinbase, which have also faced regulatory challenges regarding their staking services.
The outcome of this lawsuit could have significant implications for the cryptocurrency industry, particularly for services offering staking capabilities to U.S. clients.
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