Author: 0xjs, Golden Finance
It seems that the US SEC is not going to let ConsenSys go.
On April 26, 2024, the U.S. SEC issued a "Wells Notice" to ConsenSys, accusing its product MetaMask of violating securities laws, failing to register as a broker, and participating in the issuance and sale of certain unregistered securities. ConsenSys then sued the U.S. SEC.
After the U.S. SEC passed the spot ETH ETF 19b-4 filing under political pressure, the market once thought that the U.S. SEC would let ConsenSys go. On June 18, 2024, the U.S. SEC wrote to Consensys’ lawyers, saying, “We are writing to inform you that we have completed our investigation into [Ethereum 2.0 issues]… Based on the information we currently have, we do not intend to recommend that the SEC take enforcement action against your client, Consensys Software Inc., in connection with this investigation.”
Two months after the Wells Notice was issued, the US SEC decided to continue pursuing ConsenSys. On June 28, 2024, the US SEC formally sued ConsenSys.
US SEC sues ConsenSys: MetaMask is unregistered
1. Since 2016, Consensys has developed and operated a range of crypto-related services under the brand name “MetaMask.” Consensys positions itself as a leader and innovator in the crypto-asset industry, but some of its products to clients perform traditional functions: (1) brokering securities trades for retail investors and (2) participating in the issuance and sale of securities.
2. Consensys violated the federal securities laws by failing to register as a broker-dealer and engaging in the offering and sale of certain unregistered securities, thereby depriving investors of important protections afforded by those laws. Since October 2020, Consensys has acted as an unregistered broker-dealer in crypto-asset securities through its MetaMask Swaps service. Since January 2023, Consensys has engaged in unregistered securities offerings and sales in the form of crypto-asset staking programs through its MetaMask Staking service and acted as an unregistered broker-dealer. Through its actions as an unregistered broker-dealer, Consensys has collected more than $250 million in fees.
3. MetaMask Swaps is a digital platform that brokers crypto-asset securities transactions for MetaMask Swaps users (including retail investors in crypto-asset securities). As its name suggests, through "MetaMask Swaps", Consensys exchanges one crypto-asset for another crypto-asset on behalf of investors. Consensys solicits potential crypto-asset securities investors, positions itself as a place to buy and sell crypto-assets (including crypto-asset securities), recommends transactions (as Consensys itself says, with the "best" value), accepts investor orders, transmits investor orders, processes customer assets, trades in accordance with customer trading parameters and instructions, and collects transaction-based compensation.
4. MetaMask Swaps works as follows. Investors enter the name and amount of the crypto asset they wish to sell, and the name and amount of the crypto asset they wish to receive. MetaMask Swaps then extracts available exchange rates from a set of execution venues and other third-party liquidity providers curated by Consensys (referred to herein as "third-party liquidity providers") and displays those exchange rates to the investor, highlighting the options that Consensys considers to be the "best". The investor clicks again, and MetaMask Swaps performs the functions required to trade, trading with third-party liquidity providers on the investor's behalf. As further described below, Consensys' software interacts with third-party liquidity providers on the investor's behalf by routing the investor's orders through smart contracts on the blockchain. As is often the case in traditional securities markets, investors never interact directly with third parties here; all investor interactions are conducted directly through Consensys' platform. Consensys charges a fee on most transactions.
5. Since 2020, Consensys has brokered more than 36 million crypto asset trades through MetaMask Swaps, of which at least 5 million were crypto asset securities trades, with investors on one side trading with third-party liquidity providers (such as so-called "decentralized" crypto asset trading platforms and market makers) on the other side.
6. In addition to acting as an unregistered broker in MetaMask Swaps, Consensys also performed another traditional function of the securities market: the issuance and sale of securities. Specifically, Consensys issued and sold tens of thousands of securities for two issuers (Lido and Rocket Pool). Through this behavior, Consensys acted as an underwriter of these securities and participated in their issuance key points.
7. Lido and Rocket Pool each offer a program known as “liquidity staking.” “Staking” in a blockchain network refers to pledging the blockchain’s native crypto asset (such as Ether or “ETH” in the Ethereum blockchain) to serve as a “validator” on the network. Blockchain validators perform certain functions to earn rewards in the form of additional tokens and propose new blocks to the blockchain when selected. Lido and Rocket Pool offer investment programs centered around the Ethereum blockchain, known as “staking programs.” These staking programs essentially pool together the ETH contributed by investors and stake them on the blockchain, using their technical expertise to earn returns that ordinary investors cannot obtain on their own. After receiving the investor’s ETH, Lido and Rocket Pool each issue a new crypto asset to the investor, stETH or rETH, representing the investor’s pro rata interest in the staking pool and its returns. Lido and Rocket Pool call their staking programs “liquid” because investors’ interests in these programs (represented by stETH and rETH tokens) can be traded on secondary markets, providing investors with a mechanism to exit their investment positions, whereas tokens staked directly on the blockchain cannot be easily accessed during the staking period.
8. Lido and Rocket Pool's staking programs were offered and sold as investment contracts, respectively, and are therefore securities. Specifically, investors invested ETH in a common enterprise and reasonably expected to receive profits from the management efforts of Lido and Rocket Pool, respectively. However, neither Lido nor Rocket Pool filed a registration statement with the SEC for the offering and sale of these investment contracts.
9. Consensys brokered and offered and sold these securities through its “MetaMask Staking” platform, engaging in unregistered transactions. Consensys was an important component of the issuance of these securities by attracting investors to participate in Lido and Rocket Pool’s staking programs and acting as an intermediary between Lido and Rocket Pool and their staking program investors. In fact, Consensys developed and deployed MetaMask Staking for the specific purpose of offering and selling Lido and Rocket Pool’s staking program investment contracts. Consensys solicited investments in the Lido and Rocket Pool staking programs through “MetaMask Staking.” When an investor requested an investment in Lido or Rocket Pool through MetaMask Staking, Consensys transferred ETH to Lido or Rocket Pool on the investor’s behalf and transferred the newly issued stETH or rETH from Lido or Rocket Pool to the investor’s MetaMask Wallet (a software application developed by Consensys that is used to store the investor’s crypto assets, as described below). MetaMask Staking investors never interact directly with Lido or Rocket Pool; all investor interactions occur directly through Consensys’ platform.
10. Despite performing brokerage functions, ConsenSys failed to register with the Commission as a broker-dealer, in violation of the federal securities laws. These federal securities laws require transparency, including disclosure of conflicts of interest, so that investors have the information necessary to make informed investment decisions. Registration also requires broker-dealers to comply with applicable financial responsibility requirements to protect customers and other market participants.
11. Consensys violated the federal securities laws by offering and selling Lido and Rocket Pool securities without registration and by acting as an unregistered broker-dealer. It deprived investors of the protections afforded by the federal securities laws. In fact, registration statements provide investors with important information about securities offerings and the business and financial condition of the issuer so that investors can make informed investment decisions.
12. Through MetaMask Swaps and MetaMask Staking, Consensys has entered the U.S. securities markets but failed to act in compliance with the applicable federal securities laws, which exist to protect investors.
13. By engaging in the conduct described in this Complaint, including operating its MetaMask Swaps and MetaMask Staking platforms, Consensys acted as an unregistered broker-dealer in violation of Section 15(a) of the Securities Exchange Act of 1934 [15 U.S.C. § 78o].
14. Furthermore, through the MetaMask Staking Program, Consensys engaged in an unregistered offer and sale of securities in violation of Sections 5(a) and (c) of the Securities Act of 1933 [15 U.S.C. §§ 77e(a) and 77e(c)].
15. Unless otherwise restrained and enjoined, Defendants will continue to engage in the acts, practices, transactions, and business described in this Complaint, or in acts, practices, transactions, and business of a similar type and purpose.
Consensys fights back: The US SEC has no authority to regulate MetaMask
Consensys issued a statement regarding the SEC’s lawsuit against Consensys:
Consensys fully anticipated that the SEC would follow through on its threat to require our MetaMask software interface to register as a securities broker. The SEC has been pursuing an anti-cryptocurrency agenda led by interim enforcement actions. This is just the latest example of its regulatory overreach — a clear attempt to redefine established legal standards and expand the SEC’s jurisdiction through litigation. Consensys firmly believes that the SEC is not authorized to regulate software interfaces like MetaMask. We will continue to vigorously pursue a ruling on these issues in Texas because it is important not only to our company, but to the future success of web3.
In the lawsuit filed by Consensys against the SEC, Consensys refuted the three key points of the US SEC:
Ethereum is a global computing platform, not an investment scheme. ETH is not a security, but a commodity, as the U.S. Commodity Futures Trading Commission (CFTC) has repeatedly confirmed.
Applications that allow people to trade on their own using Ethereum are not securities brokers and therefore cannot be regulated by the U.S. SEC.
The SEC’s illegal power grab threatens to undermine America’s position as a leader in the next generation of the internet.
