Regulation
Alleged violations of securities laws
The SEC filed a new trial against Consensys for alleged violations of federal securities laws. The complaint relates to Consensys’ MetaMask wallet services, specifically the Swaps and Staking features, which the SEC alleges have been operating as unregistered brokerage services since October 2020 and January 2023, respectively.
The trial follows a Well Reviews SEC earlier this year, leading Consensys to file a countersuit alleging “aggressive and illegal” abuse of dominance. Ethereum is down about 2% on the day, but has not seen any significant selling at press time.
The SEC alleges that Consensys collected more than $250 million in fees from these activities without providing necessary investor protection.
MetaMask Swaps is a digital platform that facilitates crypto-asset trading for retail investors. According to the complaint, it offers various features, including identifying the best exchange rates, routing orders, managing customer assets, and executing trades on behalf of investors while charging transaction-based fees. . The platform’s use of smart contracts eliminates the need for investors to interact directly with third-party liquidity providers.
Staking of unregistered securities
Since January 2023, the SEC has alleged that MetaMask Staking has been engaged in the unregistered offer and sale of securities through crypto asset staking programs, collecting transaction-based compensation as an unregistered broker-dealer.
The SEC has identified several digital assets traded on the MetaMask Swaps platform, including MATIC, MANA, CHZ, SAND, and LUNA, as securities offered and sold under investment contracts, leading investors to expect profits based on the issuers’ management efforts. These assets are similar to those mentioned in the lawsuit against Coinbase Last year.
The SEC also asserts that the staking programs offered by Lido and Rocket Pool facilitated by MetaMask Staking are investment contracts and, therefore, securities. She claims that these were offered and sold without the necessary registration statements having been filed with the SEC.
The SEC claims that Consensys exercises discretion over the selection of third-party liquidity providers and digital assets available for trading, leveraging its market knowledge in a similar manner to traditional brokers. The company has also implemented a “token restriction policy” to restrict certain assets based on potential regulatory concerns.
The SEC is seeking to permanently enjoin Consensys from violating securities laws, impose civil monetary penalties, and provide other necessary relief for the benefit of investors. The agency has also required a jury trial in this case.
SEC Drops Investigation Just Before Filing Lawsuit
Despite the lawsuit, Consensys recently obtained a significant The SEC has closed its investigation into Ethereum 2.0, ruling that ETH sales are not securities transactions. The move, which follows a letter from Consensys seeking clarification following the approval of ETH ETFs, aligns with the Commodity Futures Trading Commission’s classification of ETH as a commodity.
Consensys heralded the outcome as a victory for Ethereum developers and the broader industry, noting that the SEC’s decision marked a pivotal moment by providing relief from potential regulatory actions that could have classified ETH as a security.
However, the company keep on going its legal battle against the SEC, arguing that the agency’s enforcement actions against blockchain developers and technology providers were themselves illegal. Consensys’ lawsuit seeks to clarify that offering user interface software such as MetaMask Swaps and Staking does not violate securities laws.
In a recent interview, Laura Brookover, head of litigation at Consensys, said the company will continue to sue the SEC for regulatory clarity, emphasizing that the battle for regulatory clarity is far from over. Brookover stressed the need for clear guidelines to support innovation while ensuring compliance with existing laws, reflecting a broader concern within the crypto community about the need for balanced regulation.
The resolution of the Ethereum investigation marks a critical moment, and the new lawsuit potentially bolsters Consensys’ arguments that the SEC’s treatment of crypto has been too aggressive.
The developing legal battle between Consensys and the SEC highlights the tension between regulatory oversight and technological innovation, a dynamic that will shape the future of blockchain technology and its applications. The outcome of this case will be closely watched by industry players and regulators, who will influence technological advancements in the blockchain sector.