Regulation
SEC Sues Consensys Over MetaMask Practices
On Friday, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Consensys, a major Ethereum software provider, specifically targeting its popular MetaMask service.
The suit, filed in the Eastern District of New York, accuses MetaMask of acting as an unregistered broker-dealer, allegedly engaging in the offer and sale of securities without the necessary registrations. This is a significant step forward in the regulatory oversight of cryptocurrency services.
Allegations Regarding Unregistered Securities Program
According to the SEC, not only did MetaMask operate without proper registration, but it also promoted an unregistered securities scheme through its staking services.
The federal agency alleges that MetaMask supported liquid staking services for Lido (LDO) and Rocket Pool (RPL), treating those agreements as investment contracts that, under U.S. law, are considered unregistered securities.
It’s part of a broader interpretation by the SEC that seeks to bring cryptocurrency offerings into the fold of traditional financial regulation.
In its detailed press release, the SEC clarified that since at least January 2023, Consensys has facilitated the sale of tens of thousands of unregistered securities.
Source: SEC
These transactions were carried out 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 staking tokens, which are locked and non-tradable, liquid staking tokens can be bought and sold freely.
The lawsuit also points out that MetaMask Swaps, a feature of the MetaMask ecosystem, allowed investors to exchange digital assets through Consensys’ software infrastructure.
To provide these services, Consensys collected transaction fees and, over the past four years, facilitated over 36 million crypto transactions.
Interestingly, the SEC points out that at least 5 million of these transactions involved what it calls “crypto asset securities,” which include top cryptocurrencies such as Polygon (MATIC), Mana (MANA ), Chiliz (CHZ), Sandbox (SAND) and Luna (LUNA).
Many of these digital assets have been implicated in previous SEC actions, where they were designated as unregistered securities.
Roles and accusations against Consensys
In its detailed complaint, the SEC accuses Consensys of assuming roles typically associated with traditional securities markets. It alleges that Consensys acted as an unregistered broker and underwriter with respect to the MetaMask swaps.
Specifically, the complaint states that Consensys sold tens of thousands of securities for issuers such as Lido and Rocket Pool, thereby underwriting those securities and participating in their distribution.
According to the SEC, Consensys earned more than $250 million in fees from these activities. By operating without the proper registrations, the SEC contends, Consensys circumvented legal safeguards intended to protect investors, thereby exposing them to potentially greater risks.
Accordingly, the SEC is seeking a permanent injunction to prevent further violations, as well as substantial civil penalties and other equitable remedies to address these alleged violations of U.S. securities laws.
Broader implications for the cryptocurrency industry
This lawsuit follows an earlier indication from the SEC that even if it had concluded its Ethereum-related investigations, it could still pursue enforcement actions on other fronts.
Notably, the SEC’s recent communications with Consensys do not explicitly mention MetaMask, suggesting that this legal action may have been unexpected.
This legal challenge highlights the SEC’s ongoing efforts to regulate staking services, which involve locking cryptocurrencies to improve the security and operation of blockchain networks.
These staking activities not only confirm transactions and generate new blocks, but also provide rewards to validators, creating a passive income stream.
This is part of a broader regulatory effort, 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 sector, particularly for services offering staking capabilities to American customers.