The SEC has filed a new lawsuit against Consensys alleging violations of the federal securities laws. The complaint focuses on Consensys’ MetaMask wallet services, specifically its Swaps and Staking features, which have been operating as unregistered brokerage services since October 2020 and January 2023, according to the SEC.
The lawsuit follows a Wells Notice from the SEC earlier this year, which prompted Consensys to file a countersuit for “aggressive and unlawful” overspending. Ethereum is down about 2% on the day, but hasn’t seen a significant sell-off at the time of writing.
The SEC alleges that Consensys collected more than $250 million in fees for these activities without providing necessary investor protections.
MetaMask Swaps is claimed to be a digital platform that enables crypto asset transactions for retail investors. According to the lawsuit, it provides several functions, including identifying the best exchange rates, routing orders, processing customer assets and executing trades on behalf of investors, while charging transaction fees. The platform’s use of smart contracts eliminates the need for investors to communicate directly with third-party liquidity providers.
Unregistered securities trading
The SEC alleges that MetaMask Staking has been engaged in the unregistered offering and sale of securities through crypto asset staking programs since January 2023, collecting transaction-based compensation as an unregistered broker.
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 as investment contracts, leading investors to expect profits based on the issuer’s management efforts . These assets are similar to those mentioned in the lawsuit against Coinbase last year.
The SEC also alleges that the staking programs offered by Lido and Rocket Pool, facilitated through MetaMask Staking, are investment contracts and therefore securities. It is alleged that these were offered and sold without the necessary registration statements having been filed with the SEC.
The SEC confirms that Consensys exercises discretion in selecting third-party liquidity providers and the digital assets available for trading, using its market knowledge in the same manner as traditional brokers. The company has also implemented a ‘Token Restriction Policy’ to restrict certain assets based on potential regulatory issues.
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 demanded a jury trial in this case.
SEC ends investigation just before filing lawsuit
Despite the lawsuit, Consensys recently scored a significant victory when the SEC closed its investigation into Ethereum 2.0 and determined that ETH sales are not securities transactions. This decision, following a letter from Consensys seeking clarity following the approval of ETH ETFs, is consistent with the Commodity Futures Trading Commission’s classification of ETH as a commodity.
Consensys heralded this outcome as a victory for Ethereum developers and the broader industry, emphasizing 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 continues its legal battle against the SEC, arguing that the agency’s enforcement actions against blockchain developers and technology providers themselves have been unlawful. Consensys’ lawsuit seeks to make clear that offering user interface software such as MetaMask Swaps and Staking does not violate securities laws.
In a recent interview, Laura Brookover, chief litigation officer at Consensys, stated that the company would continue to sue the SEC for more regulatory clarity. She noted that the battle for regulatory clarity is far from over. Brookover emphasized the need for clear guidelines to support innovation while ensuring compliance with existing laws, reflecting broader concerns within the crypto community about the need for balanced regulation.
The resolution of the Ethereum investigation marks a critical juncture, and the new lawsuit potentially strengthens Consensys’ case by arguing that the SEC’s treatment of crypto has been overly aggressive.
Consensys’ evolving legal battle with 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 participants and regulators, who will influence technological advancements in the blockchain sector.