SEC looks to end Ethereum staking through MetaMask in new lawsuit

The SEC has filed a new lawsuit against Consensys for alleged violations of federal securities laws. The complaint centers on Consensys’s MetaMask wallet services, specifically the Swaps and Staking features, which the SEC claims have been operating as unregistered broker services since October 2020 and January 2023, respectively.

The lawsuit follows a Wells Notice from the SEC earlier this year, which led Consensys to file a countersuit for “aggressive and unlawful” overreach. Ethereum is down around 2% on the day but has not seen a significant sell-off as of press time.

The SEC asserts that Consensys has collected over $250 million in fees from these activities without providing necessary investor protections.

It claims MetaMask Swaps is a digital platform facilitating transactions in crypto asset securities for retail investors. According to the lawsuit, it offers various features, including identifying the best exchange rates, routing orders, handling 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.

Unregistered securities staking

Since January 2023, the SEC claims MetaMask Staking has been involved in the unregistered offer and sale of securities through crypto asset staking programs, 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 issuers’ managerial efforts. These assets are similar to those mentioned in the lawsuit against Coinbase last year.

The SEC also claims that the staking programs offered by Lido and Rocket Pool facilitated through MetaMask Staking are investment contracts and, therefore, securities. It claims these were offered and sold without the necessary registration statements filed with the SEC.

The SEC affirms that Consensys exercises discretion over selecting third-party liquidity providers and the digital assets available for trading, leveraging its market knowledge similarly to traditional brokers. The company has also implemented a “Token Restriction Policy” to restrict certain assets based on potential regulatory issues.

The SEC seeks to permanently forbid Consensys from violating securities laws, imposing civil monetary penalties, and providing other necessary relief for investors’ benefit. The agency has also demanded a jury trial for this case.

SEC drops investigation just before filing lawsuit

Despite the lawsuit, Consensys recently secured a significant win when the SEC closed its investigation into Ethereum 2.0, determining that ETH sales are not securities transactions. This decision, following a letter from Consensys seeking clarity after the approval of ETH ETFs, aligns with the Commodity Futures Trading Commission’s classification of ETH as a commodity.

Consensys announced this outcome as a victory for Ethereum developers and the broader industry, emphasizing that the SEC’s decision marks 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 have themselves been unlawful. Consensys’s lawsuit seeks to clarify that offering user interface software like MetaMask Swaps and Staking does not violate securities laws.

In a recent interview, Consensys’s head of litigation, Laura Brookover, stated that the company would continue to sue the SEC for more regulatory clarity, noting 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 a broader concern within the crypto community about the need for balanced regulation.

The resolution of the Ethereum investigation marks a critical juncture, and the new suit potentially strengthens Consensys’s case by arguing that the SEC’s treatment of crypto has been overly aggressive.

Consensys’s developing 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 progress in the blockchain sector.

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