By Amy Castor and David Gerard
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In April, the SEC sent Consensys a Wells notice of impending action over MetaMask Swaps and MetaMask Staking. Consensys countersued in Texas to get a ruling that the SEC could not sue them over MetaMask Swaps or MetaMask Staking and that ETH was not a security.
On June 18, Consensys proudly announced that the SEC had told them it would not be suing them to claim ETH was a security. [Blog post; CoinDesk; SEC letter, PDF]
But the SEC didn’t rule out taking other actions. So they just sued Consensys over MetaMask Swaps and MetaMask Staking. [Press release; complaint, PDF; case docket]
The SEC is charging Consensys for unauthorized sales of securities through MetaMask Staking and for failure to register as a broker and a dealer while offering crypto trades and staking services through MetaMask Staking and Swaps. The SEC says that Consensys took $250 million in fees as an unregistered broker.
Joe Lubin and the Ethereum team in 2014
MetaMask Staking
MetaMask is Consensys’ main money maker — a popular browser-based wallet that also lets you stake ETH and buy and sell crypto via decentralized exchanges with “swaps.”
Since January 2023, Consensys sold tens of thousands of stETH and rETH — “liquid staking tokens” — on behalf of Lido and Rocket Pool.
Staked ETH is generally locked on a validator for many months. You can’t use your ETH once you stake it. So these are tokens representing that staked ETH and you can trade them freely.
The SEC says that the Lido and Rocket Pool staking programs are investment contracts because “investors make an investment of ETH in a common enterprise with a reasonable expectation of profits from the managerial efforts of Lido and Rocket Pool, respectively.”
The SEC notes that Consensys developed MetaMask Staking specifically to offer and sell the Lido and Rocket Pool staking tokens. It says that in doing so, Consensys is brokering these securities — “Consensys acts as an underwriter of those securities and participates in the key points of their distribution.”
MetaMask Swaps
MetaMask Swaps lets you “swap” — or trade — one crypto for another. MetaMask finds the best exchange rate on a decentralized exchange and then handles everything else behind the scenes with smart contracts, collecting a 0.875% fee in the process.
Consensys claims MetaMask does “all the work” so traders don’t have to. The SEC agrees — MetaMask does do all the work, just like brokers do, and collects a fee, just like brokers do.
If the tokens are securities, then Consensys is serving as a securities broker.
The SEC calls out Polygon (MATIC), Decentraland Mana (MANA), Chiliz (CHZ), Sandbox (SAND), and Luna (LUNA) as securities. Luna was already found to be a security in the Terraform Labs case in December 2023.
What the SEC wants
The SEC is asking the court to permanently enjoin Consensus from acting as a broker-dealer and to pay a cash penalty.
The SEC does not specifically demand that MetaMask Swaps and MetaMask Staking must be shut down. Their demand is simply that Consensys stops breaking these laws.
That said, it probably doesn’t make a difference. Consensys could offer to bring everything into compliance — register as a broker, make sure these securities are registered, and so on. But we think that’s unlikely — they’ll probably just have to stop offering the swaps and staking products.
Venue
Consensys brought its April case against the SEC in Texas on the basis of its new office in a WeWork in Fort Worth, which they moved to specifically so as to take legal actions in the Northern District of Texas under weird judge Reed O’Connor.
The SEC brought its case in the Eastern District of New York, on the basis that Consensys was based there when they set all of this up and still maintain an office there.
The Texas court can’t order the New York court to pass the case over. But we expect Consensys to file in New York to consolidate this case with the earlier Texas case — and the SEC to object.
What does this mean?
The SEC really doesn’t like crypto exchanges doing securities things without being a registered broker. It’s also quite sure that staking as a service is an investment contract and can’t be offered to the retail public without being registered as a security.
This SEC case seems to be just another in a series of actions against unregistered crypto security broking. Settled cases include Bittrex, ShapeShift, and BarnBridge DAO. Ongoing cases include Coinbase, Kraken, Binance, Uniswap, and Robinhood Crypto.
We’re not so surprised that the SEC didn’t pursue a case about whether ETH 2.0 is a security — it would be a long and fraught battle and the issuer is based in Switzerland. Resources are limited and so the SEC seems to have brought a case they’re more sure of.
Consensys has reacted to the SEC complaint by pounding the table. In fact, they started pounding the table as soon as they first got the Wells notice. This seems to us not to be what they’d do if they were confident in their position. [Blog post]
We haven’t found a non-crypto securities lawyer weighing in on the case yet. The Block asked several bagholders who were all sure the SEC had a fatally weak case. Their main argument is that everything is automated with smart contracts, so it’s not actually Consensys doing the work. Though nobody sits at Robinhood allowing or stopping each trade by hand — they just leave it to their computers. [The Block]
The SEC appears to have a reasonable case against Consensys. We expect Consensys to eventually settle.
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