{"id":26789,"date":"2024-06-30T13:29:06","date_gmt":"2024-06-30T13:29:06","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=26789"},"modified":"2024-06-30T13:30:05","modified_gmt":"2024-06-30T13:30:05","slug":"sec-sues-consensys-over-metamask-swaps-and-staking","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2024\/06\/30\/sec-sues-consensys-over-metamask-swaps-and-staking\/","title":{"rendered":"SEC sues Consensys over MetaMask Swaps and Staking"},"content":{"rendered":"<p><em>By <strong>Amy Castor<\/strong> and <strong>David Gerard<\/strong><\/em><\/p>\n<ul>\n<li aria-level=\"1\">If you like this post, please <b><i>tell at least one other person<\/i><\/b>. It really helps!<\/li>\n<li aria-level=\"1\">If you want to encourage more posts, here\u2019s<a href=\"https:\/\/www.patreon.com\/amycastor\"> Amy\u2019s<\/a> Patreon and here\u2019s <a href=\"https:\/\/www.patreon.com\/davidgerard\/\">David\u2019s<\/a>. For casual tips, here\u2019s<a href=\"http:\/\/ko-fi.com\/amycastor\"> Amy\u2019s<\/a> Ko-Fi and here\u2019s<a href=\"https:\/\/ko-fi.com\/A1529D5\"> David\u2019s<\/a>.<\/li>\n<\/ul>\n<p>In April, the SEC sent Consensys a Wells notice of impending action over MetaMask Swaps and MetaMask Staking. <a href=\"https:\/\/amycastor.com\/2024\/04\/27\/consensys-gets-a-wells-notice-over-metamask-swaps-and-staking\/\">Consensys countersued<\/a> 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.<\/p>\n<p>On June 18, Consensys proudly announced that the SEC had told them it would not be suing them to claim ETH was a security. [<a href=\"https:\/\/consensys.io\/blog\/sec-closes-ethereum-2-0-investigation-will-not-pursue-ethereum-enforcement\"><i>Blog post<\/i><\/a><i>; <\/i><a href=\"https:\/\/www.coindesk.com\/policy\/2024\/06\/19\/sec-ends-probe-into-consensus-wont-sue-over-ethereum\/\"><i>CoinDesk<\/i><\/a><i>; <\/i><a href=\"https:\/\/assets.ctfassets.net\/gjyjx7gst9lo\/6BtUdxsw1vlatBjIspkJN9\/792adab194b9ac71c1eeeded42b01615\/Termination_Notice_K._Schwartz_6.18.24.pdf\"><i>SEC letter<\/i><\/a><i>, PDF<\/i>]<\/p>\n<p>But the SEC didn\u2019t rule out taking other actions. So they just sued Consensys over MetaMask Swaps and MetaMask Staking. [<a href=\"https:\/\/www.sec.gov\/news\/press-release\/2024-79\"><i>Press release<\/i><\/a><i>; <\/i><a href=\"https:\/\/storage.courtlistener.com\/recap\/gov.uscourts.nyed.517222\/gov.uscourts.nyed.517222.1.0.pdf\"><i>complaint<\/i><\/a><i>, PDF; <\/i><a href=\"https:\/\/www.courtlistener.com\/docket\/68897483\/securities-and-exchange-commission-v-consensys-software-inc\/\"><i>case docket<\/i><\/a>]<\/p>\n<p>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.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2024\/04\/27\/consensys-gets-a-wells-notice-over-metamask-swaps-and-staking\/lubin-ethereum-team-2014\/\" rel=\"attachment wp-att-26633\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-26633\" src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2024\/04\/lubin-ethereum-team-2014.jpg\" alt=\"\" width=\"510\" height=\"315\" srcset=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2024\/04\/lubin-ethereum-team-2014.jpg 680w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2024\/04\/lubin-ethereum-team-2014-300x185.jpg 300w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2024\/04\/lubin-ethereum-team-2014-348x215.jpg 348w\" sizes=\"auto, (max-width: 510px) 100vw, 510px\" \/><\/a><\/p>\n<p style=\"text-align: center;\"><i><small>Joe Lubin and the Ethereum team in 2014<\/small><\/i><\/p>\n<p>&nbsp;<\/p>\n<h3>MetaMask Staking<\/h3>\n<p>MetaMask is Consensys\u2019 main money maker \u2014 a popular browser-based wallet that also lets you stake ETH and buy and sell crypto via decentralized exchanges with \u201cswaps.\u201d<\/p>\n<p>Since January 2023, Consensys sold tens of thousands of stETH and rETH \u2014 \u201cliquid staking tokens\u201d \u2014 on behalf of Lido and Rocket Pool.<\/p>\n<p>Staked ETH is generally locked on a <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/08\/20\/proof-of-stake-is-better-than-proof-of-work-but-ethereums-merge-wont-fix-any-other-problem-with-cryptocurrency\/\">validator<\/a> for many months. You can\u2019t use your ETH once you stake it. So these are tokens <i>representing<\/i> that staked ETH and you can trade them freely.<\/p>\n<p>The SEC says that the Lido and Rocket Pool staking programs are investment contracts because \u201cinvestors 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.\u201d<\/p>\n<p>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 \u2014 \u201cConsensys acts as an underwriter of those securities and participates in the key points of their distribution.\u201d<\/p>\n<h3>MetaMask Swaps<\/h3>\n<p>MetaMask Swaps lets you \u201cswap\u201d \u2014 or trade \u2014 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.<\/p>\n<p>Consensys claims MetaMask does \u201call the work\u201d so traders don\u2019t have to. The SEC agrees \u2014 MetaMask does do all the work, just like brokers do, and collects a fee, just like brokers do.<\/p>\n<p>If the tokens are securities, then Consensys is serving as a <i>securities<\/i> broker.<\/p>\n<p>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\u00a0 <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2024\/01\/20\/crypto-collapse-sec-takes-on-terraform-and-coinbase-etf-fallout-continues-tether-is-for-crime\/\">Terraform Labs case<\/a> in December 2023.<\/p>\n<h3>What the SEC wants<\/h3>\n<p>The SEC is asking the court to permanently enjoin Consensus from acting as a broker-dealer and to pay a cash penalty.<\/p>\n<p>The SEC <i>does not<\/i> specifically demand that MetaMask Swaps and MetaMask Staking must be shut down. Their demand is simply that Consensys stops breaking these laws.<\/p>\n<p>That said, it probably doesn\u2019t make a difference. Consensys <i>could<\/i> offer to bring everything into compliance \u2014 register as a broker, make sure these securities are registered, and so on. But we think that\u2019s unlikely \u2014 they\u2019ll probably just have to stop offering the swaps and staking products.<\/p>\n<h3>Venue<\/h3>\n<p>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 <a href=\"https:\/\/amycastor.com\/2024\/04\/27\/consensys-gets-a-wells-notice-over-metamask-swaps-and-staking\/\">specifically<\/a> so as to take legal actions in the Northern District of Texas under <a href=\"https:\/\/en.wikipedia.org\/wiki\/Reed_O%27Connor#Significant_cases\">weird judge<\/a> Reed O\u2019Connor.<\/p>\n<p>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.<\/p>\n<p>The Texas court can\u2019t 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 \u2014 and the SEC to object.<\/p>\n<h3>What does this mean?<\/h3>\n<p>The SEC really doesn\u2019t like crypto exchanges doing securities things without being a registered broker. It\u2019s also quite sure that staking as a service is an investment contract and can\u2019t be offered to the retail public without being registered as a security.<\/p>\n<p>This SEC case seems to be just another in a series of actions against unregistered crypto security broking. Settled cases include <a href=\"https:\/\/amycastor.com\/2023\/08\/15\/crypto-collapse-sam-bankman-fried-goes-to-jail-sec-appeals-ripple-ruling-prime-trust-bankrupt-the-tangled-tale-of-trueusd-and-tron\/\">Bittrex<\/a>, <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2024\/04\/07\/crypto-is-going-great-kucoin-busted-how-kickstarter-shot-itself-in-the-foot-with-blockchain-tether-goes-ai\/\">ShapeShift<\/a>, and <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2024\/01\/20\/crypto-collapse-sec-takes-on-terraform-and-coinbase-etf-fallout-continues-tether-is-for-crime\/\">BarnBridge DAO<\/a>. Ongoing cases include <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2023\/06\/07\/the-sec-sues-coinbase-its-on\/\">Coinbase<\/a>, <a href=\"https:\/\/amycastor.com\/2023\/12\/03\/crypto-collapse-sec-brings-regulatory-clarity-to-kraken-and-celsius-stablecoins-for-the-uk-crypto-money-laundering\/\">Kraken<\/a>, <a href=\"https:\/\/amycastor.com\/2023\/06\/12\/sec-sues-binance-part-1-the-complaint-binance-us-asset-freeze-tai-chi-plan-sock-puppet-ceos-weird-cash-flows\/\">Binance<\/a>, <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2024\/05\/27\/crypto-is-going-back-ethereum-front-runner-charged-coinbase-looking-to-re-enact-2022-crash-uniswap-responds-to-sec-the-not-telegram-open-network-wyoming\/\">Uniswap<\/a>, and <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2024\/05\/09\/robinhood-crypto-receives-an-sec-wells-notice-for-securities-violations\/\">Robinhood Crypto<\/a>.<\/p>\n<p>We\u2019re not so surprised that the SEC didn\u2019t pursue a case about whether ETH 2.0 is a security \u2014 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\u2019re more sure of.<\/p>\n<p>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\u2019d do if they were confident in their position. [<a href=\"https:\/\/consensys.io\/blog\/company-statement-on-the-sec-action-against-consensys\"><i>Blog post<\/i><\/a>]<\/p>\n<p>We haven\u2019t 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\u2019s not actually Consensys doing the work. Though nobody sits at Robinhood allowing or stopping each trade by hand \u2014 they just leave it to their computers. [<a href=\"https:\/\/www.theblock.co\/post\/302631\/does-the-sec-have-a-weak-case-against-consensys-experts-weigh-in\"><i>The Block<\/i><\/a>]<\/p>\n<p>The SEC appears to have a reasonable case against Consensys. We expect Consensys to eventually settle.<\/p>\n<br><br><div align=\"center\"><p><a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\"><img src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/10\/become_a_patron_button.svg\" alt=\"Become a Patron!\" title=\"Become a Patron!\" width=217 height=51><\/a><br><p style=\"align:center;\" class=\"patreon-badge\"><i>Your subscriptions keep this site going. <a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\">Sign up today!<\/a><\/i><\/p><\/div>","protected":false},"excerpt":{"rendered":"<p>Another in the SEC&#8217;s series of cases against unregistered crypto security broking.<\/p>\n","protected":false},"author":1,"featured_media":26633,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[2738,196,852,82,3171,2948,1406,201,2359,3822,1972,33,551],"class_list":["post-26789","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorised","tag-chiliz","tag-consensys","tag-decentraland","tag-ethereum","tag-lido","tag-luna","tag-matic","tag-metamask","tag-polygon","tag-rocket-pool","tag-sandbox-blockchain-game","tag-sec","tag-texas"],"jetpack_featured_media_url":"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2024\/04\/lubin-ethereum-team-2014.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/26789","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=26789"}],"version-history":[{"count":14,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/26789\/revisions"}],"predecessor-version":[{"id":26803,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/26789\/revisions\/26803"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media\/26633"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=26789"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/categories?post=26789"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/tags?post=26789"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}