On June 28, local time, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against ConsenSys in the Brooklyn federal court in New York, less than two weeks after notifying ConsenSys to cease its investigation into Ethereum 2.0.
The SEC accuses the company of acting as an unregistered broker-dealer through its digital asset wallet MetaMask, engaging in the issuance and sale of securities. According to SEC, ConsenSys earned over $250 million in fees from these activities.
Consensys positioned itself as a marketplace for buying and selling cryptographic assets, including cryptographic asset securities, recommending trades purportedly offering ‘best’ value, accepting investor orders, routing those orders, managing client assets, executing trades on behalf of clients, and earning transaction-based compensation.
The court documents state that Consensys failed to register as a broker-dealer or register certain securities for issuance and sale, thus violating federal securities laws.
Regarding regulatory targets, SEC alleges that Consensys sold thousands of unregistered securities through staking providers Lido and Rocket Pool. These companies issued tokens named stETH and rETH in exchange for staked assets, promising returns that investors might not achieve on their own.
After receiving ETH from investors, Lido and Rocket Pool issued new cryptographic assets, stETH or rETH, representing proportional ownership in the staking pool and its rewards. SEC claims these actions constitute securities under investment contracts.
Notably, Lido and Rocket Pool are the two largest liquidity staking protocols on Ethereum, holding a combined $37.6 billion in Total Value Locked (TVL). Native tokens of these protocols experienced rapid declines following the news; LDO dropped 12% within 30 minutes.
This isn’t the first time SEC has targeted staking service providers. In February of this year, cryptocurrency exchange Kraken settled with SEC for $30 million over similar allegations and subsequently discontinued its staking services for U.S. customers. Another major player, Coinbase, has been challenging SEC’s stance on staking in court.
Nick Almond, CEO of Factory Labs, argues that SEC’s push to categorize open-source crypto wallets as broker-dealers is erroneous, emphasizing user sovereignty over asset custody as crucial. He contends that MetaMask’s swap service is essentially a user-controlled ‘bot’, not a broker.
According to Judge Katherine Failla’s previous ruling in a similar case involving Coinbase Wallet, where she denied SEC’s allegations, self-custody wallets like MetaMask do not act as brokers because users retain control over their funds.
Jorge Izquierdo, founder of Tuyo, suggests Consensys and MetaMask face a similar situation, where providing UI for decentralized smart contracts doesn’t equate to intermediary brokerage. He likens staking services to UI interfaces rather than traditional financial institutions.
In summary, while SEC continues its scrutiny of Ethereum and DeFi-focused firms this year, Consensys remains steadfast in its legal challenges, asserting that SEC lacks authority over software interfaces like MetaMask, which it believes is pivotal not only for their company but also for the future success of Web3.
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