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The Securities and Exchange Commission has filed a request. New Lawsuit Against Consensys for alleged violations of federal securities laws. The complaint focuses on Consensys’ MetaMask wallet services, specifically its Swaps and Scking features, which the SEC alleges operated as unregistered broker-dealer services since October 2020 and January 2023, respectively.
The lawsuit comes A Wales Notice The SEC earlier this year imposed sanctions on Consensys, prompting it to file a countersuit for “aggressive and unlawful” overreach. Ethereum Microsoft stock is down about 2% on the day but has not seen any major selling as of press time.
The SEC alleges that Consensys collected more than $250 million in fees from these activities without providing adequate investor protections.
The lawsuit alleges that MetaMask Swaps is a digital platform that facilitates cryptocurrency trading for retail investors. According to the lawsuit, it offers various features, including determining the best exchange rates, routing orders, handling client 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.
Betting on unregistered securities
Since January 2023, the SEC has alleged that MetaMask Scking has engaged in the unregistered offering and sale of securities through cryptocurrency staking programs, and collected transaction-based compensation as an unregistered broker.
The SEC 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’ administrative efforts. These assets are similar to those mentioned in Lawsuit Against Coinbase last year.
The SEC also alleges that the staking programs offered by Lido and Rocket Pool, which are facilitated by MetaMask Staking, are investment contracts and therefore securities. It alleges that these securities were offered and sold without filing the necessary registration information with the SEC.
The SEC asserts that Consensys exercises discretion in selecting third-party liquidity providers and digital assets available for trading, leveraging its market knowledge similar 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 enjoin Consensys from violating the securities laws, impose civil monetary penalties, and provide other necessary relief for the benefit of investors. The agency also requested a jury trial in the case.
SEC Drops Investigation Before Lawsuit Is Filed
Despite the lawsuit, Consensys recently won a prominent A win when the SEC closed its investigation into Ethereum 2.0, determining that ETH sales were not securities transactions. This decision, following a letter from Consensys requesting clarification following the approval of the ETFs, is in line with the Commodity Futures Trading Commission’s classification of ETH as a commodity.
Consensys heralded the outcome as a victory for Ethereum developers and the broader industry, stressing that the SEC’s decision represents a pivotal moment by providing relief from potential regulatory action that could have classified ETH as a security.
However, the company continuous In its legal battle against the SEC, the company claimed that the SEC’s enforcement actions against blockchain technology developers and providers were illegal. Consensys’ lawsuit seeks to clarify that offering user interface programs such as MetaMask Swaps and staking does not violate securities laws.
In a recent interview, Laura Brookover, head of litigation at Consensys, said the company will continue to sue the SEC for more regulatory clarity, noting that the fight for regulatory clarity is far from over. Brookover stressed 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 turning point, and the new lawsuit is likely to bolster Consensys’ case by arguing that the SEC’s treatment of cryptocurrencies has been overly aggressive.
The evolving legal battle between Consensys and the Securities and Exchange Commission 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.
