Regulation
SEC Files Charges Against Crypto Wallet Developer
In a significant escalation of its cryptocurrency enforcement efforts, the Securities and Exchange Commission (SEC) has filed charges against Consensys Software Inc., the developer of the popular MetaMask cryptocurrency wallet and suite of services. The complaint, filed on June 28, alleges that Consensys has operated and continues to operate as an unregistered broker-dealer and has engaged in and continues to engage in the unregistered offering and sale of securities through two MetaMask staking programs.
The action represents a new front in the SEC’s crackdown on cryptocurrency, targeting a major infrastructure provider rather than a token issuer or exchange. The SEC is signaling that no part of the cryptocurrency ecosystem is beyond its reach by targeting the company behind one of the most widely used self-custodial cryptocurrency wallets.
The complaint focuses on two key MetaMask services:
- MetaMask Swaps: The SEC alleges that since October 2020, Consensys has been acting as an unregistered broker through its MetaMask Swaps service, which allows users to swap one crypto asset for another. According to the complaint, Consensys violated broker registration requirements by soliciting investors, providing investment advice, placing orders, and receiving transaction-based compensation for certain crypto asset securities, all without registering with the SEC.
- MetaMask Staking: The SEC alleges that since January 2023, Consensys has engaged in the unregistered offering and sale of securities through its MetaMask Staking service. Specifically, the complaint focuses on Consensys’ staking program offerings from Lido and Rocket Pool, which the SEC believes are investment contracts and, therefore, securities.
In filing these charges, the SEC is taking a broad view of what constitutes brokerage activity in the crypto space. The complaint details how Consensys’ software and smart contracts broker transactions between users and liquidity providers, demonstrating the SEC’s willingness to look beyond claims of decentralization and focus on its vision of how the economic realities of these services work.
The SEC’s targeting of MetaMask Staking is particularly significant, as it puts the entire liquid staking industry on alert. By treating Lido and Rocket Pool’s liquid staking programs as securities, the SEC is potentially jeopardizing an important segment of the DeFi industry that has grown rapidly in recent years. Furthermore, without specifying its reasoning, the SEC implies in its complaint that investors’ receipt of separate tokens to demonstrate their pro-rata interest in MetaMask Staking pools and rewards, namely stETH (for participation in Lido Pool) and rETH (for participation in Rocket Pool), along with the tradability of those tokens on secondary markets, somewhat bolsters its claim that Consensys’ offering and sale of those pools constitutes the offering and sale of investment contracts. The SEC has previously held in prior enforcement actions that firms’ offerings of staking-as-a-service programs constitute the offering and sale of investment contracts regardless of whether or not they involve the issuance of liquid staking tokens.
The outcome of this case could have far-reaching implications for the structure of cryptocurrency markets and the ability of infrastructure providers to operate without SEC registration. Companies offering similar wallet, swapping, or staking services should evaluate their potential regulatory exposure in light of the SEC’s allegations against Consensys.
Ultimately, this case underscores the urgent need for regulatory clarity in the cryptocurrency space. As the SEC continues its rule-by-rule approach to regulation, many in the industry are looking for legislative solutions. The Financial Innovation and Technology for the 21st Century Act, a bipartisan bill recently passed the House by a vote of 279-136, aims to provide a comprehensive regulatory framework for digital assets. If passed, this bill could address many of the uncertainties surrounding cryptocurrency regulation, including the classification of various crypto assets and the regulatory status of infrastructure providers like Consensys. However, until such legislation is enacted, cryptocurrency firms will continue to operate in a state of legal uncertainty, with the threat of SEC action hanging over their businesses.
Click Here to access information relating to the SEC’s enforcement action against Consensys.