The SEC has charged Consensys Software Inc with engaging in the unregistered offer and sale of securities through a service it calls MetaMask Staking, and with operating as an unregistered broker through MetaMask Staking and another service it calls MetaMask Swaps. But the regulator suffered a partial setback in a separate action against Binance over whether crytocurency tokens can be classed as investment contracts.
The complaint against Consensys was filed in federal district court in the Eastern District of New York, charging the firm with violating the registration provisions of the Securities Act of 1933 and Section 15(a) of the Securities Act of 1934 and seeks to enjoin the business from further such violations.
In a nutshell, the SEC’s suit labels an even wider array of crypto tools as securities, with this enforcement action targeting services that enable people to swap coins or stake them. Staking is when you lock crypto assets for a set period of time to help support the operation of a blockchain. In return for staking your crypto, you earn more cryptocurrency. In some ways, staking is similar to depositing cash in a high-yield savings account; banks get to use and lend out your deposits, and you earn interest on your account balance.
What the SEC alleges
According to the SEC’s complaint, since at least January 2023, Consensys has offered and sold tens of thousands of unregistered securities on behalf of liquid staking program providers Lido and Rocket Pool, who create and issue liquid staking tokens, called stETH and rETH, in exchange for staked assets.
While staked tokens are generally locked up and cannot be traded or used while they are staked, liquid staking tokens, as the name implies, can be bought and sold freely. Investors in these staking programs provided funds to Lido and Rocket Pool in exchange for the liquid tokens.
“Consensys inserted itself into the US securities markets, yet failed to act in accordance with the provisions of the federal securities laws to which it is subject and that exist to protect investors.”
SEC
The SEC’s complaint alleges that Consensys engages in the unregistered offer and sale of securities by participating in the distribution of the staking programs and operates as an unregistered broker with respect to these transactions. Or, put another way, the agency says Consensys violated federal securities laws because its MetaMask Swaps feature (something used to make the Ethereum blockchain more effective for users) basically functions as a “broker of crypto asset securities.”
“With MetaMask Swaps and MetaMask Staking, Consensys inserted itself into the US securities markets, yet failed to act in accordance with the provisions of the federal securities laws to which it is subject and that exist to protect investors,” the complaint reads.
The SEC alleges that, since at least October 2020, Consensys has brokered transactions in crypto asset securities by doing such things as soliciting investors to trade crypto asset securities, providing pricing and other investment information regarding crypto asset securities, purporting to provide investors with the “best” quote, accepting and routing customer orders, facilitating order execution, handling customer assets, and receiving transaction-based compensation.
Consensys responds
The company issued a statement in response, saying: “Consensys fully expected the SEC to follow through on its threat to claim our MetaMask software interface must register as a securities broker. The SEC has been pursuing an anti-crypto agenda led by ad hoc enforcement action. This is just the latest example of its regulatory overreach – a transparent attempt to redefine well-established legal standards and expand the SEC’s jurisdiction via lawsuit. We are confident in our position that the SEC has not been granted authority to regulate software interfaces like MetaMask.”
The company says it will continue to vigorously defend itself in New York and pursue its case in Texas for a ruling on these issues. Texas is where it had tried to preemptively sue the SEC in April over what it deems as regulatory overreach, asking the court to protect it, and requesting declaratory and injunctive relief.
Almost two weeks ago, Consensys declared victory in its fight with the SEC. “The Enforcement Division of the SEC responded by notifying us that it is closing its investigation into Ethereum 2.0 and will not pursue an enforcement action against Consensys,” the company wrote in a statement on June 18.
SEC is still probing crypto
In 2024, the SEC has sent Wells notices, filed lawsuits, or reached settlements with a number of crypto firms.
Those include ShapeShift, for acting as unregistered dealers in connection with its operation of online crypto asset trading platforms, and TradeStation, for failing to register the offer and sale of a crypto lending product that allowed US investors to deposit or purchase crypto assets in a TradeStation account in exchange for the company’s promise to pay interest. It also accused the Uniswap protocol of being an unregistered securities exchange and the interface and wallet of being unregistered securities brokers.
And Bloomberg reported in March that the SEC has demanded information from companies about dealings with the Ethereum Foundation as part of a review of aspects of ether – the world’s second-biggest cryptocurrency, according to people familiar with the matter.
But the agency has not only picked a bunch of fights, it has lost (in whole or in part) some too – notably one on Friday, the same day it filed its Consensys lawsuit.
Binance and tokens v contracts
In a case the SEC brought a year ago against the largest crypto exchange, Binance, a federal judge ruled that most of the SEC’s case could proceed, but she also handed the company a win by rejecting one of the counts – the idea that a cryptocurrency token can be (by itself) an “investment contract” under the Supreme Court’s Howey test.
US District Court Judge Amy Berman Jackson said the SEC’s suggestion that the token is the embodiment of the investment contract, as opposed to the subject of the investment contract, “muddied the issues before the Court.” But the opinion takes care to say that “no one should read this case as deciding that crypto assets themselves are or are not ‘securities,’ that is not the issue presented.”
So, the dismissed counts all relate to the ongoing sale of Binance’s token called BNB (although the initial sale of it could be the subject of an action) and the charge over the ongoing sale of Binance’s stablecoin called binance usd or BUSD.
The SEC’s charges over products built around lending, staking, registration as an exchange and the company’s adherence to the anti-fraud procedures will proceed.