In a significant escalation of regulatory scrutiny in the United States, the US Securities and Exchanges Commission (SEC) has filed a lawsuit against software provider Consensys over their very popular MetaMask wallet, alleging the software operates as an unregistered broker and engaging in the sale of unregistered securities.
The SEC’s regulatory action, which may have been triggered by Consensys suing for declaratory relief that MetaMask is not infringing, centers around MetaMask's 'Swaps' and 'Staking' features. The Swaps service, which allows users to buy and sell digital assets directly within the MetaMask app, has facilitated over 36 million transactions in the past four years.
According to the SEC, at least 5 million of these involved what the SEC calls "crypto asset securities", claiming that Polygon and Luna in particular fall within what the SEC considers a security under US law.
The SEC has also taken issue with MetaMask’s staking functionality, which integrates with Ethereum staking services Lido and Rocket Pool. Users can deposit assets to secure the Ethereum blockchain and receive liquid staking tokens, stETH and rETH, in return.
The SEC argue that these tokens constitute unregistered securities, making MetaMask's involvement an illegal 'investment contract.'
The lawsuit appears to be another attempt by the SEC to broaden the scope of what are considered securities, a sentiment echoed by a representative from Consensys speaking with Coindesk:
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.
Consensys recently sued the SEC in Texas, seeking judicial relief from the regulator’s attempts to classify MetaMask as a broker and its staking service as a securities offering.
We will continue to vigorously pursue our case in Texas for a ruling on these issues because it matters not only to our company but the future success of web3
The lawsuit follows the SEC's recent enforcement actions against Kraken and Coinbase (not to mention the Wells Notice that was sent to Uniswap, which is usually a pre-curser to a lawsuit).
The battle between the SEC and the crypto industry rages on, with Consenys becoming the latest industry player forced to incur costs defending a claim that they contravened securities laws that might not even apply to the products they offer. As many have previously observed, there appears to be no way for these products to be offered as compliant investment contracts under US law by registration with the SEC in any event, leaving the operators in a precarious position which could amount to a shadow-ban. The fact that MetaMask is non-custodial, and so has more in common with a password manager than what is commonly understood to be a digital wallet, means that many other non-custodial wallet product developers will be watching the outcome of the case closely, lest their business models be found to be in breach of US law.
By Michael Bacina and Luke Misthos