SEC sues Consensys again, and also involves Lido and Rocket Pool?

Author | jk, Odaily Planet Daily

On Friday, June 28, local time in the United States, the U.S. Securities and Exchange Commission (SEC) sued Consensys in the U.S. District Court for the Eastern District of New York, accusing the company of engaging in securities issuance and sales through its digital asset wallet called MetaMask, as well as acting as an unregistered broker.

Scope of SEC’s Crackdown

The complaint states, ‘Consensys violated federal securities laws by failing to register as a broker-dealer and failing to register the offer and sale of certain securities. Consensys, as an unregistered broker-dealer, collected fees in excess of $250 million through this conduct.’

According to The Block, the SEC stated that Consensys sold thousands of unregistered securities through staking providers Lido and Rocket Pool, which would issue liquid staking tokens called stETH and rETH upon receiving the staked assets. Investors provide ETH to Lido and Rocket Pool, which is then pooled and staked on the blockchain to obtain returns that investors may not be able to achieve individually.

The SEC stated, ‘Upon receipt of the investors’ ETH, Lido and Rocket Pool will respectively issue new encrypted assets - stETH or rETH - representing the proportional rights of investors in the staking pool and its returns.’ Lido and Rocket Pool are sold and issued as investment contracts and are therefore securities, the agency added.

In April, Consensys attempted to pre-empt the SEC’s action with its own lawsuit in Texas, accusing the regulator of overreach. So far this year, the SEC has issued Wells notices, filed lawsuits, or reached settlement agreements with multiple cryptocurrency companies focused on Ethereum and decentralized finance, including ShapeShift, TradeStation and Uniswap, while also investigating the Ethereum Foundation.

Consensys Response

Consensys claims that they have:

“We fully expected the SEC to claim that our MetaMask software interface must be registered as a securities broker. The SEC has been pushing its anti-crypto agenda through enforcement actions. This is just the latest example of its regulatory overreach— an attempt to redefine existing legal standards through litigation and expand the SEC’s jurisdiction. We are confident in our position that the SEC does not have the authority to regulate software interfaces like MetaMask. We will continue to actively pursue our case in Texas because the resolution of these issues is not only important to our company, but also to the future success of Web3.”

Just 10 days ago, Consensys announced a victory in its battle with the SEC. In a statement on June 18th, the company wrote, “The SEC enforcement division has notified us that it will end its investigation into Ethereum 2.0 and will not take enforcement action against Consensys.” Odaily summarized the views of various lawyers in an article published this week, titled “SEC’s investigation into ETF 2.0 has just ended, but lawyers are arguing.”

Viewpoint

The SEC’s approach to this matter is now clear. It is highly likely that, as most people have said, the approval of an Ethereum ETF is due to political pressure, but the SEC has indeed followed up on Ethereum and other public chains, proving their status as securities and establishing the SEC’s intention and determination to regulate them.

So, the SEC chose to send a cease-and-desist letter to Consensys regarding its investigation into Ethereum itself (the letter also contains many ambiguous sentences, such as indicating the cessation of the investigation does not mean agreeing with Consensys’ viewpoint in the case), suspending the matter and reserving the right to continue to pursue whether other public chain tokens are securities in the future (because other public chain tokens are not as decentralized as Ethereum), and choosing to meet Consensys in court on the matter of staking.

While there is no clear conclusion on whether staking is considered a security; based on the Howey Test, does the revenue come from ‘the efforts of others’ or purely from market speculation, or from assets generated by on-chain contracts? In this way, the SEC actually has two paths to continue legally pursuing other tokens, either by claiming that the tokens themselves are securities or by claiming that token staking is a security.