Metamask sued by SEC, where will Web3 go from here? | TrendX Research Institute

Just as everyone was still paying attention to the final stance of the SEC (U.S. Securities and Exchange Commission) on the ETH ETF, the SEC suddenly filed a lawsuit against ConsenSys, a blockchain technology company and the parent company of Metamask, on June 29, accusing MetaMask's Swap and staking products of violating securities laws, and specifically naming Lido and Rocket Pool's liquidity staking tokens stETH and rETH as unregistered "securities".

This news has caused a great stir in the industry. According to TrendX sentiment index data, the sentiment index of Lido and Metamask has dropped significantly. Lido's sentiment index decreased by 30, from 21 to a low of -9; Metamask's sentiment index dropped by over 100, from the original 33 to a plummeting -69, and the sentiment has changed from relatively positive to extremely negative.

The decline in sentiment has also caused price fluctuations. According to Coinmarketcap data, on the day the SEC filed the lawsuit, Lido's price dropped from a high of $2.43 to a low of $1.86, a decrease of over 23%.

As the Metamask wallet, which has the highest user penetration in the web3 industry, and Lido, which plays a crucial role in the ETH Stake & Restake sector, are facing a lawsuit, it will undoubtedly cast a shadow over their project development and the entire industry.

ConsenSys vs. SEC: Long-standing legal disputes

On Thursday, April 25, 2024, ConsenSys, a blockchain technology company, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) in the Northern District of Texas, as the SEC attempted to classify Ethereum (ETH) as a security. This event has attracted widespread attention. In the lawsuit documents, ConsenSys pointed out that the SEC is attempting to regulate ETH as a security, despite the fact that ETH does not possess the attributes of a security, and the SEC has previously stated that ETH is not a security and does not fall within the SEC's statutory jurisdiction.

Origin of the event

On April 10, 2024, SEC staff sent a "Wells Notice" to ConsenSys, stating that the SEC was about to recommend enforcement action against ConsenSys for allegedly violating federal securities laws through its MetaMask Swaps and MetaMask Staking products. A Wells Notice is a formal notice issued by the SEC to inform individuals or institutions under investigation that the SEC intends to recommend enforcement action for alleged violations of securities laws. This notice allows the notified party to provide written statements or oral defenses, explanations, or rebuttals of the SEC's preliminary findings before the SEC makes a final decision.

Focus of the lawsuit

The SEC's legal basis is that MetaMask's related Swap and other functions involve unregistered securities transactions, thereby violating federal securities laws. ConsenSys' argument is that the SEC's stance on whether these tokens should be considered securities is ambiguous, and therefore they decided to file a lawsuit with the court. ConsenSys believes that Ethereum should not be considered a security, and MetaMask's functions do not involve securities transactions, thus not violating federal securities laws. The SEC's lawsuit is typically based on the following aspects:

Unregistered securities issuance: The SEC may accuse ConsenSys of not following the registration requirements of U.S. securities laws in the issuance process of certain tokens. Under U.S. law, any asset considered a security must be registered with the SEC before issuance, or meet certain exemption conditions.
Misleading investors: The SEC may claim that ConsenSys misled investors or failed to provide adequate disclosure during its token issuance process, leading to investors not fully understanding the risks and nature of the investment.

Impact and concerns

If the court rules that Ethereum is a security, the sale of Ethereum in the United States will need to follow procedures similar to stocks, which will have a significant impact on exchanges and institutions holding large amounts of Ethereum, and will also affect the approval of an Ethereum ETF. ConsenSys believes that the SEC's illegal usurpation of power over ETH will bring disaster to the Ethereum network and ConsenSys.

The SEC's lawsuit against ConsenSys may have widespread implications:

Impact on ConsenSys: If the SEC's allegations are upheld, ConsenSys may face substantial fines, compensation for investor losses, and requirements to reform its business model. This will have a significant impact on the company's operations and reputation.
Impact on the crypto industry: This lawsuit may become a significant landmark event for the industry, indicating that the SEC is enforcing stricter regulations on cryptocurrency and blockchain companies. This may prompt other companies in the industry to re-examine the compliance of their business and encourage more companies to work with the SEC to avoid similar legal risks.
Market reaction: This event may cause short-term fluctuations in the cryptocurrency market, especially for projects and tokens related to ConsenSys. Investors may have concerns about regulatory risks, affecting market sentiment.

Escalating contradictions

In earlier lawsuits, ConsenSys expressed doubts about the SEC, and on June 18, the SEC gave an ambiguous statement: "While we do not agree with the facts or legal conclusions stated in the June 4 letter in this notice or in any other respect, based on the information available to us as of the date of this notice, we do not intend to recommend enforcement action against ConsenSys Software Inc." However, this statement does not mean that the SEC has given up its investigation of ConsenSys.

Statement from legal counsel

In response to this lawsuit, Laura Brookover, ConsenSys' legal counsel, stated that the entire investigation (not just against ConsenSys) has concluded. The letter indicated that no charges would be brought against ConsenSys, but this does not mean that lawsuits will not be brought against others who provide or sell Ethereum.

Different viewpoints

However, there are also opponents who believe that the SEC's letter did not explicitly state that the investigation had "ended". For example, David Barrera, the founder of Enumma, believes that this only means that the SEC will not bring lawsuits against others who provide or sell Ethereum, but according to the SEC's enforcement manual, the conclusion of an investigation does not mean that the investigation is completely over.

Industry impact

Currently, it seems that the SEC's lawsuit against ConsenSys has become a foregone conclusion, but industry observers are more concerned about whether this will affect Liquid Staking such as Lido and Restaking, as well as the final approval of an ETH ETF. Laura believes that the SEC's investigation into these activities is part of a separate investigation and does not affect the conclusion of the Ethereum 2.0 investigation.

Conclusion

Although more details about this lawsuit have yet to be disclosed, it is certain that the integration of Web3 and the real world is becoming increasingly close, and relevant policies or regulatory bodies are finding it difficult to exclude Web3. In this regard, we should have full confidence.

The conflict between the SEC and ConsenSys reflects the complexity of the cryptocurrency industry in terms of law and regulation. With the introduction of more regulations and policies, finding a balance between innovation and compliance will be an important challenge for the entire industry. We look forward to the final outcome of this case and hope that it will provide beneficial guidance for the healthy development of the industry.

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