Metamask sued by SEC, where will Web3 go from here?

While everyone was still focused on the SEC's (U.S. Securities and Exchange Commission) final stance on the ETH ETF, the SEC unexpectedly took action on June 29 by formally suing the blockchain technology company ConsenSys, the parent company of MetaMask. They accused MetaMask's Swap and staking products of violating securities laws and specifically named Lido and Rocket Pool's liquid staking tokens stETH and rETH as unregistered "securities."

This news caused a stir in the industry. According to TrendX sentiment indicator data, the sentiment indicators for Lido and MetaMask saw significant declines, with Lido dropping 30 points from 21 to a low of -9, and MetaMask declining over 100 points from an initial 33 to a low of -69, shifting sentiment from relatively positive to very negative.

The drop in sentiment also triggered price fluctuations. According to Coinmarketcap data, on the day the SEC lawsuit was announced, Lido's price fell from a high of $2.43 to a low of $1.86, a decline of over 23%.

As the most widely used wallet in the web3 industry, MetaMask, along with Lido, which plays a crucial role in the ETH Stake & Restake sector, is bound to face shadows over its project development and the overall industry development due to this lawsuit.

ConsenSys vs. SEC: A Long-standing Legal Dispute

On Thursday, April 25, U.S. time, blockchain technology company ConsenSys filed a lawsuit in the Northern District of Texas against the SEC, which attempted to classify Ethereum (ETH) as a security. This event attracted widespread attention. In the lawsuit documents, ConsenSys pointed out that the SEC is trying to regulate ETH as a security, despite ETH not possessing the attributes of a security, and the SEC previously clearly stated that ETH is not a security and does not fall under the SEC's statutory jurisdiction.

Origin of the Incident

On April 10, 2024, SEC staff sent a "Wells Notice" to ConsenSys, stating that they would soon 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 notification issued by the SEC before initiating enforcement action, informing the investigated individual or entity that the SEC intends to recommend enforcement action for suspected violations of securities laws. This notice allows the notified party to provide a written statement or oral defense before the SEC makes a final decision.

Focus of the Lawsuit

The SEC's legal basis is that the functions related to MetaMask, such as Swap, involve trading unregistered securities, thus violating federal securities laws. ConsenSys argues that the SEC's stance on whether these tokens should be considered securities is ambiguous, leading them to file a lawsuit in court. ConsenSys believes that Ethereum should not be viewed as a security, and the functions of MetaMask do not involve securities trading, therefore not violating federal securities laws. The SEC's lawsuit is typically based on several aspects:

• Unregistered securities issuance: The SEC may accuse ConsenSys of not following the registration requirements of U.S. securities laws during certain token issuance processes. Under U.S. law, any asset deemed 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 during its token issuance process or failed to provide adequate disclosures, preventing investors from fully understanding the risks and nature of the investment.

Impact and Concerns

If the court rules that Ethereum is a security, then the sale of Ethereum in the U.S. would need to follow procedures similar to those for stocks, which would have significant implications for exchanges and institutions holding large amounts of Ethereum, as well as affecting the approval of Ethereum ETFs. ConsenSys believes that the SEC's illegal power grab over ETH would spell disaster for the Ethereum network and ConsenSys.

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

• Impact on ConsenSys: If the SEC's accusations are upheld, ConsenSys may face hefty fines, compensation for investor losses, and demands to reform its business model. This would significantly affect the company's operations and reputation.

• Impact on the crypto industry: This lawsuit could become a 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 reassess their business compliance and encourage more companies to seek cooperation with the SEC to avoid similar legal risks.

• Market reaction: This event may cause short-term volatility in the cryptocurrency market, especially for projects and tokens related to ConsenSys. Investors may become concerned about regulatory risks, affecting market sentiment.

Escalation of Conflicts

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 circumstances, based on the information we have to date, we do not intend to recommend to the Commission that enforcement action be taken against ConsenSys Software Inc." However, this statement does not mean that the SEC has abandoned its investigation into ConsenSys.

Statement from Legal Counsel

In response to this lawsuit, ConsenSys's legal counsel, Laura Brookover, 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 charges will not be brought against others who provide or sell Ethereum.

Different Perspectives

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

Industry Impact

Currently, the SEC's lawsuit against ConsenSys seems to be a foregone conclusion, but industry observers are more concerned about whether this will affect Liquid Staking and Restaking sectors like Lido, as well as the final approval of the ETH ETF. Laura believes that the SEC's investigation into these activities falls under a separate independent 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 with the real world is becoming increasingly close, and relevant policies and regulations are becoming difficult to keep Web3 at bay. We should have full confidence in this.

The conflict between the SEC and ConsenSys reflects the complexities of the cryptocurrency industry in terms of law and regulation. As more regulations and policies are introduced, finding a balance between innovation and compliance will be a significant challenge facing the entire industry. We look forward to the final outcome of this case and hope it can provide valuable insights for the healthy development of the industry.