Metamask is sued by SEC, where will Web3 go?

While everyone is still paying attention to the SEC (U.S. Securities and Exchange Commission)’s final stance on ETH ETF, the SEC made a sudden move and officially filed a lawsuit against Consensys, a blockchain technology company and the parent company of Metamask, on June 29. The lawsuit accuses MetaMask's Swap and staking products of allegedly violating securities laws, and names Lido and Rocket Pool's liquid staking tokens stETH and rETH as unregistered "securities." As soon as the news came out, it caused an uproar in the industry. According to TrendX sentiment indicator data, Lido and Metamask sentiment indicators respectively experienced significant declines. Among them, Lido dropped by 30, from 21 to the lowest -9; Metamask dropped by more than 100, from the original 33 to -69, and the sentiment also changed from relatively positive to very negative.

The decline in sentiment also caused fluctuations in currency prices. According to Coinmarketcap data, on the day the SEC lawsuit was announced, the price of Lido fell from a maximum of $2.43 to a minimum of $1.86, a drop of more than 23%.

As the Metamask wallet with the highest user popularity in the Web3 industry, and Lido, which plays an important role in the ETH Stake & Restake sector, this lawsuit is bound to cast a shadow on the development of its project and the development of the entire industry.

ConsenSys vs. SEC: A long-standing legal dispute

On Thursday, April 25, US time, blockchain technology company ConsenSys was in trouble due to the US Securities and Exchange Commission (SEC)’s attempt to characterize Ethereum (ETH) as a security. The lawsuit was filed in the District Court for the Northern District of Texas. The incident attracted widespread attention. ConsenSys pointed out in the lawsuit that the SEC attempted to regulate ETH as a security, even though ETH does not have the attributes of a security, and the SEC has previously made it clear that ETH is not a security and does not fall within the SEC's legal jurisdiction.

Origin of the event
On April 10, 2024, SEC staff sent a "Welsh Notice" to ConsenSys, stating that it was about to recommend that the Commission initiate enforcement action against ConsenSys on the grounds that ConsenSys violated federal securities laws through its MetaMask Swaps and MetaMask Staking products. . A Wells Notice is a formal notice issued by the SEC prior to the filing of an enforcement action, informing a person or institution under investigation that the SEC intends to recommend enforcement action against the person or institution for alleged violations of securities laws.

Focus of the lawsuit
SEC’s legal stance is that MetaMask-related Swap and other functions involve the trading of unregistered securities, thereby violating federal securities laws. ConsenSys’ logic is that the SEC was ambiguous on whether it considered these tokens securities, so it decided to file a lawsuit in court. ConsenSys believes that Ethereum should not be considered a security and MetaMask’s functionality does not involve the trading of securities and therefore does not violate federal securities laws. SEC prosecutions are usually based on the following aspects:

Unregistered securities offering: The SEC may accuse Consensys of failing to comply with the registration requirements of U.S. securities laws during certain token offerings. Under U.S. law, any asset considered a security is required to be registered with the SEC before it is issued, or to qualify for certain exemptions.
Misleading Investors: The SEC may allege that Consensys misled investors or failed to provide adequate disclosures during its token offering, resulting in investors not fully understanding the risks and nature of the investment.

Impact and Concerns
If the court rules that Ethereum is a security, then sales of Ethereum in the United States will need to follow similar procedures to stocks, which will have a significant impact on exchanges and institutions holding large amounts of Ethereum, as well Will affect the approval of the Ethereum ETF. ConsenSys believes that the SEC’s illegal usurpation of power over ETH will have suicidal consequences for the Ethereum network and ConsenSys.

SEC’s prosecution of Consensys could have wide-ranging ramifications:

Impact on Consensys: If the SEC’s charges are proven, Consensys could face hefty fines, compensation for investor losses, and requirements to revamp its business model. This will have a significant impact on company operations and reputation.
Impact on the crypto industry: This lawsuit may become an important landmark event for the industry, indicating that the SEC will implement stricter regulations on cryptocurrency and blockchain companies. This could trigger a re-examination by other companies in the industry about the compliance of their businesses, prompting more companies to seek cooperation with the SEC to avoid similar legal risks.
Market reaction: This incident may have short-term volatility on the cryptocurrency market, especially projects and tokens related to Consensys. Investors may have concerns about regulatory risks, affecting market sentiment.

Intensification of contradictions
In earlier lawsuits, ConsenSys expressed doubts about the SEC, and the SEC gave an ambiguous statement on June 18: “Notwithstanding our actions in this notice, or in any other case, We do not agree with the factual or legal conclusions stated in the June 4 letter, but based on the information we have so far, we do not intend to recommend to the committee that enforcement measures be taken against ConsenSys Software Inc. "However, this position does not mean that. SEC drops investigation of ConsenSys.

Statement from Legal Counsel
In response to this lawsuit, ConsenSys’ legal counsel Laura Brookover stated that the entire investigation (not just ConsenSys) has concluded. The letter states that charges will not be filed against ConsenSys, but that does not mean that lawsuits will not be filed against others offering or selling Ethereum.

Different views
However, there are also opponents who believe that the SEC’s letter did not clearly state that the investigation has been “closed”. For example, Enumma founder David Barrera believes that this simply means that the SEC will not prosecute others who offer or sell Ethereum, but according to the SEC’s enforcement manual, the conclusion of the investigation does not mean that the investigation is completely over.

Industry Impact
At present, the SEC’s prosecution of ConsenSys seems to be a foregone conclusion, but followers in the industry are more concerned about whether this will affect the Liquid Staking and Restaking parts such as Lido, as well as the final approval of the ETH ETF. Laura believes that the SEC’s investigation into these activities falls within the scope of another independent investigation and does not affect the conclusion of the Ethereum 2.0 investigation.

Summary
Although more details about this lawsuit have not yet been disclosed, it is certain that Web3 is increasingly integrated with the real world, and it has been difficult for relevant policies, regulations or policy groups to keep Web3 out. We should have full confidence in this.

The conflict between the SEC and ConsenSys reflects the legal and regulatory complexities of the cryptocurrency industry. As more regulations and policies are introduced, how to find a balance between innovation and compliance will be an important challenge facing the entire industry. We look forward to the final outcome of this case and hope it will provide useful lessons for the healthy development of the industry.

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