The recent Supreme Court decisions curtail the SEC's regulatory and enforcement powers over the cryptocurrency sector. These rulings emphasize the need for clear congressional authorization for these kinds of regulatory actions.
The U.S. Securities and Exchange Commission (SEC) faces renewed scrutiny over its regulatory approach as it files charges against MetaMask's operator, Consensys. Accused of offering unregistered securities and operating as an unregistered broker, ConsenSys joins a growing list of crypto firms entangled in legal battles with the SEC. Meanwhile, recent Supreme Court rulings addressing agency overreach seem set to reshape the regulatory landscape for the entire crypto industry.
After Kraken, Coinbase, or Ripple, the SEC has now filed charges against Consensys Software, the company behind the popular Ethereum wallet MetaMask, for allegedly offering unregistered securities and operating as an unregistered broker.
The complaint, filed in the Eastern District of New York, focuses on two MetaMask services: MetaMask Staking and MetaMask Swaps. The SEC alleges that since January 2023, Consensys has offered and sold unregistered securities through its staking service, which allows users to participate in liquid staking programs from providers like Lido and Rocket Pool. The SEC claims that the liquid staking tokens (stETH and rETH) issued by these programs in exchange for staked assets constitute securities. Unlike traditional staked tokens that are locked and untradeable, these liquid versions can be freely bought and sold.
The agency also alleges that Consensys has been operating as an unregistered broker since October 2020 and that the company solicited investors to trade crypto asset securities, provided investment information, routed orders, and received transaction-based compensation through its MetaMask Swaps feature.
"By allegedly collecting hundreds of millions of dollars in fees as an unregistered broker and engaging in the unregistered offer and sale of tens of thousands of securities, Consensys inserted itself squarely into the U.S. securities markets while depriving investors of the protections afforded by the federal securities laws." Gurbir S. Grewal, Director of the SEC's Division of Enforcement
In a statement on June 28, Consensys replied that it "fully expected" the SEC's complaint and accused the agency of "pursuing an anti-crypto agenda led by ad hoc enforcement action." The company views this latest charge as another instance of the SEC's "regulatory overreach," as well as "a transparent attempt to redefine well-established legal standards and expand the SEC's jurisdiction via lawsuit."
Consensys expressed confidence in its legal position, arguing that "the SEC has not been granted authority to regulate software interfaces like MetaMask." This stance aligns with Consensys' general argument that MetaMask is simply an interface ("web browser extension and mobile app," according to its website) for users to interact with the Ethereum network rather than as a broker of securities.
Consensys also reaffirmed its commitment to the lawsuit it filed on April 25, 2024, against the SEC in the Western District of Texas. The company seeks a declaratory judgment that Ether (ETH), Ethereum's native cryptocurrency, is a commodity rather than a security.
Interestingly, the SEC's new complaint came just a few weeks after Consensys announced that the SEC had closed its investigation into Ethereum 2.0 and would not pursue enforcement action against the company. The firm shared that it had also asked a federal court to rule out activities as a broker with MetaMask Staking and MetaMask Swaps.
"It is imperative that the SEC abandon its unprincipled and opaque regulation-by-enforcement campaign in favor of much-needed regulatory clarity for an industry that serves as the backbone to countless new technologies and innovations."
In parallel to its case with Consensys, the regulator has struck a significant blow against Binance and its U.S. subsidiary, despite the company's attempts to dismiss most claims at a recent hearing.
On June 28, Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia issued a memorandum opinion on the SEC's 13 charges against Binance, Binance.US, and founder Changpeng "CZ" Zhao. The lawsuit, filed in June 2023, accused the defendants of engaging in "an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law."
While Judge Jackson dismissed one charge outright and partially dismissed two others, the majority of the SEC's claims were allowed to proceed. The crypto sector celebrated the partial dismissal of count one, which involved Binance's initial coin offering (ICO) for its BNB token and secondary sales on exchanges.
Judge Jackson ruled that the BNB ICO did qualify as an investment contract under the Howey test for identifying securities. However, she left room for further debate on the motivations of BNB purchasers, noting that discounts on exchange fees could potentially support a different conclusion in later proceedings. Regarding secondary sales of BNB on exchanges, Jackson sided with a previous ruling in the Ripple case, stating that the SEC's position "marks a departure from the Howey framework" and lacks clear principles for distinguishing between tokens that are securities and those that are not.
The judge also dismissed the agency's claims regarding Binance's BUSD stablecoin, stating the SEC did not sufficiently establish BUSD as an investment contract. Judge Jackson, however, allowed charges related to Binance's BNB Vault program to move forward while dismissing those concerning the Simple Earn program.
Serious charges such as fraudulent wash trading, misleading customers, and mishandling deposits will be upheld. The SEC will also be able to charge CZ as a "control person" of Binance.US.
In a July 1 tweet, the company said it was "prepared" for Jackson's ruling and remains "confident" that "the SEC's case is unsupported by the facts or the law." Like Consensys, Binance.US accused the SEC of a "regulation by enforcement approach" and "politically motivated overreach" under Chair Gary Gensler's leadership.
The next hearing is scheduled for July 9. Other crypto firms in a legal affair with the SEC were quick to use the Binance.US case to improve their odds. Coinbase filed a letter with U.S. District Judge Katherine Polk Failla on July 1, referencing Judge Jackson's ruling on BNB secondary sales. The exchange hopes to persuade Judge Failla to reconsider her previous rejection of its motion to dismiss the SEC's lawsuit. On July 2, Ripple filed a letter with Judge Torres, arguing that the recent ruling on secondary sales implies that Ripple's past actions do not necessitate "harsh remedies."
While Consensys and Binance continue their legal battles with the SEC, recent Supreme Court of the United States (SCOTUS) rulings could impact crypto regulation, potentially offering a lifeline to other embattled crypto firms like Kraken. On June 28, SCOTUS issued two significant rulings addressing, in part, the ongoing Major Questions Doctrine debate.
The first decision overturned the Chevron deference, a legal principle established in Chevron v. Natural Resources Defense Council. This principle had previously granted federal agencies substantial leeway in interpreting ambiguous statutes. The Court's ruling now limits this interpretative power, affecting how agencies like the SEC approach crypto regulation.
The second ruling, in SEC v. Jarkesy, curtailed the SEC's ability to use in-house administrative courts. This decision will impact the SEC's enforcement strategies in the crypto space, potentially requiring more cases to be heard in federal courts.
In a statement issued the same day, House Financial Services Committee Chairman Patrick McHenry praised the decisions as a "critical rebuke of the administrative state's outsized influence over the lawmaking process" and a "welcome check to this Administration's overzealous regulators."
In fighting against the SEC's overreach, these changes are likely to spur increased congressional involvement in defining the crypto industry's regulatory boundaries. This could lead to the establishment of clearer guidelines and a more transparent regulatory framework, ultimately benefiting both the industry and investors. We will continue to observe.