The U.S. Securities and Exchange Commission sued Ethereum ETH +3.90% incubator Consensys on Friday, alleging the company’s in-house built wallet MetaMask violated several laws on the books.

Specifically, MetaMask’s “swaps” feature, which enables users to exchange one token for another, made it an unregistered broker. Additionally, the MetaMask staking service, which offered an easy way to interact with liquid staking protocols including Lido and Rocket Pool, should be classified as an unregistered securities program, the securities watchdog alleged.

While the SEC’s claims that Consensys “underwrote” several million in illicit securities transactions by providing the software that enabled them seems damning, some experts believe the agency has a weak case.

Factory Labs CEO Nick Almond said the SEC’s arguments that an open-source crypto wallet be forced to register as a broker-dealer is wrong.

Going after smart contracts

“For me, it’s about custodiality — the degree to which users are in sovereign control of their assets. If they are through and through no custody of funds; no broker-dealer,” Almond told The Block in a direct message. Traditionally, a broker-dealer is someone who sits in between a securities transaction for another person.

For instance, according to the SEC’s written definition, a “broker-dealer is any person engaged in the business of buying or selling securities for the account of others.” Although several engineers are working to improve MetaMask at Consensys, the swapping service is essentially a robot controlled by users who want to execute their own transactions.

This was the interpretation of U.S. District Judge Katherine Failla, who on March 27 threw out similar SEC charges against Coinbase Wallet in that ongoing case. Because it was a self-custody wallet where users maintain control of their funds, neither Coinbase nor Coinbase Wallet could be said to be brokers.

The same is likely true for Consensys and MetaMask, according to Tuyo founder Jorge Izquierdo, who said in a post on X that there’s no difference between offering non-custodial smart contract support and “offering a UI for any random swap.” The only wrinkle is that ​​Consensys collects a fee for providing its swapping service.

Start your day with the most influential events and analysis happening across the digital asset ecosystem.

By signing-up you agree to our Terms of Service and Privacy Policy

Also receive The Scoop, The Funding, and our weekly Data & Insights newsletters

By signing-up you agree to our Terms of Service and Privacy Policy

Staking out challenges

A similar argument can be made for the charges against MetaMask’s staking service, which acts as an intermediary between users and decentralized protocols Lido and Rocket Pool. According to the SEC, “Consensys has offered and sold tens of thousands of unregistered securities on behalf of liquid staking program providers.”

But again, this may be placing an intermediary in between transactions where there actually isn’t any. Almond described the staking service as something more like a UI interface.

“The idea that front end equals bank or something equivalent is a bit silly because anyone can interact with smart contracts directly, or can even run their front ends local,” Almond said. In other words, MetaMask is just one way of accessing protocols that will live indefinitely as long as Ethereum stays operational.

“So in essence the regulation doesn’t stop the action it just makes it harder for everyday people to access, which I guess is the desired outcome,” he added.

It’s worth noting the SEC also alleges Lido’s stETH and Rocket’s rETH are securities because neither platform is registered. As many crypto legal experts have long noted, however, there is not yet a viable way for decentralized applications to register with the agency.

This is part of the reason why companies like Coinbase and Consensys have launched their own, independent lawsuits against the agency seeking regulatory clarity.

“We are confident in our position that the SEC has not been granted authority to regulate software interfaces like MetaMask. We will continue to vigorously pursue our case in Texas for ruling on these issues because it matters not only to our company but the future success of web3,” Consensys Senior Counsel and Director of Global Regulatory Matters Bill Hughes said in a statement.