Tag: Joe Lubin

Consensys gets a Wells notice over MetaMask Swaps and Staking

  • By Amy Castor and David Gerard
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Consensys is the center of the Ethereum ecosystem. Its founder, Joe Lubin, is the man who’s made more money from Ethereum than anyone.

Consensys makes the immensely popular MetaMask crypto wallet. They offer a swaps service and a staking service through MetaMask.

Anyway, Consensys got a Wells notice of impending enforcement action from the SEC on April 10. The SEC thinks Consensys is operating as an unregistered broker-dealer by making money on the MetaMask Swaps and MetaMask Staking products.

To head this off, Consensys is preemptively suing the SEC first! [Blog post; complaint, PDF; docket]

Consensys wants a ruling that:

  • MetaMask Swaps does not make Consensys a broker-dealer;
  • MetaMask Staking is not an offering of securities;
  • Ether (ETH), the native token of the Ethereum blockchain, is not a security.

It also wants an injunction against the SEC even investigating MetaMask Swaps or Staking, and against investigating the company’s sales of ETH in terms of ether being a security. And a pony would be nice too.

The complaint

The SEC has been investigating Consensys for two years. The agency first sent Consensys a letter in April 2022 advising them that they were investigating MetaMask. Then in September 2022, Consensys got another letter that the SEC was investigating staking protocols on the Ethereum network.

Consensys complains that it “did not have fair notice” of only two years.

The complaint was filed in the Northern District of Texas — Consensys used to be in Brooklyn, New York, but moved to Fort Worth sometime last year. 

Consensys has hired Wachtell, Lipton, Rosen & Katz, one of the best-known law firms on Wall Street. It’s the same firm Coinbase is using to fight back against the SEC. 

MetaMask

MetaMask is a self-custody crypto wallet that Consensys distributes free as a web browser extension. You can move ETH or tokens running on top of Ethereum, such as altcoins or NFTs, between blockchain addresses.

Two services that Consensys sells via MetaMask are MetaMask Swaps and MetaMask Staking. It even calls these “core features” — though Swaps was introduced in 2020 and Staking in 2023. 

MetaMask Swaps

Swaps lets you “communicate with third-party decentralized exchanges.” Consensys charges a 0.875% fee for use of the service. What does Swaps do?

MetaMask Swaps software itself does not execute transactions and never comes into possession of users’ digital assets. It simply displays pricing information collected from third-party aggregators and sends user commands to DEXs, which execute the transactions. 

Now, you might think this closely resembles a stockbroker buying and selling stocks for you and taking a fee for doing so.

In the world of conventional securities, facilitating trade in beneficial ownership rights in stocks whose owner of record is the Depository Trust and Clearing Corporation (DTCC) is also non-custodial. We still call this job being a “broker.”

But this only matters if any of the tokens are securities. Are they? Well … yes. Almost all of the tokens you can use on MetaMask would be considered securities under the Howey test. They were created as schemes to profit from the efforts of others. The SEC’s 2017 DAO Report and 2019 framework for investment contract analysis bludgeon this point home.

The SEC has settled or won in court in previous cases arguing that many tokens of this sort are securities — such as its actions against Bittrex, Terraform, and ShapeShift — so we expect that a complaint will name various tokens traded in Swaps and detail why they are securities.

Consensys admits that it’s helping customers buy and sell these tokens and it’s taking a fee for doing so. The SEC just has to show that some of the tokens are securities.

MetaMask Staking

MetaMask Staking lets you “stake” ETH to earn more ETH.

Ethereum doesn’t use proof-of-work mining like bitcoin — instead, it uses proof-of-stake. You put up a validator node with 32 ETH locked in it and you have a certain chance to generate a block that goes into the blockchain. If you do, you win the block reward.

Ethereum staking hits all of the elements of the Howey test of whether something is a security:

  • “an investment of money” — your 32 ETH stake
  • “in a common enterprise” — Ethereum
  • “with a reasonable expectation of profits” — the validator specification document literally says “verify and attest to the validity of blocks to seek financial returns” [GitHub]
  • “derived from the efforts of others” — promotion and management of the scheme by the Ethereum Foundation and money from the retail suckers who buy your ETH winnings.

The Ethereum Foundation, which determines how Ethereum works, is based in Switzerland. However, staking that involves a US entity would be under SEC jurisdiction.

Various companies have offered staking as an investment to institutional and accredited investors. That’s fine — but it’s not so fine when they offer it to ordinary mom-and-pop retail investors.

In June 2023, the SEC and ten state securities regulators came down on Coinbase for offering its staking product to retail investors. The SEC fined Kraken $30 million in February 2023 over its staking offerings. Kraken had to remove its staking product from the US market. 

Consensys offers its ordinary retail customers using MetaMask access to the Lido and Rocket staking pools. Consensys doesn’t mention it in the complaint, but they take a 10% fee for staking via MetaMask. [Consensys]

The complaint hammers again on the non-custodial nature of the staking service:

Like the rest of the MetaMask wallet software, the MetaMask Staking feature is entirely non-custodial; at no point does Consensys come into possession, custody, or control of a user’s tokens, nor can it alter in any way the user’s transaction instructions to the protocol. 

But that doesn’t matter — because they’re blatantly offering an investment scheme to retail investors and taking a 10% fee.

In fact, Consensys admits that it put a lot of work into the new staking mechanism, and the SEC subpoenaed information on this work:

They also seek detailed information concerning the role of Consensys, including its software developers, in a host of Ethereum Improvement Proposals related to the Ethereum Merge, the transition from a proof-of-work to a proof-of-stake validation mechanism. 

That is, Consensys themselves helped move the Ethereum network to its current very security-like operating mode, which is entirely different from the 2018 mechanism that wasn’t considered an investment contract.

Is ETH a security?

The complaint rants at length about whether ETH is a security, and even says that “the SEC now claims that ETH is a security subject to SEC regulation.”

This isn’t something the SEC has actually declared yet. What SEC chair Gary Gensler has done is suggest that ETH might possibly be a security now — particularly after Ethereum’s move to proof-of-stake in September 2022.

Consensys is outraged by this. The complaint cites lengthy historical evidence of the SEC and its commissioners telling the world that ETH is not a security. However, most of this dates back to 2018.

In 2018, Ethereum was running on a proof-of-work network, where crypto miners got rewards for spending electricity to guess a number and not for putting in funds.

Consensys notes the switch — but not how the payment model changed.

The crypto world is very good at going “la la la I can’t hear you” when obvious concerns such as this are raised early, then acting surprised when they suddenly become relevant. But crypto people were already talking in 2019 about the then-planned Ethereum staking really obviously being a security in the US, and both the SEC and the CFTC started looking into the question in that year. [Grant Gulovsen, 2019; CoinDesk, 2022]

If ETH is determined to have changed its operating model to now run as an offering of securities, that takes out Consensys’ entire business. It also undermines Lubin’s massive wealth. We’re surprised Consensys was dumb enough to even raise the question.

What happens next?

We’re not lawyers ourselves, but the expensive lawyers who wrote this complaint seem only to have been able to find the crayons that day.

Consensys admits upfront to most of what the SEC would need to nail them on MetaMask Swaps and Staking. The SEC would just need a ruling that tokens on Swaps were securities. On Staking, it looks like Consensys doesn’t have a case.

The extended table-pounding on the history of ETH leaves out how present-day staking works — that is, just like an investment contract. The SEC just needs to note the fact.

After that incredibly stupid Ripple ruling, we won’t say that Consensys can’t prevail here. We do think their chances of winning are incredibly thin, and the complaint leaves itself wide open to the SEC’s obvious responses.

Update 1: One possible reason for Consensys filing this bizarre complaint in the Northern District of Texas is that it’s likely to go to Judge Reed O’Connor, a George W. Bush appointee known for his history of such bizarre rulings that even the present Supreme Court has consistently knocked them back. O’Connor might plausibly go for the complaint’s good ol’ boy hollering about the evils of fed overreach.

Consensys is weirdly vague about precisely when they moved to Texas. There wasn’t a press release. CoinDesk says Consensys’ office is in a WeWork, though WeWork only has the fourth floor of 5049 Edwards Ranch Road, Fort Worth, TX 76109, and there are other companies in the building. Various sources give their move date to Fort Worth as December 2023, though they were sending out press releases datelined Fort Worth as early as June 2023. [CoinDesk]

Did Consensys move to Fort Worth specifically to try to win a bizarre ruling from O’Connor with this weird filing as their judicial lottery ticket? This is almost too crypto an idea to seriously posit, but it’s less nonsensical than any other interpretation we have. Ideas welcome!

Update 2: Nevermind! Consensys straight up admits they moved to Ft. Worth for the courts.

Laura Brookover, Consensys head of litigation, tells Unchained: “For us, we moved to Texas because it’s a wonderful laboratory for innovation. Texas celebrates individual freedom, celebrates technology, and it’s a great opportunity for us being headquartered here to call on the courts and to say, please help us, because what the SEC is doing is unlawful.” [Unchained]

Feature image: Joe Lubin of Consensys and the Ethereum team in 2014.

Posted on by Amy Castor 1

News: Yuga Labs goes APE, Meebits insider trading, ConsenSys raises another $450M to focus on Web3 buzzword

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BAYC: Money for nothing

Yuga Labs finally launched its Apecoin — oops, sorry, not Yuga, but the Apecoin DAO launched APE. On March 17, the same day the coin launched, it was listed on all the major crypto exchanges in the U.S., including Coinbase, Kraken, and Gemini. (My blog post)

Apecoin has a fixed supply of 1 billion. So far, about 130 million Apecoins have entered circulation, according to CoinGecko. Today, Apecoin is up to $11, and 40% of the volume is on Binance trading against two stablecoins with dubious backing — USDT (35%) and BUSD (5%).

Soon after Apecoin launched, Bored Ape Yacht Club NFT holders took to Twitter, proclaiming how rich they had become overnight. Each bored ape holder got ~10,094 APE tokens, valued anywhere between $80,000 to $200,000.

It’s the same Ponzi promotion story we have heard since bitcoin launched in 2009 — buy this token and you will get rich for free. Everyone who holds Apecoin now wants you to buy APE, so the value goes up, and they can cash out. That value right now is being artificially pumped by tethers.

Hundreds of millions of dollars worth of Apecoin also went to Yuga Labs founders, Yuga Labs itself, contributors to the project, and to the newly formed Ape DAO. Just like that, everyone is rich.

What about Andreessen Horowitz (a16z)? How many Apecoins were they allotted? We may never be privy to the details.

“A spokesperson for Yuga said Andreessen received coins in exchange for assisting with ‘overall DAO governance design’……Yuga and Andreessen both declined to comment on the potential financing.” (FT)

Apecoin serves as a governance token, giving holders voting rights in the newly formed Ape DAO. Big holders, like Yuga Labs and a16z, have a greater say in the future of BAYC. This is the problem with the Ape DAO — it’s centralized decision-making. (Bloomberg)

Someone figured out a clever way to make $1.1 million by “borrowing” another person’s bored apes just long enough to claim Apecoin. (The block; Web3 is going just great)

Benji Bananas, the play-to-earn game that Yuga Labs is using via Animoca Brands to give Apecoin some utility so the SEC doesn’t sue its issuers, was bad and exploitative from the get-go. (Twitter)

The Block got a hold of Yuga Labs’ pitch deck. According to the deck, Yuga Labs hopes to make $455 million in 2022 through virtual land sales. It’s aiming to build a gaming metaverse called MetaRPG, compatible with a host of NFTs, powered by Apecoin. (The Block; Pitch Deck)

Yes, that’s right. Yuga’s next project is selling make-believe land. You can buy the land with APE.

Bored Ape Yacht Club NFTs along with Apecoin are inherently worthless. The BAYC project doesn’t offer a service; it doesn’t manufacture a product. Its business model is based on filling a balloon with hot air and getting high-profile celebs to shill its product on prime-time TV.

Sure, holding a bored ape NFT will gain you entrance into a warehouse party — but they don’t even work properly for that. NFTs literally, don’t work for anything they are intended to do.  

Insiders acquire Meebits

​​On March 11, Yuga Labs announced it acquired the IP for CryptoPunks and Meebits collections from Larva Labs. It’s giving the NFT holders the IP, so they can create derivative products, like hoodies, T-shirts, and other merch. (Press release; Techcrunch) 

Yuga also got 423 Punks and 1,711 Meebits in the deal. The terms were undisclosed, so we don’t know how much they paid Larva Labs.

The floor price of Meebits doubled after the announcement, climbing to 6.134 ETH ($15,800).

Insiders took the opportunity to buy Meebits in advance and make some easy money.

Lesley Silverman, the head of digital assets at United Talent Agency, formally representing Larva Labs, is one of those people. She bought two Meebits in the days prior to the announcement. (Twitter)

All told, 14 Ethereum addresses, with no previous history of mainstream NFT collection purchases, quietly acquired 159 Meebits between March 5 and March 11. The top address purchased 24 Meebits at once on March 5. (Bloomberg)

Insider trading in the securities business is illegal and comes with harsh consequences, but NFTs are not regulated, so people get away with this stuff, literally, all of the time.

Smile for the camera

Yuga Labs and its partner Animoca Brands want bored ape holders to submit a government-issued ID and have their photos taken to confirm their real identities, so they can register for a mystery project. Bored ape holders are pissed off, some thinking they were going to be turned over to the IRS. (Cointelegraph)

The irony is that this all happened only a month after Yuga Lab’s founders made a big to-do about Buzzfeed revealing their true identities. They responded by directing an onslaught of anger and harassment from the crypto community toward Buzzfeed reporter Katie Notopoulos.

Coinbase class-action

Apecoin resembles a security, like a stock or bond, but that didn’t stop Coinbase from listing it asap.

​​SEC Chair Gary Gensler has already stated that Coinbase lists dozens of tokens that may be securities. According to securities laws, exchanges that list securities must register with the SEC as a securities exchange or a broker-dealer. Coinbase has not registered as either.

A recent class-action against Coinbase alleges that 79 tokens the exchange lists meet the definition of securities, but plaintiffs were not warned of the risks. The claim, filed by three Coinbase users, asks for monetary relief and an injunction enjoining Coinbase from offering the tokens without having to register with the SEC. (Complaint; Cointelegraph)

I think you should leave

Time magazine wrote a lengthy profile on Ethereum founder Vitalik Buterin, calling him the “prince of crypto.” Buterin is concerned about what Ethereum has morphed into.

“Buterin worries about the dangers to overeager investors, the soaring transaction fees, and the shameless displays of wealth that have come to dominate public perception of crypto.” (Time)

It’s funny Buterin should have these feelings.

Ethereum was literally designed for all of these things. It fueled the ICO bubble of 2017. Most ICO tokens live on the Ethereum blockchain, just as most NFT tokens today are bought and sold on Ethereum. And Ethereum’s proof-of-work consumes the energy of a small country.

Buterin is the guy in the hotdog suit in a sketch from the comedy series “I think you should leave.”

In the sketch, a hot-dog-shaped car has crashed through the window of a menswear shop. Everyone is looking around to see who is responsible. Suddenly a man in a hot-dog costume appears out of nowhere and says, “Yeah, whoever did this, just confess. We promise we won’t be mad!”

Never forget, Vitalik created Ethereum because World of Warcraft nerfed his favorite warlock. 

VCs shovel more millions into ConsenSys

Joe Lubin’s ConsenSys got another $450 million round of funding with a $7 billion valuation. This comes just four months after its Series C that raised $200 million and valued it at $3 billion.

The company has more than doubled in value, thanks to the venture capitalists.

Lubin is one of the cofounders of Ethereum who struck it rich in Ethereum’s early crowdfunding sale.

ConsenSys invested in ICO projects throughout 2017 — mostly hilariously bad ideas like Civil. When none of these projects had any hope of making it, and some like Airfox and Paragon, had to pay hefty fees to the SEC for securities violations, ConsenSys went through a “strategic transformation.” It cut staff and converted its failing portfolio business into a separate company called ConsenSys Mesh, effectively pushing the ugly mess off into the corner.

Nowadays, Lubin is busy hyping software like Infrura and Metamask to build Web3.

Stephen Dhiel explains why Web3 is “bullshit.”

The latest round will “accelerate the global adoption” of Infura and ConsenSys’s efforts to “drive NFT adoption for artists, content creators, brands, intellectual property owners, game publishers, and sports leagues.” (ConsenSys blog; Decrypt)

Anyone who thinks NFTs are going to crash soon has little understanding of how much money VCs are shoveling into this space. This money will keep the space propped up long enough for investors and insiders to cash out, just like they did with ICO tokens.

Elsewhere in cryptoland

Vice did a story on nocoiners — bitcoin skeptics, as we call ourselves. It has some good content, but also a misleading flaw: it makes it seem that nocoiners are insignificant because the “nocoiner industry” moves a tiny amount of money compared to the crypto industry. (Vice)

NYT reporter Kevin Roose wrote a lengthy story explaining crypto to the masses. Don’t be fooled. This is a piece of crypto boosterism, where Roose continually tries to convince the reader that he is a “crypto moderate.” The story is especially pernicious because of its “reasonable” tone. (New York Times)

Vice reporter Edward Ongweso went to the first SXSW post-covid, only to find out it was overtaken by crypto-mania and NFT nonsense, like 3D anthropomorphic rabbits plastered everywhere, “which I gathered were somehow related to crypto though it wasn’t clear how.” (Vice)

Mark Zuckerberg says that in the coming months you’ll be able to mint NFTs within Instagram. “I would hope that, you know, the clothing that your avatar is wearing in the metaverse, you know, can be basically minted as an NFT and you can take it between your different places,” he said. (Engadget)

There is no actual metaverse. Zuckerberg is lying. Metaverse is a meaningless marketing term used by companies in an effort to separate people from their money.

“Zuckerberg created this conversation to distract from his problems and made fertile ground for truly evil people to profit,” Ed Zitron wrote in a blog post last month.

Jorge Stolfi, a computer science professor in Brazil, says Web3 is nothing more than a new way to frame cypherpunk’s utopia: “The cypherpunks are a bunch of ‘socially challenged’ nerds who dream of building a society on the internet that is totally beyond the reach of governments. That the cops cannot monitor, regulate, or control.” (Reddit: here and here)

The CFTC is looking into Binance to see if the exchange permitted U.S. residents to buy and sell derivatives traded on its platform. (Bloomberg)

Also, Binance has stopped serving residents of Ontario, this time for real. (Binance Letter of Undertaking and Acknowledgment; OSC press release)

Münecat just came out with a brilliant video (100 minutes) explaining Web 3.0. Picture this: The year is 2063, and the global currency is Moosecoin. (Youtube)

Wikipedia editor and software engineer Molly White did a podcast with “Scam Economy” talking about her “Web3 is going just great” project. (Youtube)

If you haven’t read it yet, this Verge article on Tron CEO Justin Sun is an amazing piece of reporting. Sun has a huge tolerance for risk. The story also explains what happened with Poloniex, the crypto exchange that Circle bought in early 2018 for $400 million and spun out for a $156 million loss. (Verge)

Me in the news

I recently wrote a story on BAYC for Artnet News, and one on Ethereum’s move to POS for MIT Tech Review. I did a podcast for Artist’s Well and made some minor updates to my “Bitcoin Widow” review.

Posted on by Amy Castor 1