Why ConsenSys is Suing the SEC | Joseph Lubin & Matt Corva

This regulatory scrutiny is great because it gives us an opportunity to share how powerful and wonderful the technology is and can be. And it gives us a platform effectively to speak with politicians and regulators, help them understand that it's not just this action. We we need many, many actions to reform the laws in the United States and on the planet so that the world can embrace this technology. And so if we want it, then we're all gonna have to fight for it.

The US is trying to disconnect from Ethereum. That's what Joe Lubin, the CEO of Consensus, said in our conversation today. And he was talking about those in power trying to unplug Ethereum from the citizens, from we the people. And I gotta say, the evidence for that increasingly seems to back up that statement. The SEC is going after Kraken, Coinbase, Uniswap, Metamask. We've done episodes on many of these. They're essentially trying to turn every non-custodial wallet into a broker dealer. You already know some of that story, but here's what's new Joe and Matt are producing evidence that the SEC is coming after Ethereum itself. The SEC is sending discovery requests to Ethereum core developers, threatening their employers. They're pushing a coordinated effort to claim Ether is a security so that they can control it. But this time we're going on the offensive. Consensus is taking them to court to settle this issue once and for all. And if they're successful, it'll be the first time in a US court we get a clear ruling that Ether is not a security, it's a commodity.

Before we get into the conversation with Joe and Matt, a message from our friends and sponsors over at both Matt and Joe are interesting characters that we had on the episode today. And for bankless listeners that aren't from as familiar with Joe Lubin, he is the founder and CEO of Consensus. He has been building critical software that Ethereum has really needed in order to actually be a usable system. Many of the products that have been built out of Consensus have made Ethereum usable. MetaMask being the big one, Infura, but many other projects as well. Like Gitcoin was incubated out of Consensus. And Joe, I think for people who aren't familiar with him, I appreciate Joe because he thinks in like cosmic scales. Yeah. He thinks he's he's a very big thinker. Yeah. He's like, he understands the way of the universe, the way of the world, very like Ray Dalio-esque in the way that like things uh move forward across time. Uh and then we also have Matt, the legal counsel of Consensus, who is a lawyer, right? Very grounded, very pragmatic. Uh, but each each of these uh two guests take turns putting on the conspiracy hat a little bit, which I thoroughly enjoyed. So these are the two guests on the show today, and they each bring their perspectives to the show, which I thought uh it we've done these shows before, like SEC suing company, company suing uh the SEC, but this is different. It's different when it's Joe, and it's different when it's consensus.

Yeah.

Yeah. And what I appreciate about them, both of them, is uh they came here on this episode and they're here to fight. They're here to push back. They're they're here for the resistance. So, guys, we're gonna get right to that conversation. But before we do, we want to thank the sponsors that made this episode possible, including Bankless Nation. We have Joe Lubb and he is a crypto OG. He's the CEO of Consensus. He's been on the podcast a number of times. Consensus is the company behind a massive number of crypto projects, uh, including many we know and love, such as the popular MetaMask wallet. Joe, welcome to Bankless.

Thanks, Ryan. Thanks, David.

And Matt Korva is here for the first time. He's the general counsel at Consensus. He is leading the charge in this case against the SEC. Matt, welcome to Bankless.

Thanks, David and Brian.

All right, guys. Um, give us a rundown. What is going on at this point in time? The high level, it sounds like the SEC is maybe coming after MetaMask, coming after Ethereum in general, and you guys are taking them to court instead. I don't know. That that's the TL, that's my high level TLDR. Can you tell us what's really going on? First, you, Joe.

So at a high level, um

we feel that uh the Ethereum ecosystem is under threat, uh, that uh

the United States effectively is trying to disconnect uh America from Ethereum. Um

we uh we've been tracking this issue for quite a while, and we believe that uh the stakes are now um clearer and much higher than and more existential um

than we previously believed. Um and uh

It seems that the SEC

is intent on using um

surgical enforcement actions, granular enforcement actions, um

to um try to

uh cast ether, recast ether uh as a security, even though it's been very clear for quite a while, um,

based on statements made by SCC officials and CFTC officials and the way our our whole ecosystem in the world has been operating, that uh uh ether has been classified as a commodity for a long time.

Um, and worse than that, uh, we're we're seeing, and Matt can flesh this out a little bit, we're we're seeing

scrutiny of the technology, uh, or scheme, we're seeing scrutiny of

actions that software developers are taking, taking in building out the protocol.

Um, and that's either um a merit based evaluation that the SEC is engaged in. Um

And I I think uh

I think uh Chair Gensler was on video a short while ago saying something like um that the technology is too volatile, uh too volatile or unstable, or something like that. Uh

um

and um essentially by classifying

MetaMask uh as a broker dealer, uh, which uh they've indicated that uh uh that they're moving towards, um, it makes uh the entire industry without uh

Without even making it clear that uh Ether is a security, it makes the

whole platform unusable. Uh because uh um, again, uh by gaslighting, by refusing to utter that uh Ether's a security, they're effectively treating it behind the scenes as a security, and they're going after us and many others. And uh uh if MetaMask is uh is a broker dealer in in the eyes of regulators, then pretty much all software.

on the Ethereum platform, um, which engages uh with

the Ether token, um, swapping, doing other things with it, uh um might have to go in and and register uh with the SEC.

And and that's obviously gonna chill all software development in the US and and usage.

Matt, this isn't the first case that we've seen uh either with the SEC versus crypto or crypto versus the SEC, but uh I think there's also just some new elements here. Uh what about consensus's case versus the SEC really stands out? What's what's what were the the unique properties about this particular case?

Yeah, uh, so our case is really about three things. So the the headline thing is MetaMask, right? That's sort of what Joe had had talked about as well. Uh it's the subject of our wells notice, MetaMask wallet, the swapping feature, and the staking feature. The real differentiator, I we think, in our case, is to some other actions which have been about challenging agency rules or about specific.

Company operations is Ethereum itself. Ethereum itself is under attack. As Joe said, the narrative we sort of like to talk about internally is we think they're seeking to unplug Ethereum, and we think that's just wrong. They have sort of um

deputized themselves, sort of the police of open source technology, in a way that we think is outside of their agency authority. And so we've gone in front of a court in the Fifth Circuit of Texas to say.

Look, Judge, they are wrong here. Ethereum's a commodity. Everybody knows it's a commodity. The SEC has said it's a commodity. The CFTC has said it's a commodity. The facts show it's a commodity. They are outside the scope of their authority. On Ethereum, our complaint details that they have sought testimony from our developers and our professionals and document production over 88,000 pages that we've uh produced to them over the past few years.

Wait, wait, wait. Can can we catch that? So you have produced 88,000 pages to the SEC? W like what what is that? Is that sort of like discovery? Have they asked for

Yeah, exactly. Document production and I think perhaps most alarmingly, like a lot of that document production is contributions to GitHub, right? Like show me the your your work on GitHub and contributions to Ethereum or

Protocols or clients or things like that. And it's not just us. And that's sort of what led us to take action in a lot of ways. We think we believe this action against us is imminent. But we've heard this throughout the ecosystem. It's been reported on that they've sent similar letters to the Ethereum Foundation and individual open source developers. And for me, that was a bridge too far in what we'd be willing to passively tolerate while they went through their process. That's why I thought we had to stand up as a leader in the space, protect the developers who contribute to open source code.

So Matt, so Matt, I I really want people to hear that because this was actually I skimmed the complaint. It's 36 pages. We'll include a link in the show notes. This is the uh complaint for injunctive, uh injunctive uh relief. Uh I might be getting the legal terms uh wrong, Matt, but like it's it's your case against the SEC, basically. And what was most startling to me as I I skimmed through this is of those 88,000 pages, the SEC is asking for a list of contributors from consensus from other organizations that have contributed to EIP, that is Ethereum improvement proposals that went into the ETH2.0 merch, right? You you can see them trying to make a case that this isn't decentralized open source software with a permissionless open group group of contributors, but but it's somehow like, I don't know, some cabal, some centralized group that's actually running the show. And the level of detail that they're going to here, it it does seem like it's um.

Like they are going after directly open source developers in a way. And that to me was incredibly startling and shows the breadth of this. It's it's it's far beyond just the MetaMask wallet. It's actually looking at uh Ethereum from an open source developer perspective and who's contributing and like what codes go into EIPs. That was incredibly alarming to me.

It's almost like the SEC believes they have a mandate to regulate technology. It's almost like they have a mandate to assess technology on its merits. This action is related to what they've told us they're going to sue us for. But it goes further. It focuses on

Uh getting clarity uh from the courts uh regarding how uh the US should classify ether. Um that's something that uh we would not get um if we sat on our heels and uh let the SEC sue us. Um uh Chair Gensler has been really careful uh not to contradict um what has been said before, uh, because that would be kind of ridiculous. Um, but instead to to sort of gaslight our industry um and act as though um a reclassification has been done um without actually doing that. Um there is uh a theory um that that we can get into that uh um that uh this is related to the shift uh to proof of stake. Um but uh uh it it's a foolish theory. It's a foolish theory.

Zooming out and kind of like I identifying the pattern that I'm seeing here, uh, first part of the details of this case uh we've mentioned in passing, but just to make it explicit is that the SEC sent consensus a well's notice saying, hey, we intend to sue. And consensus is just replying to that with like, well, we're gonna sue you guys first, uh, because we think we have a stronger case. That's kind of like how I'm reading this. Um, and Matt, do you want to clarify something?

Yeah, I I wouldn't say that's actually accurate. So this is an action we've thought about taking for a long time. Um and so we've been thinking about this for a while. They just so happened to send the Wells notice in the process. The Wells notice was was informative of of the fact that we don't think we're dealing with a reasonable party who has allegiance to the law. Uh you guys all saw the Coinbase wallet decision regarding their swapping feature. So to get a Wells notice alleging that MetaMask swaps, which is

Was the leader in the space and was doing that thing first. So the Coinbase wallet facts are very similar, is violating the same laws. A judge just said did not apply to the wallet. Um that that was perhaps another triggering factor in our decision to file. But

you know, we've we've thought their action was imminent for a while against us prior to the Wells notice. So this is something we've been preparing for and has been well thought out.

Yeah, one thing we didn't want to do is harm the prospects of the approval of the Etherspot ETF. And so uh while we we could have uh started this action a while ago, um, we wanted to to sit back and and read the tea leaves and make sure that uh uh that if the SEC was going to open that floodgate, uh, because it would probably change everything, that that we did not uh get in the way of that.

So are are you saying by f filing this uh complaint you you're thinking that the uh ETH ETF approval pro like the SEC is just not going to approve an uh Ethereum ETF and that kind of like factored into?

We thought it was over based on um various communications that we have with people in the industry that they weren't gonna approve in

2024.

Yeah, the the inverse is probably true, Ryan. So like we we thought that we wouldn't need to bring the Ethereum action if the SEC was going to approve the Ethereum ETF, because that's sort of your best evidence to say, look, Ethereum's obviously not a security. This is just another instance of the SEC saying it's not in approving the ETFs, um, which would be a commodity based ETF product. And so w that was really what we were thinking about in relation to

Instead of just waiting for them to do the right thing and hoping that they would. And they they did.

Yeah, that's that that is a very good description.

Yeah. And and and if they did the right thing, uh, as I said, it would open the floodgates. Uh um, similar to to how the Bitcoin spot ETF affected our industry quite positively, um, we would see uh the rush of

Of lots of capital into an attention on our space. And that would be a game changer, I think, for the Ethereum ecosystem. It would be

something that would be likely to grow the ecosystem bigger and faster than it's grown before. And