Consensys v. SEC: Constructive Critique
Sloppy pleadings make bad law
There are two camps of crypto lawyers. There are cheerleaders who see things like the Consensys v. SEC complaint and then poast stuff like “yay, Wachtell’s on the case, elite of the elite bruv, we’re sooo gonna win, take that SEC!” Just noise, mostly. On the other end are crypto lawyers who read the complaint and can’t stop punching walls, throwing staplers, and dropping f-bombs. Because sloppy pleadings make bad law. And the Consensys complaint is totally sloppy as to both substance and form.
Critically important: this isn’t an outlier view. Moments after filing, crypto law DMs went up in flames. You wouldn’t know it because crypto lawyers are mostly class acts when it comes to “praise publicly, scold privately.” But the consensus critical view is the Wachtell/Consensys folks are way out of bounds in how they’re framing Ethereum, blockchain, and ecosystem actors. F-bomb levels of outrage. At the highest levels of the crypto legal bar. It’s really bad.
At CLR, our style has always been “critique publicly, support privately.” So, like, obviously doing everything we can to support the legal fight privately because clearly the SEC’s actions against good faith blockchain teams (eg, Coinbase, Uniswap, Consensys) are grossly unlawful. But constructive public critique is vital to flag subtle-yet-consequential conceptual slippage. Especially for smaller teams who might want to adopt args from big players under the wrong impression that the big players have the best legal args, or potentially even “industry consensus” args. Also, so that you, as a dev don’t fall for fancy lawsplaining: “oh, that’s just legalese, cricket; don’t worry about it, we’ve got this under control.” Because it’s not “just legalese” and the fancy lawyers definitely don’t have it under control.
Exhibit A:
Nooooooooo!
Fatal slip up. Malpractice-level slip up. The sort of headline admission / waiver that ends up as citation #1 in the SEC’s potential motion for judgment on the pleadings, or in a US Supreme Court opinion proclaiming “Ethereum is a network of contracts.” Like, wtf?!
Let’s unpack.
A bond is a contract. All bonds are contracts. If Consensys is advancing a novel bond-but-not-contract theory, the burden is on them to plead and prove this. This was not plead. Therefore, according to Wachtell, validators are contract parties with “the network” / “the blockchain” / “Ethereum” as contract counterparties. In attempt to disclaim that Consensys has contractual privity with people who interact onchain via Consensys software, Wachtell suggests that the contracts are there, you know, in the form of “bonds” and “transactions,” just not with Consensys.
No, this isn’t word fetishism. In legalese, words have case-defining significance. Consensys lawyers know this. It’s right there in the Complaint in the section on the SEC’s authority:
Per Consensys lawyers, however, Ethereum validators are “posting the[ir] [ETH] tokens as a bond.” Unnecessary. Tragic. Fatal. Waiver.
No Investment Contracts Here!
According to Consensys, “the SEC’s claim of jurisdiction rests on the claim that transactions in ETH involve an ‘investment contract’ as that term appears in the securities laws.” ¶77. Further, “for an investment to constitute an ‘investment contract’ it must include a contractual undertaking to deliver value at a later date.” ¶78.
But in Consensys eyes, ETH is a “digital asset” also referred to as a “cryptoasset,” or “cryptocurrency.” ¶28. When staked, it’s a “bond.” And since “nearly 8,000 individuals from around the world [a]re actively involved on a monthly basis in developing code for this global computing platform” (¶80), it can’t be an investment contract, see? Because there’s no “centralized manager or promoter for their investment profit.” Id.
Are you confused? Same. It gets worse. Even if there were “investment contracts,” the SEC doesn’t have authority “to regulate all investments accompanied only by a hope of gain but no contractual undertaking” (¶81, emphasis added). Basically, Consensys is betting everything on a theory there are no contracts at play involving Consensys. Just transactors, transactions, assets, bonds, cryptocurrencies, tokens. Using Consensys software as pass-through to effectuate their “digital asset transactions” (¶87).
The theory has legs; strong legs potentially. But there are several really big problems with how Consensys asserts this theory.
First, it can’t be your sole or even predominant theory of the case. Second, if you’re going to assert lack of contractual privity, you can’t undercut that theory with the aforementioned fatal “bond” waiver. Third, you need to go the distance and actually plead the existence/nonexistence of contracts. That requires identifying contract parties, and in so doing, identifying fascinating novel onchain/offchain transactional webs that may look like contracts, but are not contracts due to the lack of identifiable contract counterparties. That’s one of Consensys’ pocket aces and instead of leading with it, it’s glaringly missing.
For more context on the lines of contractual privity in Ethereum peer-to-peer relations, see Legal Frameworks for PoW → PoS (2019).
Simple questions:
- Is there a contract between, eg, a solo stake-from-home validator & Ethereum-the-blockchain?
- Is there a contract between Peer A and Peer B, where Peer A swaps Token X for Token Y on DEX where liquidity for the XY pair is provided by Peer B?
Consensys had more than a decade to prepare for this legal fight, and more than two years to put finishing touches on this brief, and the best the team put forward is there are no investment contracts because the SEC told us Ethereum was sufficiently decentralized and that ETH is not a security in 2018. Oh, and decentralization. Seriously?
The Fox Wallet, Browser, Portal
MetaMask is a genius invention. We use it daily. Huge respect to the the 🦊 team and the broader Consensys crew for keeping the fox safe. Sad to say, but it’s true, so must be said: the biggest threat to the 🦊 is how Consensys lawyers are describing the 🦊. Red is bad. Green is good.
Let’s start with the last statement, and zoom out from there.
- Can I install a fresh instance of MetaMask in my browser or as an app & generate a fresh Ethereum address with no ETH? ✅
- Can I go to EthCC or wherever & get a cool POAP dropped to this Ethereum address with no ETH? ✅
- Can I login, check-in, connect to cool blockchain dapps, sites, friends, and spaces with my ETHless EOA that has my new POAPs on it, to maybe get more POAPs, or just to browse, or whatever? ✅
- Can I sign messages & authorizations & authentications with my ETHless EOA? ✅
- Heck, can I sign contracts with my ETHless EOA? ✅
- Can I be served with legal process to my ETHless EOA? ✅
- Do at least some of these interactions constitute “transactions on the blockchain”? ✅
- Do people do things like this onchain 🦊 and irl, even without ETH? ✅
- Is this legally significant? ✅✅✅
In the Complaint, you can almost feel the tension between the use-case agnostic MetaMask Ethereans and the totalizing creep of “digital asset industry”(¶33)-speak.
Concretely, it doesn’t matter if “wallet” is now synonymous with MetaMask, and even more ubiquitous than the misnomer smart contract. It doesn’t matter if Consensys itself has been using “wallet” and “digital asset” speak not only publicly but throughout the 88,000 pages (!!!) of documents they’ve been forced to produce to the SEC.
A Complaint is a precious opportunity to reset the dialogue and frame the terms of debate in a way that is most favorable to the Plaintiff. In a way that’s most accessible to the jury who will ultimately decide these questions. Instead of embracing this opportunity, Consensys stepped right into the trap set by the arbitrary and capricious securities regulators: foregrounding “digital assets,” cryptocurrency, trillion dollar market caps, the commodity v. security false dichotomy, and the like.
All this is very unfavorable to Consensys as plaintiff, to put it mildly. It comes across as equivocating, defensive, insecure.
To be clear, there are a few bangers in the Complaint where you can hear Consensys inhouse lawyers add, “hey don’t forget about the non-fi applications!” “Oh yeah, and games, and marketplaces, dCloud!” (¶34). Respect. Truly.
But even there, the utterly unnecessary foregrounding of assetization — “Hundreds of millions of people globally use cryptoassets for financial and non-financial purposes.” Ok, but why force the cryptoassets? Hundreds of millions of people globally use Ethereum and MetaMask for thousands of different purposes, versus one type or even category of securities transactions. Period.
Since Consensys cannot access users’ private keys and other data, isn’t it more relevant to emphasize the general-purpose nature of MetaMask not like a browser, but functioning as a browser? With the added bonus of having countless exhibits where MetaMask has been marketed by Consensys precisely in those terms: as browser, portal, gateway, and the like.
SEC: You operate as a broker.
🦊: No, we operate as a browser. See Exhibits 452 to 972.
The key point is people do a lot more with MetaMask than just asset stuff like swap, stake. People sign, attest, login, connect, explore. Yes, many interactions do, of course, require sending ETH to pay for gas. But not all. Very subtle but very expansive window of opportunity there, legally.
Commodity v. Security
Mindful of precedent on this issue under U.S. law, the key point here is that even if Consensys finds the commodity classification more desirable than a security-required-to-be-registered-with-the-SEC classification (which, for obvious reasons, duh), it still doesn’t mean one should casually concede that “ETH is a commodity.”
We’re in the legal weeds here, and nuance is all-important:
- So like, as between a “security” under SEC jurisdiction, and a “commodity,” ETH has been recognized as a commodity. ✅
- “Eth is a commodity.” 🛑
If you’re looking for cover on this point, check out the doctrine of comity. Else, you’re unwittingly (or perhaps consciously) projecting a very parochial one-state-centric legal classification regime onto an inherently global jurisdictional cyberspace commons, which is no bueno to your own interests, not to mention the shared interests of your peers. Not as some meta theoretical point, but very concretely for this case & controversy.
The Substantive Halfie
When you have a multi-year track record of good faith cooperation with a federal agency that suddenly turns against you and your peers — serving you, your executives, your employees with subpoenas; prosecuting baseless enforcement actions; lying under oath — and you make the radical (albeit 100% correct 🫡) decision to sue the agency, you bring out your best arguments, your best talent, all you’ve got. Especially where the threatened prosecution by the federal agency poses an existential threat to not only your business model, but an existential threat to your industry, your very life’s work: your legacy.
Concretely, where the agency has been acting abusively, and in an arbitrary and capricious manner, you have to take a stand and publicly call out your opponents for their bad faith, unlawful, unconstitutional behavior.
The substantive claims in Consensys v. SEC fall far short of that. Yes, there is the allegation of arbitrary and capricious action in violation of the APA. Yes, there are the allegations of lack of fair notice and abuse of due process. But what is this?
Given the shocking extent of redactions, the substantive claims lose much if not all of their force.
To emphasize, now that we’re in full blown crypto impact litigation, the ‘courts’ aren’t crypto’s best only hope, but the court of public opinion, the jurors sitting within those courtrooms. This requires fully public, radically transparent, offensive strategies. You don’t win the public by redacting the secret sauce. That’s contra crypto and very bad public policy.
Unredacting is key to balancing the power dynamic between federal agencies and agents involved in Chokepoint 2.0 and the people they’re choking. If anyone was expected to understand that, it is ultra-OG Team Consensys. Yet here we are, asking ChatGPT to hallucinate what’s behind those black lines. And before you come at us with “that’s the law, mates, it has to be redacted, them’s the rules.” Please don’t embarrass yourself. If you don’t know how to legally unseal inter-agency enforcement guidance dox, you have no business suing a U.S. federal agency for arbitrary and capricious action. As in, of course you can, and maybe even should sue, but you’ll most likely lose.
Final Thoughts
As far as high stakes U.S. Supreme Court-bound APA complaints go, the Complaint in Consensys v. SEC is the pleading equivalent of an “audit by Certik.” Not trying to be mean or take cheap shots. Very sensitive to the insane levels of stress the Consensys legal team has been working under. But with “elite of the elite” outside counsel on board and a long list of apex industry peers willing to help, there are really no excuses.
Bluebooking citation mistakes, stylistic bloopers, substantive gaps, lack of cohesion, and the rhetorical oomph of a Roomba hitting a wall, this Complaint just screams “written under insane time constraints because we needed to frontrun the SEC in the docket mempool.” Which kinda makes sense. But still. With stakes this high, there’s zero room for error.
Anyway, good luck with the FAC & SAC. Please ask your amici for peer review. 🖤 Ape together strong. Long live the 🦊!
