SEC Charges Ethereum Developer Over Liquid Staking and Swap Programs

SEC Charges Developer for Unregistered Offers and Sales of Securities and Operating as an Unregistered Broker

The Securities and Exchange Commission ("SEC" or the "Commission") has charged a software developer¹ for crypto assets on the Ethereum blockchain with engaging in the unregistered offer and sale of securities through an Ether staking service and with operating as an unregistered broker through services that the SEC alleges distribute, underwrite and/or broker transactions in digital asset securities.

The SEC's complaint, filed on June 28, 2024, alleges that since at least January 2023, the developer has offered and sold tens of thousands of unregistered securities on behalf of liquid staking program providers Lido and Rocket Pool, who create and issue "liquid staking" tokens (called stETH and rETH) in exchange for staked assets. While staked tokens are generally locked up and cannot be traded or used while they are staked, liquid staking tokens can be bought and sold freely. The SEC alleges that investors in these staking programs provided funds to Lido and Rocket Pool in exchange for the liquid tokens, and that the tokens are securities because these pools use their technological expertise to earn returns that the typical investor would not be able to earn on their own. Based on these allegations, the SEC charged the developer with engaging in the unregistered offer and sale of securities by participating in the distribution of the staking programs and operating as an unregistered broker for these transactions.

The SEC also alleges that, since at least October 2020, the developer has acted as an unregistered broker involving crypto asset securities transactions through its swaps platform. This platform connects users with third-party liquidity providers, who then facilitate swaps across chains and product suites. The SEC alleges that the swaps platform acted as a broker by soliciting investors to trade crypto assets, providing pricing and other investment information, recommending trades to investors with the "best" value, accepting and routing customer orders, facilitating order execution, handling customer assets, and receiving transaction-based fees. The SEC's complaint alleges that the swaps platform transacted in a number of crypto assets that the SEC considers to be securities, and that the developer therefore operates as an unregistered broker with respect to these transactions, in violation of Section 15(a) of the Exchange Act.

What Next?

The SEC's complaint is only the latest in a series of events relating to this developer. On April 10, 2024, the SEC staff sent the firm a Wells Notice stating the staff's intent to recommend that the Commission bring an enforcement action against the firm for violating the federal securities laws by operating as an unregistered broker-dealer through its swaps and staking products. About two weeks later, the developer filed a pre-emptive complaint against the SEC alleging regulatory overreach and challenging the classification of Ether and staking services as securities. According to the developer, on June 18, 2024, the Division of Enforcement notified the firm that the Division was closing its investigation and would not pursue an enforcement action against the firm. The SEC's complaint may reflect the fact that while the SEC does not question the security status of Ether itself, there may be products or services based on Ether that the SEC considers to be securities, or securities transactions.

The complaint also reflects regulatory interest in liquid staking. The SEC has previously brought and settled enforcement actions against several crypto asset exchanges for delegated staking services. These actions concerned "staking-as-a-service" programs offered by crypto exchanges, where investors' crypto assets were pooled by the exchange, and staked on behalf of investors for staking rewards. The SEC alleged that such staking programs constituted investment contracts that were offered and sold to investors without an effective registration statement, in violation of Section 5 of the Securities Act of 1933. However, the SEC had not previously moved against liquid staking products or the platforms that offered them. This action is a first in that respect, and it may well be a sign of future SEC enforcement activity.

The SEC's allegations relating to the developer's swaps platform are also likely to raise significant questions. The SEC has previously alleged that at least one crypto asset wallet provider was acting as an unregistered broker-dealer, but those allegations were rejected by a district court in the Southern District of New York, which noted that the wallet provider in question was not engaging in brokerage activities. In the present action, the SEC appears to be alleging that the developer operated the swaps platform in conjunction with its wallet application to provide brokerage services. It remains to be seen whether the litigation in this case will lead to a different judicial outcome.

The SEC's complaint in this case breaks new ground in terms of the crypto asset products and services that the SEC has sought to bring within the scope of federal securities regulation. In another sense, however, the complaint reflects continuity: the SEC appears to be continuing its series of enforcement actions against crypto asset platforms and their product offerings.

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