Consensys will cut its staff by 20% due to increased costs of litigation with the SEC

What’s new? Ethereum blockchain software company Consensys will lay off more than 160 employees, or 20% of its staff across all divisions. Founder and CEO Joe Lubin attributed the move to the macroeconomic situation, as well as legal costs due to the protracted proceedings with the US Securities and Exchange Commission (SEC).

Material by Fortune

What else is known? In April, the SEC sent Consensys a pre-trial notice on the Wells form, meaning the regulator found violations of securities laws in the company’s operations and is preparing to file a lawsuit. The commission raised complaints about the swaps feature and staking service in MetaMask Wallet and also noted that Consensys did not have the required broker-dealer registration.

The company was also the first to file a lawsuit against the SEC and five of its commissioners in a Texas court, saying the commission was “waging a campaign to seize control over the future of cryptocurrency”. Its attempts to place the native ETH blockchain token under its jurisdiction threaten to shut down the use of the Ethereum network in the United States.

As part of this proceeding, Consensys has made arguments that ETH is not a security. For example, back in 2018, William Hinman, then Director of the SEC’s Division of Corporation Finance, stated that ETH is not a security due to its decentralized structure and actual offer and sale procedures.

While the SEC has not officially abandoned that position, Gary Gensler, who heads the commission in 2021, has repeatedly conceded that ETH could be classified as a security. Consensys noted that the SEC’s sudden change of heart without substantial new evidence or changed circumstances is unwarranted and calls into question previous regulatory guidance.

The second argument was that the US Commodity Futures Trading Commission (CFTC), another market regulator along with the SEC, has consistently recognized ETH as a commodity. In the KuCoin litigation, the CFTC definitively confirmed this view: the lawsuit said that the exchange offered services with crypto assets that are commodities, including bitcoin, Ethereum, and Litecoin.

As a third argument, Ethereum’s decentralized structure and open protocol is mentioned, in stark contrast to securities managed by a single entity. A similar position was taken by William Hinman, and furthermore, these features of the network do not meet the criteria of a security under the Howey Test. Under it, an asset is recognized as such if investors expect to receive income from a company managed by third parties.

Through its lawsuit, Consensys sought to establish through the court that ETH is not a security and to enjoin the SEC from taking enforcement action against the company and its MetaMask product.

Despite Consensys’ requests, in June, the SEC had already filed suit against it for violating securities laws, while the company’s suit against the regulator was dismissed with the language that enforcement actions are not final agency actions.

In a new appeal regarding staff cuts, Joe Lubin noted:

“Multiple cases with the SEC, including ours, represent meaningful jobs and productive investment lost due to the SEC’s abuse of power and Congress’s inability to rectify the problem. Such attacks from the US government will end up costing many companies…many millions of dollars.”

The SEC has been repeatedly criticized for regulating the sector by filing lawsuits rather than creating clear rules. And the criticism comes not only from industry representatives, but also from congressmen. In turn, the agency’s chair Gensler says that the existing laws are enough to regulate the industry, and the commission will continue to file lawsuits against violators. At the same time, this month, Crypto.com exchange accused the SEC of violating the federal law on administrative procedures.

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Consensys was launched in Brooklyn in 2014. Its flagship product is MetaMask, a non-custodial software-based crypto wallet that allows users to self-store assets, stake them, and interact with decentralized applications (DApps). The company later moved its headquarters to Texas.

Lubin called the layoffs a “tough but prudent decision to streamline our operations.” They will affect 162 of Consensys’ 828 employees from all divisions, including business and product development. Those laid off will be given pay, benefits, and job placement assistance.

According to the CEO, Consensys will now seek to accelerate its transition from a conventional company to a decentralized networked community in line with blockchain principles.