Self-custodial wallets retreat? US SEC regulation targets MetaMask

Source: Coindesk Translation: Ning

According to Coindesk, two Bitcoin wallets are exiting the U.S. market, perhaps in response to recent regulatory action against the self-hosted wallet Samourai, and also indicating that the U.S. Securities and Exchange Commission is turning its regulatory focus to MetaMask, the most widely used Ethereum access point.

As we all know, a self-hosted wallet is a cryptocurrency wallet that is controlled by the user and does not rely on any third party. It can be considered the closest to the decentralization of the encryption core.

On April 26, Paris-based Bitcoin company Acinq announced that it would remove its popular Lightning Network wallet Phoenix from the U.S. app store due to regulatory uncertainty. Users are advised to close channels and transfer wallet assets before access is terminated on May 3, 2023.

Just one day later, zkSNACKs announced that it would shut down access to its privacy wallet Wasabi in the United States, saying in a statement on April 27 that "in light of recent announcements by U.S. authorities, zkSNACKs now strictly prohibits U.S. users from using its services."

This was echoed by Acinq's statement, which said that "recent announcements by U.S. authorities have raised questions in the industry as to whether decentralized self-custodial wallet providers, lightning network service providers, and even lightning network nodes can be regulated as money service businesses and subject to such strict supervision."

It is unclear which announcement Acinq's response focused on, but the legal action taken against Samourai Wallet and the recently disclosed SEC Wells Notice to MetaMask indicate that self-custodial wallets are likely to be included in the SEC's regulatory scope.

In addition, an April 26 DOJ court filing responding to a motion to dismiss a case against Tornado Cash co-founder Roman Storm indicated that even decentralized self-custodial services may need to implement KYC/AML and register with FinCEN based on Section 1960 of the U.S. Code.

Crypto advocate Seth For Privacy wrote on X: “This is simply generalizing MSB laws to cover almost every sector of the cryptocurrency industry except for users who run their own nodes.” If money transmission does not require controls, then anything that makes Bitcoin convenient and easy to use may fall under this broad definition. ”

Many commentators in the crypto community have pointed out that Phoenix’s decision to withdraw from the United States is disappointing, but the strategic shift is largely understandable given the legal uncertainty. In response, Jack Dorsey, founder of Block, a fintech company that builds hardware wallets, lamented that Acinq’s move was “completely unnecessary.”

“Agree, this is not the best solution,” said Elizabeth Stark, CEO of Lightning Labs, in response to Dorsey.

The news comes after a recent lawsuit by cryptocurrency companies, in which Samourai Wallet CEO Keonne Rodriguez and CTO William Hill were arrested for operating an unlicensed remittance business. The U.S. Department of Justice accused Samourai of processing more than $2 billion in illegal transactions since 2015 and earning more than $4.5 million in fees.

While legal experts have highly questioned the rationale for going after self-custodial platforms that do not hold assets on behalf of users, regulatory authorities around the world have been trying to bring decentralized systems within regulatory boundaries for years.

A typical example is the European Union, which has been considering setting a €1,000 ($1,080) limit on crypto transactions on self-hosted crypto wallets as part of its new anti-money laundering law. U.S. authorities also considered introducing legislation to essentially ban "self-hosted wallets," but the legislation was rejected in 2022.

From the current perspective, the authorities' new legal actions and statements have increased uncertainty and increased the possibility that many core crypto activities beyond building wallets may be subject to money transmission laws, even including lightning node hosting. Similar to other issues in the crypto space, the court's decision will provide important precedents for such issues, which is undoubtedly a regulatory offensive and defensive battle, and one of the important reasons why Consensys decided to sue the SEC.

Just a few days ago, software development company Consensys sued the U.S. Securities and Exchange Commission (SEC) and its five commissioners filed a lawsuit, claiming that the SEC orchestrated a regulatory campaign to "seize the power of cryptocurrency discourse". The regulator tried to illegally regulate Ethereum through special enforcement actions against Consensys and other companies, but in theory the SEC had no jurisdiction on the grounds that crypto tokens were not securities.

Consensys said that the SEC has "set its sights on" the MetaMask wallet software, which allows users to self-custody ETH and other cryptocurrencies. The company emphasized in the document that they received a Wells notice from the SEC on April 10, warning of possible enforcement actions against its MetaMask Swaps and MetaMask Stake products. The SEC stated in a conference call that Consensys is an unregistered broker-dealer. According to Consensys, the company received three subpoenas in 2023 requesting information related to "acquisition, holding and sale of ETH".

In response, Consensys filed a lawsuit in Texas and put forward four reasons why ETH is not a security. First, the SEC's historical position on Ethereum. In 2018, William Hinman, then director of the SEC's financial division, made an important speech, clearly stating that Ethereum is not considered a security. The SEC did not respond to this position at the time, so there is no basis for the current change of its original intention. Secondly, there is the confrontation of regulatory power. The CFTC (Commodity Futures Trading Commission) has always believed that Ethereum is a type of commodity, and it has continued this to the KuCoin lawsuit. Finally, Consensys emphasized that Ethereum has a sufficiently decentralized architecture, and there is no core control and development group for Ethereum, and the change in the consensus mechanism does not affect this point.

However, according to the latest court documents, the US SEC and its Gary Gensler seem to have made it clear for at least a year that Ethereum, the second largest cryptocurrency, is an unregistered security that does not comply with current federal regulations. For now, the SEC has not responded to this. And it is foreseeable that the lawsuit between the two will likely be a tug-of-war that will last for several years. It is for this reason that the market believes that the SEC will not approve any Ethereum spot ETF when the deadline (June 11) arrives.

Returning to decentralized wallets, it is not clear whether Phoenix and Wasabi will be the only wallets to leave the United States, but at least one wallet company, Zeus, has made it clear that it will continue to operate. "We will definitely not move out," Zeus' official account posted on X.

"We believe that Zeus is now complying with the letter of the law. If the law changes or any judgment is made, we will adjust accordingly." Zeus founder Evan Kaloudis said.

"If Zeus collapses, all other lightning node operators are next. If a lightning node operator collapses, the next one will be self-custody, and self-custody is the last line of defense."