MetaMask Swaps Platform Under Fire for Allegedly Operating Without Broker Registration

B. Consensys Effects Transactions for MetaMask Swaps Investors.

66. Indeed, Consensys acts as a quintessential broker because it developed, deploys, and maintains MetaMask Swaps to, among other things, (1) interface with an investor to receive the investor’s trade request (i.e., the investor’s order); (2) seek out prices in the market; (3) identify the “best” one; (4) transfer the investor’s asset out of the investor’s possession; (5) effectuate the trade on the investor’s behalf; and (6) obtain transaction-based compensation for itself.

67. From the investor’s perspective, the process is simple—requiring no more than a few clicks or taps on the screen.

68. To use the MetaMask Swaps platform, the investor needs no technical or blockchain expertise

69. “Behind the scenes,” however, Consensys’s software engages in a series of technological tasks to intermediate the purchase and sale of crypto assets on behalf of investors who use MetaMask Swaps.

70. The MetaMask Swaps User Guide (the “User Guide”) emphasizes the ease and simplicity of the investor experience as compared to the breadth of technological work Consensys has programmed its software to perform to broker the transactions for the benefit of the investors.

71. In the “Preparing your Swap” section of the User Guide, Consensys explains: “There’s a lot going on behind the scenes while you’re watching Swaps search” for the best price. “This process is the secret ingredient in making MetaMask Swaps the cheapest and best swapping service out there.”

72. This User Guide section continues: “Swaps is searching across decentralized token exchanges and token swapping protocols to find you the most advantageous exchange rate. At the same time, it’s running test transactions, checking to make sure that if you do end up submitting a transaction, that it’s likely to go through—and if not, those options are filtered out. MetaMask is saving users here from the pain of a failed transaction [including gas fees]. . . . Swaps failure rate is very low, and improvements are in the works to make it almost nonexistent.”

73. The User Guide further explains that “Slippage,” explained below, “is yet another parameter that Swaps is using in your favor.”

74. It says that the MetaMask software does the “DeFi number-crunching” for the investor.

75. The “Executing your Swap” section of the User Guide further states: “There’s a lot going on here [on the quote screen] but don’t be alarmed. . . . [MetaMask] Swaps is continuing to do all the work we mentioned previously on an ongoing basis, ensuring that you’re getting the most up-to-date price and availability.”

76. The User Guide also notes that, by interfacing with third-party platforms on your behalf, MetaMask Swaps “lessen[s] your exposure to potentially hackable or malicious smart contracts.”

i. Consensys’s MetaMask Swaps Provides Pricing Information, Advises on the “Best” Trade, and Accepts Orders.

77. Consensys designed MetaMask Swaps to provide investors with an intuitive and easy-to-use way to trade crypto assets, including crypto asset securities.

78. To request a trade through MetaMask Swaps, the investor begins by clicking a button labelled “Swap” inside the MetaMask Wallet application.

79. Next, MetaMask Wallet presents investors with a screen on which they can select (from two drop-down menus) the asset they want to sell (i.e., one they currently hold in their wallet address, or “account,” for the relevant blockchain) and the asset they want to buy.

80. As the below screenshot shows, investors also select the quantity of the currently held asset (Crypto Asset A) that they want to spend to acquire the new asset (Crypto Asset B).

81. Under “advanced options,” the investor can adjust the “slippage tolerance.”

82. In the words of Consensys’s MetaMask Swaps User Guide: “Slippage is the amount of change between the price you click on and the final transaction price that MetaMask Swaps will tolerate. . . . [MetaMask] Swaps allows a little bit of a difference between the price you agree on and the final price, to ensure your transaction goes through—but not too much, in order to protect you from sudden spikes or drops.” (Setting a slippage tolerance effectively creates a “limit order,” which is an extremely common type of order offered by traditional brokers.)

83. The investor then clicks a button labelled “Get quotes,” at which point they are taken to another screen, on which MetaMask Swaps recommends the “best quote” or “best overall value” for the requested exchange.

84. In the browser extension version of the software, MetaMask Swaps allows the investor to view a list of other options, with the recommended option at the top.

85. For example, by clicking the “Best of 5 quotes” link on the left, MetaMask Swaps will display to the investor the screen on the right.

86. In the browser extension, an investor is able to select an option other than the one Consensys deems the “best.”

87. The mobile application, however, only permits the user to select the quote Consensys identifies as the “best.”

88. Consensys has designed its MetaMask software to display to the investors the “best” quote according to parameters Consensys has determined the software will use to calculate such a quote—such as likelihood of success (as described above) and transaction fees.

89. Below are additional visualizations of the MetaMask Swaps investor interface, taken from the MetaMask Swaps website and the Consensys video demonstration of MetaMask Swaps, respectively:

90. The investor can then click “Swap,” which causes MetaMask Swaps to attempt to effect the requested transaction on the investor’s behalf.

91. If Consensys’s MetaMask software successfully effects the transaction, the investor sees a screen that says, “Transaction complete.”

92. To place an order through MetaMask Swaps, the investor does not need to know or enter their private key (the cryptographic “passcode” that is necessary to transfer Crypto Asset A out of their wallet).

93. The investor does not even need to know or enter the entire public blockchain address for the asset they seek to sell. Indeed, Consensys does not present this information to the investor by default.

94. When placing orders through MetaMask Swaps, the investor never interfaces directly with any of the third-party liquidity providers.

ii. Consensys Exercises Discretion In Providing Pricing Information and A Recommendation To The Investor.

95. Indeed, Consensys does “do all the work” by employing its own market knowledge and exercising its own discretion when displaying pricing information and providing investment advice to the investor. This type of market knowledge and discretion is employed by traditional brokers in their business of effecting transactions in securities for the account of others, including through software programs they may develop.

96. When the investor clicks the “Get quotes” button described above, Consensys has programmed its software to send a query to a Consensys “Token API” server, which pulls and aggregates pricing (i.e., exchange rate) information from certain third-party liquidity providers.

97. More specifically, Consensys has chosen approximately 14 different external markets and market makers (the “third-party liquidity providers”) to make available crypto assets for buying and selling by investors, some of whom it has contracted with to integrate with the MetaMask Swaps product.

98. Consensys has configured its software to interface directly with each of these thirdparty liquidity providers.

99. These third-party liquidity providers include crypto asset trading platforms and other private market makers.

100. Consensys’s Token API Server pulls pricing information from these third-party liquidity providers and displays it to the investor on the quote screen (subject to the conditions described herein).

101. Consensys’s software does not query all third-party liquidity providers; it only pulls pricing information from the approximately 14 providers that Consensys configured it to interface with, at least some of whom have contracted with Consensys and with whom Consensys may share a portion of the fees it charges investors.

102. Therefore, the quotes displayed to investors on MetaMask Swaps are those sourced from third parties at Consensys’s discretion—specifically, this is how Consensys has programmed the MetaMask software to function. In other words, Consensys is using its own market knowledge just like brokers in the traditional securities markets do, to suggest to investors what Consensys considers the best execution venues for their customers.

103. The crypto asset pairs available for “swapping”—i.e., trading—through MetaMask Swaps generally include whatever crypto asset pairs are available to trade via the third-party liquidity providers with whom Consensys has configured its software to interface, so long as those crypto assets are compatible with the blockchains known as Ethereum, Polygon, and BNB Smart Chain, as well as certain other specified blockchains.

104. Consensys, however, exercises further discretion over which crypto assets it makes available to investors.

105. Pursuant to a “Token Restriction Policy” adopted first in August 2021 and later amended throughout 2022, Consensys does not permit investors to trade in crypto assets that are “restricted assets,” as determined by Consensys. In accordance with the token restriction policy, restricted assets include tokens that Consensys has determined: (1) appear to resemble other tokens and have a likelihood of creating investor confusion; (2) extract hidden fees; or (3) tokens that Consensys legal counsel have a very strong reason to believe might constitute regulated assets, such as securities or commodity derivatives, under U.S. law.

106. So long as a token is not deemed “restricted” by Consensys, Consensys collects prices for the requested trade, runs test transactions, estimates gas fees, and, based on this information, and advises the investor of the “best.”

iii. Consensys Effects Transactions on the Investor’s Behalf—Routing Investor Orders, Handling Investor Assets, and Taking A Fee.

107. If the investor selects the “best price”—or any other price—displayed on the screen and clicks “Swap,” that signals Consensys’s software to proceed with submitting a blockchain transaction to a Consensys owned and operated node, routing the investor’s trade request (i.e., the investor’s order) and transferring the investor’s crypto asset to the third-party liquidity provider. During this process, Consensys-developed and Consensys-deployed smart contracts handle the investor’s assets and carry out instructions in accordance with the investor’s order.

108. Specifically, to route the investor’s order and exchange Crypto Asset A for Crypto Asset B on the investor’s behalf, Consensys has programmed its software—including its MetaMask Wallet software and other software (e.g., smart contracts) that it has deployed on Ethereum and other blockchains, interacting with each other and with other third-party software interfaces—to take the following steps:

109. First, the Consensys software reads the investor’s private key from the MetaMask Wallet. This is the digital password that cryptographically unlocks Crypto Asset A so that it can be transferred out of the investor’s MetaMask Wallet.

110. Second, the Consensys software submits a blockchain transaction to a Consensysoperated and controlled remote procedure call or “RPC” node. The RPC node stores the blockchain transaction in a mempool (a collection of proposed transactions that are in a queue) until it is included in a block and executed, as per the steps below. More specifically, the Consensys software creates, signs (using the investor’s private key), and submits this blockchain transaction to Consensys’s RPC node, which when executed will transfer the specified amount of Crypto Asset A from the investor’s wallet address to a Consensys-developed smart contract called “Spender.sol.”

111. This Spender.sol smart contract has its own, separate public address on the Ethereum blockchain.

112. Accordingly, the Consensys software transfers Crypto Asset A to Consensys’s Spender.sol smart contract’s blockchain address.

113. The investor has no control over Consensys’s Spender.sol smart contract blockchain address.

114. Indeed, the investor does not have any control over Crypto Asset A once Consensys software transfers it out of the investor’s MetaMask Wallet.

115. Consensys’s Spender.sol smart contract address temporarily holds the investor’s Crypto Asset A.

116. Third, Consensys’s Spender.sol smart contract will interact with a number of Consensys-developed “Adapter” smart contracts.

117. Because each third-party liquidity provider is different, Consensys has built unique “Adapter” contracts to allow its Spender.sol smart contract to interact with each of the approximately 14 unique third-party liquidity providers.

118. Accordingly, for example, if the quote selected by the investor was offered on Liquidity Provider A, the Spender.sol smart contract would rely on Consensys’s Liquidity Provider A Adapter smart contract to interact with Liquidity Provider A or its liquidity pool (which refers to, in essence, a blockchain address into which crypto assets are deposited for buying and selling).

119. Fourth, the corresponding Adapter smart contract facilitates the exchange with the third-party liquidity provider.

120. Specifically, through the Adapter smart contract, the third-party liquidity provider will take Crypto Asset A from the Spender.sol smart contract address and place Crypto Asset B into the Spender.sol smart contract address.

121. From the perspective of the third-party liquidity provider, Consensys’s “Spender.sol” smart contract is the counterparty to the trade.

122. The third-party liquidity provider never interacts directly with the MetaMask Swaps investor or their wallet address.

123. Fifth, the Consensys software transfers a fee—0.875% in most circumstances—from its Spender.sol contract to a “fees” smart contract blockchain address controlled by Consensys.

124. Sixth, the software transfers the remainder of Crypto Asset B from Consensys’s Spender.sol contract to the investor’s wallet address.

125. When using the MetaMask Swaps platform to request a trade, the investor does not—indeed, cannot—interface directly with the third-party liquidity provider; rather, Consensys effects the trade through software that it has programmed, including (a) MetaMask Wallet, (b) blockchain-based smart contracts, and (c) “Adapter” smart contracts that interface with thirdparty software applications.

126. As explained by the MetaMask Swaps User Guide: “[MetaMask] Swaps enables you to trade tokens on any Ethereum-compatible network . . . without having to interface directly with third-party platforms.” (Emphasis added.)

127. Consensys acts as a broker and, through software it has written, performs each step necessary to intermediate the transaction between the investor and the third-party liquidity provider.

128. Consensys, through the MetaMask Swaps platform, has effected over 36 million crypto asset transactions on behalf of investors and collected fees worth over $250 million.