- Bi-Weekly Update
Blockchain+ Bi-Weekly; Crypto Legislation Breaks Through: GENIUS Act Signed, CLARITY Advances and Other Key Web3 Legal Highlights: July 24, 2025
In a historic week for digital assets, the United States has officially enacted its first federal crypto legislation with the GENIUS Act signed into law on July 18, 2025. Passed after the longest House vote in history, this bipartisan milestone establishes a comprehensive framework for the issuance, sale and redemption of fiat-backed digital assets and bringing long-awaited regulatory clarity to stablecoins, and opening the door for their use in faster, cheaper and more secure payment systems. This update breaks down what the GENIUS Act means for businesses and financial institutions, tracks the parallel developments of the CLARITY Act in the House and Senate market structure efforts, and recaps other major legal and regulatory developments from what lawmakers dubbed “Crypto Week” on Capitol Hill. We paused our usual biweekly schedule so we could deliver the legislative updates while they were fresh, and in hindsight, that was the right call. There’s a lot to cover. Read on for analysis, updates and a few additional developments briefly noted below. GENIUS Act Passes House, Signed Into Law: July 17, 2025 Background: It took the longest vote in House history, nearly 10 hours just to clear the procedural threshold for a floor vote, but the GENIUS Act ultimately passed on a striking 307–122 bipartisan vote. This rare show of consensus in today’s deeply divided Congress is an important signal of national momentum behind digital asset legislation. The President signed it into law the following day, making it the first federal crypto legislation ever enacted in the U.S. making America one of the first countries to develop a formal legal framework for issuance, sale and redemption of digital assets pegged to a sovereign currency. The law’s regulatory framework gives businesses and financial institutions long-sought-after legal certainty around stablecoin use in payments and financial infrastructure. Analysis: It wouldn’t be a Crypto Week without some last-minute drama. The GENIUS Act almost fell apart when a group of House Republicans demanded the addition of the Anti-CBDC Surveillance State Act language to the bill. That move would have forced the bill back to the Senate, where it likely would have died. Fortunately, cooler heads prevailed—and likely some pressure from President Trump, who publicly urged Republicans to get behind crypto legislation—and the GENIUS Act made it through cleanly. Now law, it marks a historic turning point in U.S. crypto legislation and provides opportunity for stablecoins to be integrated into faster, more secure and cost-effective payment systems. CLARITY Act Passes House, Heads to the Senate: July 17, 2025 Background: The House also passed the CLARITY Act, its long-anticipated digital asset market structure bill with broad bipartisan support on a vote of 294-134. All House Republicans voted in favor of the legislation or abstained and 78 Democrats joined them—an improvement over FIT21, the prior House market structure bill, which drew 71 Democratic votes before dying in the Senate. The CLARITY Act now heads to the Senate, where it will meet competing frameworks already in development by the Agriculture and Banking Committees. This sets up the next phase of negotiations over what a final market structure bill might look like. Analysis: As with the GENIUS Act, the CLARITY vote nearly went sideways, due to last minute efforts of the House Freedom Caucus to attach the Anti-CBDC Surveillance State Act language to the bill. That move would have undermined the wide bipartisan support it eventually obtained. Instead a deal was struck to attach the CBDC provision to a separate defense spending authorization package, allowing for broad bipartisan support for the passage CLARITY. It remains to be seen whether the Senate will advance the CLARITY Act itself or use it as a base for new legislation. Either way, the level of bipartisan backing in the House is a promising signal. With parallel efforts already underway in Senate committees, the prospect of comprehensive digital asset market structure legislation becoming law is more real than at any time before. Senate Moves Forward on Market Structure: July 9, 2025 Background: The Senate Banking Committee held a hearing of the full committee titled From Wall Street to Web3: Building Tomorrow’s Digital Asset Markets. Witnesses included Summer Mersinger from the Blockchain Association, Ripple CEO Brad Garlinghouse, Chainalysis CEO Jonathan Levin and others. The Senate Agriculture Committee has also scheduled its own hearing this week. The Senate Banking Committee has since then released a discussion draft of legislation along with a formal request for industry input. Analysis: The hearing marked another step in the Senate’s increasingly engaged posture on crypto regulation. Last month, the Senate Banking Committee leadership released its Principles for Market Structure Legislation. The hearing felt productive, reflected growing consensus that digital assets can no longer be ignored or simply litigated out of existence. Even skeptical voices are now focused on how to regulate crypto; not whether to do so (though many still appear unsure how to get their handle on something they tried to ignore away for years). That said the Senate remains well behind the House, which has already passed the CLARITY Act. And unlike the GENIUS Act’s fairly clean path to enactment, market legislation is expected to undergo extended negotiations between the chambers. Lawmakers, like Senator Warren and Congresswoman Waters are expected to oppose most market structure efforts, which could complicate the path to bipartisan consensus. Time is also running out: Congress is fast approaching its pre-election recess, and the window to finalize legislation this year is narrowing. And with the current state of dysfunction in Washington, anything is possible—including, as recent reports suggest, Congress going into early recess over political drama and rising fears of a government shutdown later this fall. The mere fact that crypto legislation is receiving this level of sustained attention in Congress is remarkable—and a sign of how far the industry has come in just a few years. Important Amicus Filed in Right-to-Code Case: July 7, 2025 Background: Back in January, a plaintiff backed by Coin Center filed a lawsuit seeking a declaratory judgment that developing and publishing non‑custodial digital asset software does not require a money-transmitter license (the case is Lewellen v. Bondi in the Northern District of Texas). The Department of Justice (DOJ) moved to dismiss arguing that the plaintiff failed to show a credible threat of enforcement, failed to state a plausible constitutional claim and was seeking an improper advisory opinion. Now, a coalition of prominent digital asset stakeholders have filed an amicus brief opposing the DOJ’s motion and urging the court to allow the case to proceed. The amici include the venture firm Paradigm, the DeFi Education Fund, the Digital Chamber, the Solana Foundation and others—forming a who’s-whoof crypto litigation advocates. Analysis: The DOJ argues there’s no credible risk of prosecution, but that position is hard to square with its ongoing criminal cases against crypto software developers. As the amicus brief states, “[t]he developers are analogous to the manufacturers of USB drives and frying pans. Since they merely make the tools that other people use to make transfers, they are not involved in the transfers themselves.” Despite signals from the current administration that it is taking a more constructive approach to crypto, this case highlights the persistent legal uncertainty facing developers. If the DOJ prevails, open-source software creators across the crypto ecosystem could remain exposed to prosecution simply for publishing code. Whether or not this court grants relief, the issue is unlikely to go away without either a legislative fix or clear, binding precedent. This is a fight that still needs to be fought at won or software developers in this and other spaces will remain at risk of criminal prosecution for public Briefly Noted: Paradigm Crypto User Research: Paradigm is a leader in crypto market research, and its latest mapping of crypto users is no exception. One of the more striking findings: 59% of respondents said the crypto assets someone owns—or previously owned—can reveal a lot about them. This suggests a growing belief that wallet history signals personal values, risk appetite or even political alignment. As crypto use becomes more mainstream, these behavioral cues may shape how users are profiled, marketed to or even evaluated for platform access. Research like this is especially valuable as more traditional businesses begin to explore the space under a more welcoming regulatory regime. Anti-CBDC Surveillance State Act Update: Also during Crypto Week, in line with expectations Representative Emmer’s Anti-CBDC bill passed the House on a largely partly-line 219-210 vote with only 2 Democrats voting in favor. While the bill is unlikely to gain traction in the Senate, it shows concerns over digital asset financial surveillance which are worth considering. DeFi Broker Rule Is Done: The IRS rule regarding digital asset “broker” reporting requirements issued just before the last administration ended is now officially dead, after being directed to be retracted by Congress. A quite but meaningful win for the industry and another loss for the dwindling anti-crypto holdouts in Washington who not too long ago openly talked of building an anti-crypto army. Important Message from Commissioner Hester Peirce on Tokenization: In response to various tokenized securities announcements, Commissioner Peirce has released a well-timed statement “Enchanting, but Not Magical: A Statement on the Tokenization of Securities.” Her key message: tokenized or not, securities need to follow securities laws. “While blockchain-based tokenization is new, the process of issuing an instrument representing a security is not. The same legal requirements apply to on- and off-chain versions of these instruments.” This message is what Polsinelli advocated for on behalf of the Digital Chamber in a recently submitted letter to the SEC which we covered in our last update and was submitted a week before Commissioner Peirce’s statement. DOJ v. Storm Trial Updates: A few pre-trial developments surfaced in the DOJ’s criminal case against Roman Storm (this is a good background on the case available here). Among them: the DOJ reportedly misrepresented a text from a reporter as coming from another Tornado Cash developer during the Grand Jury proceedings, and there were some other spicy pre-trial exchanges. The trial is underway and expected to last for a few more weeks, so we will keep covering those developments as they occur. Banking Regulators Give Guidance on Crypto Custody: The FDIC, the Office of Comptroller of Currency and the Federal Reserve issued joint guidance stating that banks can custody crypto assets for customers but need to be aware of risks and take appropriate steps to manage risk. A long overdue and welcomed step toward normalizing digital asset custody in the traditional banking system Crypto Tax Changes: Though announced a while ago, it made the news again that the President supports a de minimis tax exemption on appreciation related to crypto used to purchase everyday goods and services. Any such changes are likely need to come from Congress as it considers appropriate ways to tax crypto. Crypto-specific tax change proposals were not included in the recently passed “big beautiful bill” despite a last minute push. John Doe Summons Live On: SCOTUS will not be hearing a case challenging the broad use of warrantless summons, called “John Doe” summons, against third parties including digital asset exchanges. Combined with the anti-CBDC legislative efforts and the prosecution of Roman Storm discussed above, the financial surveillance of digital assets and legality of privacy preserving technologies will continue to be hot topics to follow. Conclusion: The passage of the GENIUS Act marks a turning point in U.S. digital asset regulation, signaling that stablecoins are no longer operating in a legal gray space but within a defined and enforceable framework. Combined with bipartisan momentum behind the CLARITY Act and ongoing Senate efforts on broader market structure legislation, the U.S. is finally laying the groundwork for a cohesive digital asset regulatory regime. While challenges remain, including constitutional litigation over software development to unresolved questions around CBDCs and financial surveillance, the last few weeks which included “Crypto Week” have demonstrated that meaningful, bipartisan progress is not only possible but actively underway. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.
July 24, 2025 - Bi-Weekly Update
Blockchain+ Bi-Weekly: Week of July 25th
While the nation was preoccupied with the significant developments in the Presidential race, advocates and promoters of the blockchain ecosystem were particularly attentive to the news, given the perception that the current administration is unfriendly to many within the industry. This upheaval comes during a period of relative optimism in the industry, given the current period of rising prices for digital assets, the addition of more digital asset exchange traded products available to the public, and certain high-profile investigations by the SEC coming to a close without litigation. While Web3 legal developments seem to be looking up, there are still roadblocks, such as the ongoing litigation against various digital asset exchanges, which the Polsinelli Blockchain+ team analyzed in detail in our recent article here. As we enter the heart of summer and what is certainly an historic presidential campaign, the last few weeks have left many in the industry with a sustained sense of hopeful optimism in the potential for meaningful legal acceptance of digital assets in the United States. These developments and a few other brief notes are discussed below. Amicus Briefs Come Out in Support of Declaratory Judgment Action Against SEC: July 10, 2024 Background: Paradigm has filed an amicus brief in support of Lejilex’s action against the SEC pending in the Northern District of Texas. The Digital Chamber also filed in support of the action against the SEC, as did Coinbase and a coalition of seven state Attorney Generals. Many of the briefings focused on the major questions and doctrine issues, and if that has any chance of victory at a district court level, a Northern District of Texas judge is probably the best shot of that happening. Analysis: While we often cover amicus briefs in the “Briefly Notes” section of these updates, this ground swell of support at the district court level for an exchange that doesn’t even operate yet warranted a fuller breakdown (the fact Paradigm cited to Commissioner Pierce’s Dissent in LBRY, where she quoted BitBlog author Jonathan Schmalfeld, helps too). The Digital Chamber’s brief, where they cite the forthcoming article The Original Public Meaning of Investment Contract by Edward Lee, was an especially fascinating read. Combined with the expediting briefing in the Consensys declaratory judgment action, the Lone Star State is going to be issuing some major rulings in the (relatively) near future. People can donate to support Lejilex’s efforts here. Paxos Prevails; Avoids Litigation After SEC Wells Notice Regarding BUSD: July 11, 2024 Background: Paxos has been notified by the SEC that the agency staff will not be recommending an enforcement action be brought against the entity in connection with BUSD. This is following a ruling in the Binance case that the sales of BUSD on the Binance platform did not constitute securities transactions. Binance stopped offering BUSD in December of 2023 after Paxos was ordered by the New York Department of Financial Service to stop issuing it, but this is still seen as a win for the industry generally and a sign that perhaps the SEC is backing off its position regarding fully back stablecoins being securities. Analysis: Honestly, the fact that the SEC is even issuing letters ending investigations is a step in the right direction. This comes the same week as the SEC agreed not to pursue charges against Hiro as issuers of the now-(mostly)failed Stax token, which was registered through Reg-A, resulting in the token’s slow death due to regulatory restrictions. This doesn’t mean all stablecoins are fine in the SEC’s eyes, especially algorithmic coins like those at issue in the Terra/Luna matter, but it is better than nothing. Presidential Election Shakeups Seen as Advantageous for Crypto: July 15, 2024 Background: Former President Trump has announced that Ohio Senator J.D. Vance will be his Vice-Presidential running mate in the upcoming presidential election. Senator Vance is a well-known proponent of the digital asset industry who, prior to being announced as the potential VP, was working on his own legislation in the Senate similar to FIT21 in the House. Now that Biden has dropped out and endorsed Kamala to be the Presidential nominee, it appears regardless of who wins there will be an administration change and a potential associated change in policy on digital assets. Analysis: An increasingly pivotal aspect of the presidential election is the prominence of cryptocurrencies as a significant issue, influenced by several digital asset factors. One is the role that prediction markets are playing in the election, with these markets again being the earliest and most reliable source of Trump’s pick. Another is that Vance is a Bitcoin owner who has preached the value of self-custody and pushed back at the SEC’s regulation by enforcement in the industry. However, industry participants may want to temper expectations at this point, as politicians and policy makers are hard to predict. For example, many thought Gensler, a former MIT professor who taught courses on blockchain technologies, would be pro-crypto, which turned out to be incorrect. However, the selection of Vance certainly signals that a change of administration could result in a historic opportunity for the industry to flourish in the U.S. While Kamala Harris has yet to take a firm position on crypto, the hope is that she will not be as firmly anti-crypto as the current administration. Topping all of this off, Donald Trump is expected to attend and speak at the upcoming Bitcoin conference in Nashville this weekend, and as of publication, event organizers extended an invitation for Kamala Harris to speak as well. Spot Ether ETF Launches: July 23, 2024 Background: In our May 29, 2024 Bi-Weekly update, we covered the SEC rule changes that all but guaranteed certain spot Ether exchange-traded funds would be available to trade in the near future. The first of those products began trading on July 23, 2024. Some analysts are expecting spot Ether ETFs to reach over $4 billion by the end of the year, following the spot Bitcoin ETFs, which have been an objective success for the issuers of those products. Analysis: This has been inevitable since the SEC did a surprise aboutface and approved certain rule changes that implicitly acknowledged Ether as a commodity and not a security. Of the issuers approved for trading, none include Ether staking, meaning the blockchain fees required for trading of spot Ether will be purely deflationary, without any offsetting staking rewards. This is something that could change if the next leadership structure is more open to digital assets being made available to traditional investors. Briefly Noted: Polsinelli Publishes Update in Exchange Litigation: As mentioned in the introduction, the Polsinelli Blockchain+ team published an article analyzing where the various SEC lawsuits against digital asset exchanges currently stand and what to expect from those lawsuits in the upcoming year. Important Article Examining Technical Functionalities of MetaMask Wallet in Light of SEC v. Consensys: Daniel Barabander, the Deputy General Counsel at Variant venture capital, published an exceptional article breaking down the SEC’s lawsuit against Consensys and comparing the allegations in the Complaint to the technical functionalities of the swap feature in the MetaMask digital wallet. The article goes into great detail, including explaining how “setting slippage” is different than “setting a limit order” in transactions on DeFi protocols. Attorneys in the space are highly encouraged to read this article to better understand where DeFi and software integrates or conflicts with existing broker/dealer laws. CFTC Chair Testifies on Digital Assets in Senate: CFTC Chairman Rostin Behnam testified before the Senate Agriculture Committee regarding oversight of digital commodities. One big takeaway was his statement that 70-80% of the crypto marketise non-securities, which stands in stark contrast with his counterpart at the SEC, who has gone on record saying a vast majority of digital assets are securities. Republicans Add Crypto Policy to 2024 Official Policy: Republicans have stated they “will defend the right to mine Bitcoin and ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control.” They have also stood firm in opposition to the creation of a central bank digital currency. This marks the first time that digital assets have been included in an official party platform for either major U.S. political party. SAB 121 Repeat Effort Fails to Obtain Enough Votes to Override Veto: As many expected, the efforts to repeal Senate Accounting Bulletin 121 (which requires banks to list crypto safeguarded for customers to be listed as liabilities on their balance sheets) failed to garner sufficient votes in the House of Representatives to overcome President Biden’s veto. This limits the ability of individuals to have their digital assets safeguarded by trusted bank providers, even if it has been reported that the SEC has exempted certain banks from required compliance with this accounting rule. United Kingdom DAO Study Released: The Law Commission of England and Wales published a paper on DAOs to assist their legislative bodies with identifying areas of potential legal reform. The paper recommends further analysis be done on whether existing law should be reformed to facilitate the increased use of technology at a governance level where appropriate. Conclusion: The interplay between the ongoing political shifts and the blockchain industry's evolving landscape presents a pivotal moment for digital assets in the United States. While the current administration's stance has often been perceived as adversarial, recent developments such as the launch of spot Ether ETFs, successful resolutions to high-profile SEC investigations, and the growing support for pro-crypto legislation signal a potential turning point. The upcoming presidential election further adds to this dynamic, with candidates’ varying perspectives on digital assets offering a glimpse of potential policy changes ahead. As we navigate these transformative times, the blend of optimism and caution within the industry underscores the anticipation of a more legally recognized and integrated future for digital assets. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.
July 25, 2024 - Bi-Weekly Update
Blockchain+ Bi-Weekly: Week of May 29, 2024
The week of May 19-25 was the most promising for the regulation of blockchain technology in the United States in a very long time. Polsinelli’s Blockchain+ team delayed the publication of this Bi-Weekly update by a week to allow us to cover these exciting updates. These updates include the House of Representatives’ bipartisan approval of the Financial Innovation and Technology for the 21st Century Act (“FIT 21”), Uniswap decentralized finance (“DeFi”) developer responding to Wells notice from the U.S. Securities and Exchange Commission (the “SEC”), and the SEC apparently reversing course on its Ether spot ETF stance. Overnight, it seems like political tides may be turning, with a rising number of administrative and elected officials from across the political spectrum supporting various digital asset proposals. This week is also that of Consensus, the largest conference in the digital asset industry, taking place in Austin, Texas. Polsinelli attorneys and BitBlog writers, Jonathan Schmalfeld and Stephen Rutenberg will be participating and are looking forward to meeting with and discussing the current digital asset legal landscape with our BitBlog readers. These developments and a few other brief notes, including claw-back notices sent to many creditors of Voyager Networks, are discussed below. House and Senate Vote to Overturn Senate Accounting Bulletin 121 (“SAB 121”): May 8-16, 2024 Background: The first crypto-specific bill to reach a full vote in either chamber of Congress passed both chambers with bipartisan support. On May 8th, the House passed Joint Resolution 109 to overturn SAB 121, the controversial guidance from the SEC requiring public companies that custody crypto-assets to treat those assets as liabilities on their balance sheet. With most U.S. banks being public companies required by other regulators to meet asset ratio tests based on their financial statements, this makes it impractical (if not impossible) for most depository banks to take custody of crypto-assets on behalf of customers. The bill was sponsored by Democrat Wiley Nickel (NC) and Republican Mike Flood (NE), with 21 House Democrats voting in favor of the bill despite a White House statement that it intends to veto the bill if it reaches the President’s desk. The bill passed in the Senate a week later, including the approval vote of Democratic Senate Majority Leader Chuck Schumer (NY). While the bill only needed a simple majority to pass, it ended up with a filibuster-proof 60 votes, but less than the two-thirds vote that would be needed to override a Presidential veto. Analysis: Preventing the safest, most trusted custodial institutions in America from holding digital assets is a step back, rather than a step forward, in consumer protection. It also provides disparate treatment, as banks are not required to account for any other custodial asset as if the bank itself owns the asset. It remains to be seen whether President Biden will make good on his promise to veto or if the SEC will withdraw the rule as requested by Congressman Nickel. While the Presidential veto remains likely, this Congressional support, combined with FDIC Chairman Martin Gruenberg announcing his planned resignation, is a possible sign of the diminution of the influence of certain subsets in the Democratic Party that have been most vocal in their opposition to the digital asset industry. Uniswap Responds to SEC Wells Notice: May 21, 2024 Background: Uniswap made the fairly unusual decision to publish its response to the SEC’s Wells notice. Wells notices and their responses are generally confidential and are used when the agency’s staff intends to recommend bringing formal charges of securities law violations against the entity under investigation. You can read Uniswap’s blog post announcing the decision to publish its response here. In the response, Uniswap advocates that “[t]he Commission should not take on these significant litigation risks and that bringing this case would encourage Americans to use harder-to-regulate foreign interfaces and trading protocols, while also discouraging future innovators from attempting to foster new ideas that bring much-needed competition and innovation to financial and commercial markets. Although there are legitimate questions about how best to protect customers and market integrity when traders transact on a peer-to-peer basis without an intermediary, those are policy questions that are primarily for Congress and are part of ongoing policy discussions that [Uniswap] Labs has helped lead.” Analysis: While the Wells notice itself has not been made public, the response gives us a hint to its contents and prior communications between Uniswap and the agency. For instance, the blog post indicates that “[t]he SEC asserts that the Uniswap Protocol is an unregistered securities exchange controlled by Uniswap Labs, that the Uniswap interface is an unregistered securities broker-dealer, and that the UNI token is an investment contract.” While the response comes out swinging, it is unlikely to dissuade the agency from bringing any planned action against Uniswap. Their response, similar to others, appears mostly intended to sway the hearts and minds of legislators and the public rather than the agency officials that the response is addressed to. House of Representatives Passes FIT 21 Comprehensive Crypto Law: May 22, 2024 Background: The House of Representatives voted overwhelmingly in favor of passing the Financial Innovation and Technology for the 21st Century Act (“FIT 21”). FIT 21 proposes a complete market structure of digital asset regulations, with authority split between the SEC and CFTC. While the bill has changed since we first wrote about it, the general structure has remained remarkably similar. The bill passed 279-136, with 71 Democrats crossing party lines to vote in favor of this Republican-sponsored bill. Notably, support included much of the Democratic House leadership, including the House Minority Whip, Democratic Caucus Chair and Vice Chair, Campaign Committee Chair, and Speaker Emerita Nancy Pelosi. Both the President and SEC Chair, Gary Gensler, denounced the bill, but no veto is presently threatened. Additionally, multiple Democrats, including Yadira Caravei (CO) and Josh Gottheimer (NJ), not only voted for FIT 21, but also argued in favor of it on the House floor debate. Analysis: This bill’s passage is remarkable for the sheer of number votes and arguments in favor of it from both sides of the aisle. This demonstrates the depth of bipartisan support that the crypto industry is developing, even in this very partisan election year. It is interesting to note that, prior to the vote, House Democratic leaders said that they would not encourage voting against the bill after dozens of Democrats voted to repeal SAB 121, leaving Representative Waters and her allies to rally opposition on their own. The bill still faces a tough route to passage through the Senate. SEC Approves Ether Spot ETF 19b-4 Applications, Implicitly Acknowledging Ether is Not a Security: May 23, 2024 Background: The SEC has approved various applications for rule changes that, together, will allow exchanges to list spot Ether ETFs (exchange-traded funds that will track the current price of ETFs). While the S-1 applications of the issuing entities have not yet been made effective, and thus the ETFs are not yet actually approved and cannot yet trade, by approving the requested rule change, the SEC has made the determination that spot Ether ETFs can be obtained through Form S-1 applications. Entities whose assets are composed of 40% or more securities may not register through an S-1; rather, they are considered investment companies and must register on Form N-1A or N-2. Until very recently, few people expected these applications to be approved. It appears that something changed internally at the agency, possibly related to the SAB 121 vote, which led the agency to make these changes. Analysis: It is unclear what made the SEC take an apparent change in stance on the pending spot Ether ETF applications. While not confirmed, it is possible that SEC Commissioner Jaime Lizárraga changed his stance after previously voting to reject the spot Bitcoin ETF and instead indicated that he would not vote to reject the pending Ether Spot ETF 19b-4 applications, leading to a flurry of activity to provide official approvals before the applications lapsed. It may not be coincidental that Commissioner Lizárraga was a top advisor to Congresswoman Nancy Pelosi, who voted in favor of FIT 21. This, combined with a bipartisan push from members of Congress, may have turned a likely rejection into an approval. It is worth noting that none of the applicable Form S-1s on file include Ether staking, meaning these funds will be income-negative as they will need to pay blockchain fees required for trading spot Ether without getting the potential benefit of offsetting staking rewards. Briefly Noted: Voyager Network Issues Preference Demands, Unlike FTX: The Unsecured Creditors Committee of Voyager Holdings, a bankruptcy crypto lender, has issued demand letters to many account holders who withdrew funds from their accounts within 90 days prior to their bankruptcy filing. This follows a similar action in the Celsius case. This contrasts with FTX, where preference claims are not applicable since the debtor intends to pay back claims at over 100 percent. Polsinelli is representing a number of claim holders in challenging these preference actions. Court Rules Craig Wright is Not Inventor of Bitcoin: A U.K. court has ruled that Craig Wright lied "extensively and repeatedly" in both his written and oral evidence over his claims to be the pseudonymous inventor of Bitcoin, Satoshi Nakamoto. The written ruling further stated: "Dr. Wright presents himself as an extremely clever person. However, in my judgment, he is not nearly as clever as he thinks he is." Netherlands Court Sentences Privacy Protocol Developer: Tornado.cash developer Alexey Pertsev was sentenced to 64 months in prison for his contributions to the privacy protocol. He faces a long appeal route ahead, which he will need to litigate while imprisoned for writing software. Individuals Connected to MEV Bot Indicted: Two individuals have been indicted in connection with a hack on an MEV bot. As a reminder, MEV bots essentially front-run transactions to increase the price others buy tokens at and then sell at the increased price. It appears this was an alleged case where the bot operators had others involved in the operation run off with the money. Considering the potential market manipulation implications of the bot itself, it will be interesting to see if the “victims” are also swept up in charges eventually. SEC Responds in Various Coinbase Lawsuits: The SEC filed its opposition to Coinbase’s request for interlocutory appeal in the case against the exchange and its response to the Coinbase lawsuit over rejected rulemaking in the same week. Those agency attorneys are seemingly busy with even more litigation on the horizon. SEC Approved Crypto Securities Dealer Soft Launches: Prometheum has soft-launched Ether custody services, treating Ether as a security. It is currently unclear who Prometheum will treat as the issuer and how they will comply with diligence and other obligations with respect to Ether as their offerings expand. This position also appears to be inconsistent with the spot Ether ETF approvals discussed above. Anti-CBDC Bill Passes in House: The House also passed the CBDC Anti-Surveillance State Act, but this time by a narrow margin on partisan lines. The bill, if passed into law, would prohibit the Federal Reserve from issuing a Central Bank Digital Currency. This is a largely ceremonial bill that has almost no chance of being passed in the Senate and signed into law. Presidential Candidates Campaign on Crypto Issues: While there is broadening bipartisan support for digital assets as listed above, that may not be as true for the current Presidential Candidates, as former President Trump announced his plan to accept digital asset campaign contributions while President Biden released a campaign advertisement denouncing “cryptocurrency executives and oil barons” as Trump supporters. Jonathan Schmalfeld Speaks at DC Blockchain Summit: On May 15th, BitBlog author and Polsinelli attorney Jonathan Schmalfeld moderated and provided insight at the D.C. Blockchain Summit during the discussion on branding in the metaverse, including discussions on recent copyright and trademark cases and their implications for industry participants going forward. Conclusion: After years of United States regulators failing to work on a comprehensive regulatory scheme pertaining to digital assets and lawmakers making little progress on the kind of bipartisan, systematic legislation needed to allow the industry to prosper in the United States, prospects are looking up. None of this means that a robust solution is expected in the immediate future, with the SEC still bringing broad enforcement actions against key industry players and without a clear path to get legislation through the Senate in a busy election year. It does, however, seem like a window of opportunity for responsible players within the blockchain industry to proffer legislative solutions that will help crypto and the digital asset industry proliferate in a way that both protects users and investors while allowing for innovation in the always evolving digital economy. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.
May 29, 2024
- CBDCs
Blockchain+ Bi-Weekly
The Blockchain Bi-Weekly presented by the Polsinelli Blockchain+ team is a rundown of some of the key stories in the Web3, blockchain and crypto ecosystems curated by our attorneys navigating the intersections of code, smart contracts, and US law. Over the past two weeks, several government agencies have expanded their reach into digital assets. Notably, the Commodity Futures Trading Commission (“CFTC”) increased its enforcement jurisdiction into decentralized finance (“DeFi”) providers in potential conflict with the recent ruling in UniSwap as to the liability of protocol developers for actions of their users, and the Securities and Exchange Commission (“SEC”) brought enforcement action against a non-fungible token seller that involved individualized tokens intended to be used as “profile pictures” on social media. There was also important digital asset news coming out of Congress, with Representative Emmer reintroducing his Central Bank Digital Currency (“CBDC”) legislation in the House, and the SEC Chair testifying in front of the Senate Committee on Banking, Housing, and Urban Affairs. These developments and a few other brief notes are discussed below. CFTC Issues Orders Against Operators of Three DeFi Protocols: September 7, 2023 Background: ZeroEx (the developer of 0x Procotol), Opyn, and Deridex all entered into consent judgments with the CFTC after being charged with failing to register as a swap execution facilities and other similar charges. The charges were brought against the U.S. development companies for these DeFi protocols, and all agreed to fines and to implement changes to block access to U.S. users. Commissioner Mersinger was the sole commissioner to dissent to the actions. Summary: Understandably, these entities chose to settle rather than spend funds litigating against the U.S. government. However, Opyn in particular already had geoblocks against access to U.S. users, had no fees on the user-created leveraged futures contract pools in question and very limited powers over the protocol through the developer multi-signature wallet. It is possible that a challenge by one or all of these entities could have limited the CFTC from pursuing these types of primarily extraterritorial enforcement actions, but that is an expensive fight so the industry is left with still unsettled questions regarding the necessary level of geoblocking for protocol developers and when developers of protocols can be liable for actions of their users. LBRY Files Notice of Appeal of Summary Judgment: September 7, 2023 Background: LBRY, Inc. has filed a Notice of Appeal of the final judgment entered into against it on July 11, 2023. LBRY, Inc. was the developer of a project which aimed to create a Web3 version of YouTube, where individuals could pay in tokens to upload videos, and others could pay to those creators for access to the videos or to tip their favorite creators. LBRY argued that, under the precedent set in United Hous. Found., Inc. v. Forman, security laws do not apply when a buyer purchases an asset primarily to use or consume that asset. The Court disagreed, siding with the SEC and ruling that nothing in the case law suggested to the Court that a token with both consumptive and speculative uses cannot be a security. Summary: We covered the LBRY decision on the BitBlog when it was first issued in November of last year. After the ruling, the SEC lowered its requested damages from $44 million to just over $100,000 due in large part to the fact that LBRY did not have any further funds to cover a greater damages award. That raises questions as to who will be funding and litigating this appeal, which has the potential to create a powerful and groundbreaking appellate-level precedent. House Majority Whip Tom Emmer Reintroduces CBDC Legislation: September 12, 2023 Background: Majority Whip Tom Emmer reintroduced his legislation, the Central Bank Digital Currency (CBDC) Anti-Surveillance State Act, in the House of Representatives. The bill is co-sponsored by 50 other Republicans in the House. The bill prohibits the Federal Reserve from issuing a CBDC directly to individuals, to prevent surveillance into the personal financial information of Americans. Summary: CBDC’s are hot-button issues, as they are undeniably more efficient than the current system which relies on financial service providers like banks to serve as middlemen between the issuer of currencies and the users of those currencies. However, it also would create a government-controlled single point of financial information which raises obvious security and privacy concerns. It is expected that up to 2% of the global money supply could be tokenized in CBDCs and stablecoins by 2028 so this will remain a hot-button issue as state and private actors determine the best form of digital currencies. SEC Chair Gary Gensler Testifies to Congress on Digital Assets: September 12, 2023 Background: SEC chair Gary Gensler testified in front of the Senate Committee on Banking, Housing and Urban Affairs on September 12. His opening statement is available here. He has a follow-up hearing before the House Financial Services Committee scheduled for September 27. Summary: The big news from the hearing was the statement that the SEC was “still reviewing” the Grayscale spot Bitcoin ETF filing after the D.C. Circuit struck down the SEC’s rejection of the Grayscale application. With the Senate largely seen as behind the House in terms of digital asset legislation, it was not surprising that much of the testimony was focused on other aspects of the SEC, including rulemaking regarding environmental disclosures and mutual fund settlement rules. The House Financial Services Committee is expected to cover more digital asset-specific issues when they question the SEC Chair on September 27. SEC Brings Enforcement Action Against “Profile Picture” NFT Project: September 13, 2023 Background: On September 13, the SEC released a Consent Order for an immediate cease-and-desist along with monetary fines for the creators of the “Stoner Cats” NFT project, through which NFTs were sold to fund the creation of an animated series. Similar to the prior NFT enforcement action, Commissioners Peirce and Uyeda dissented comparing the sales of the NFTs to sales of Star Wars merchandise. The project creators agreed to settle the dispute without admitting or denying any wrongdoing. Summary: The SEC’s first NFT enforcement action was covered in our last Bi-Weekly update. This most recent action is notable not only because of the names behind the project (Mila Kunis and Ashton Kutcher, among others) but also due to this being the first “profile picture project” named for NFTs which have unique artwork for each token in the collection intended to be used as social media profile pictures. As with any regulation by enforcement, this still leaves questions as to when a product sale is an unregistered security offering as opposed to something more properly under the FTC or other agency’s jurisdictional oversight. Certain aspects of the Order, such as pointing to secondary sales royalties, coordination of verification with secondary sales platforms and the requirement that tokens be “destroyed” rather than prohibited from resale are all potentially problematic features of this Order which could do more harm than good to consumers and artists on a going-forward basis. However, NFT creators should carefully consider how they market their products and how they discuss the use of sales proceeds to avoid potential regulatory pitfalls. Briefly Noted: Industry Groups and Participants Write to Senate Regarding Digital Asset Taxation: The Wall Street Blockchain Alliance (of which Polsinelli is a member) submitted the following letter to the Senate in response to its request for the appropriate treatment of digital assets under federal tax law. Polygon Labs and others in the industry also submitted letters. New York Department of Financial Services (DFS) Updates Listing Guidelines: DFS announced proposals for new guidance for coin listings and a framework for green listed coins that include heightened risk assessment standards for coin-listing policies and tailored, enhanced requirements for retail consumer-facing products or service offerings, along with new requirements for coin delistings. Each regulated virtual currency licensee would need to have these policies approved by DFS. DFS is seeking public comment through October 20. As most of the major US crypto exchanges are regulated by DFS, either as trust companies or through a “BitLicense”, these guidelines could have a significant impact on what coins get listed. This also seems to run counter to recent efforts by the New York Attorney General to further regulate cryptocurrencies and label most of them (including Ethereum) as securities under the Martin Act. Ethereum Founder Pushes for Compliant Mixing Services: Ethereum founder Vitalik Buterin released a paper with others titled Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium. It argues for the use of a permissioned mixing service, using zero knowledge proofs to only allow participants who confirm their funds were acquired legally to use the service. IOSCO Issues DeFi Policy Recommendations: The Board of the International Organization of Securities Commissions (IOSCO) issued a consultation report regarding decentralized finance (DeFi). The report was largely written by member organizations, the SEC, so the recommendations largely follow the SEC’s policy recommendations on the subject. Advocacy Group Files Action to Invalidate Oracle Patent: DeFi Education Fund is petitioning to cancel the patent claiming the invention of oracle-like tech and being used to sue MakerDAO and Compound. You can read a blog post about the challenge here. Conclusion: From the CFTC's actions against DeFi protocols to the SEC's groundbreaking enforcement of NFTs, it's evident that the U.S. government is taking significant steps to gain a better grasp on this rapidly evolving ecosystem. What's more, these activities have set the stage for ongoing debates around digital asset taxation, blockchain privacy, and international policy recommendations. Yet, despite all these regulatory moves, numerous questions remain unanswered. The tension between fostering innovation and enforcing compliance continues to be a pivotal concern. This creates an uncertain environment, not just for entrepreneurs and developers, but also for consumers and investors. As we move forward, one thing is clear: the dialogue between the digital asset industry and regulatory bodies is more crucial than ever. It is this dialogue that will ultimately shape the opportunities and limitations of blockchain technology in the years to come. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys
September 21, 2023
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