Even as Congress remains preoccupied with debates over federal funding and digital asset market structure legislation looks increasingly uncertain in this session, there has still been much to report, as administrative agencies and private sector efforts dominated recent crypto law headlines. The SEC issued what may be its most significant no-action relief for token projects to date, while Senate Democrats advanced their own initiatives on digital asset market structure. At the same time, the SEC and CFTC continued to roll out new initiatives, despite the CFTC operating with only an acting commissioner and no permanent Chair, including SEC Chair Atkins promising a new initiative called Project Crypto aimed at modernizing securities regulation for digital assets. Rounding out the developments, several crypto companies pushed forward with IPOs, further integrating into the traditional financial sector. Detailed breakdowns of these developments, their implications for businesses going forward, and a few other updates on crypto-law topics are discussed below. SEC and CFTC Hold Joint Roundtable Discussions on Regulatory Harmonization Efforts: Sept. 29, 2025 Background: The SEC and CFTC held a series of roundtable discussions between various financial industry representatives to discuss how to encourage coordination between the agencies, especially regarding innovative products and services like those enabled through blockchain technologies. The Commissioners’ various statements (including by SEC Chair Atkins, CFTC Acting-Chair Pham, SEC Commissioner Peirce, and SEC Commissioner Uyeda) all emphasized a need to put regulatory missions over regulatory turf wars to ease compliance obligations on market participants and better serve the public. Despite the lack of permanent leadership at the CFTC and market structure legislation, these agencies are moving forward, consistent with the advice of the President’s Working Group Report from July of this year. Analysis: This was one of the more productive conversations from these roundtables, as the old guard and new guard were often on panels together to discuss possible approaches for the agencies to address new technologies without building regulatory barricades. Views on exemptions and regulatory sandboxes seemed largely dictated by whether the speaker represented an old-guard institution (largely anti-exemptions) or a new entry (largely pro-exemptions). Also, it is worth noting the humor of Commissioner Peirce’s speech, including the line: “[f]or sports-related complaints, please call the CFTC.” The line was both hilarious and apt for the crowd, which included predictive market CEOs who are currently fighting with regulators on whether sports prediction markets should be governed by the CFTC, state gaming regulators or both. SEC Issues DePIN Token No-Action Relief: Sept. 29, 2025 Background: The SEC has issued No-Action relief to decentralized physical infrastructure (DePIN) developer DoubleZero regarding the planned distribution and use cases for a planned “2Z” token. This is the first formal No-Action relief given to a digital asset project since the IMVU No-Action Letter from late 2020. While not binding for any other project, this gives a framework for what the SEC currently considers to be outside of the scope of federal securities laws with respect to the distribution of tokens in a DePIN project. Importantly, it was noted that “2Z is specifically designed to exclude any passive value accrual mechanisms—it does not incorporate dividends, a deflationary token supply, programmatic buybacks, or any similar functionality.”   Analysis: The requested/granted relief is limited to “Programmatic Transfers” of 2Z to “Network Providers” and “Resource Providers” as compensation for their own services, not prior transactions or speculative sales (which did occur, but under securities laws exemptions). So, this isn’t a far leap, as it is seemingly affirming other informal guidance that the mere existence of transferability or a secondary/speculative market doesn’t make a token itself a security. But the inbound letter does partially rely on a consumptive use/utility argument a la United Housing v. Forman, which had largely been rejected by courts in prior token cases like LBRY. This was a huge effort by both agency staff and the project’s team and lawyers to get this done, and shows a real willingness at the current SEC to understand the underlying technology and provide guidance consistent with that technology, which is great to see. Senate Democrats Release Market Structure Framework: Sept. 19, 2025 Background: Senate Democrats have responded to the Senate Banking Committee majority’s revised market structure bill with their own set of policies and framework that the minority will seek to have addressed in any eventual final legislation. There is a plan to have a market structure legislation markup in Senate Banking by the end of October or early November, so that leaves very little time for Senate Democrats to vet language proposals with industry participants before seeking changes to the existing market structure draft. That said, the Senate Agriculture Committee (which has oversight authority over the CFTC) still hasn’t released their companion bill, and nothing will be finalized until that is done as well. Analysis: It appears that Senate Democrats are not far away from Senate Republicans on most issues, making passage of a market structure bill in the Senate more likely, although some sticking points remain. These include whether there should be state law preemption; the level of government oversight over decentralized finance software; and adding additional prohibitions against stablecoin treasury yields being passed to consumers. Even if the Senate ultimately can pass a market structure bill, it appears there will still be huge differences between the Senate’s vision of market structure and the CLARITY Act market structure bill that already passed in the House.     SEC Approves Rule Proposal for Generic Listing Standards for ETFs: Sept. 17, 2025 Background: The SEC has granted requests for accelerated approval of certain proposed rule changes that would make it easier to list Commodity-Based Trust Shares without needing to apply for proposed rule changes with the SEC each time. This approval is significant for crypto, as there are dozens of crypto ETFs awaiting the SEC’s sign-off, and this approval will accelerate that process both for pending applications and similar applications going forward. There is expected to be a wave of spot crypto ETF launches in the coming weeks and months as a result of this move from the SEC. Analysis: This topic was one of the various topics included in Commissioner Peirce’s Feb. 21, 2025, statement soliciting public input on regulatory issues related to blockchain technology and crypto assets. The Digital Chamber (including follow-up comments specific to the proposal) and many others submitted comments on those ETF topics, so it’s great to see that advocacy work in action and getting results. The SEC also approved trading for a fund that holds five cryptocurrencies last week. Next up would be allowing staking in those products or allowing ETFs to hold liquid staking tokens, which would effectively do the same thing. Briefly Noted: Strategic Bitcoin Reserve Bill: The BITCOIN Act, which would enable budget-neutral ways for the U.S. government to buy Bitcoin, got some momentum, as industry leaders went to D.C. to advocate for it. If this is an important issue to you, the Digital Chamber has set up an easy way to contact your representatives and let them know. Request for Comment on GENIUS Act: Department of Treasury has issued an advance notice of proposed rulemaking, seeking comments on the implementation of the GENIUS Act. Good to see them moving forward here, but there is a lot of work to be done on getting the GENIUS Act fully implemented. CFTC Chair Kerfuffle: Brian Quintenz, who was initially nominated by President Trump to be the next chair of the CFTC, but who has had his confirmation hearing continuously postponed, publicly released a series of messages of why he believes his confirmation has been so delayed. His nomination has since been formally retracted. There is still not a confirmed CFTC Chair, or even a quorum of commissioners, and this power void is not expected to be filled soon. With initiatives like allowing stablecoin collateral for derivatives traders moving forward, eventually, this power vacuum will reach a breaking point. Commissioner Peirce Statement: Commissioner Peirce gave a statement titled, “Bees, Ts, and NFTs: Remarks at the Coin Center Dinner,” which is a must-read if only for its uniqueness. I personally took to heart the ending, though: “I especially appreciate the members of the crypto community who put their noses to the grindstone to serve other people—even when doing so requires them to take career, financial, legal, and reputational risk.” SEC Chair Speech Further Advocates “Super-App”: SEC Chair Atkins gave a keynote address in which he further stated his intention to drive the agency to remove barriers from onchain trading of securities, stating: “We must allow for ‘super-app’ trading platform innovation that increases choice for market participants. Platforms should be able to offer trading, lending, and staking under a single regulatory umbrella.” Great stuff to make it a less fractured system for financial products. Prediction Markets Article: This article, Unanswered Questions Surrounding Prediction Markets, is something worth reading for everybody in the space. Kalshi and Polymarket have a combined $17.5 billion of volume in 2025 so far, and they haven’t even hit the mainstream yet. Crypto Companies Go Public: Both Gemini and Figure had seemingly successful IPOs recently, with the price of shares for both companies exceeding prior estimates. Additionally, nine crypto startups raised over $869 million in just one week in September, and companies are on pace to reach $25 billion in venture funding before end of year. So, both the private and public markets remain hot in crypto. Conclusion: Taken together, these developments underscore how quickly the digital-asset landscape can shift even when Congress is consumed by unrelated fiscal debates. Senate Democrats’ market-structure proposals, the SEC’s fast-tracked ETF standards, and the ongoing CFTC leadership gap each introduce new opportunities and risks that market participants will need to monitor closely. With agency initiatives advancing in tandem with legislative efforts and crypto companies successfully entering the public markets, the coming months will likely define how the next phase of U.S. crypto regulation and market integration unfolds.

It was a busy two weeks in Congress, as key pieces of digital asset legislation move forward in both the House and Senate. While the stablecoin bill in the Senate looks like it may pass quickly, the overarching market structure bill in the House has been hotly debated and appears to lack bipartisan consensus. In other news, various crypto companies are looking to go public after a major stablecoin issuer went public with great success recently, and the SEC is clearing the way for expected upcoming formal rulemaking on the application of securities laws to digital assets. These developments and a few other brief notes are discussed below. GENIUS Act Vote in Senate: June 11, 2025 Background: In the Senate, there was a 68-30 vote to invoke cloture on the GENIUS Act, setting the stablecoin bill up for final passage this week. President Trump has put out a statement saying he would sign the bill into law in its current form if it hits his desk. It is expected that by the time of publication of this latest Bi-Weekly update, the GENIUS Act will have  passed the Senate, but the bill will still need to go to the House, and then the Senate again if the House makes any changes, before it can reach the President’s desk. The current House stablecoin legislation differs from the GENIUS Act in various ways, including issuers being regulated at both the state and federal levels and how foreign issuers are regulated. Analysis: The end of week vote to invoke cloture was a move by Senate Majority Leader Thune to end the effort to pass the bill via “regular order” which opens floor proceedings for submission and debate on various amendment proposals. This means the bill is now moving forward with just the changes negotiated with Democrats which lead to 16 Democrats supporting the GENIUS Act in a procedural vote on the Senate floor last month. The list of Senators who voted in favor of cloture is worth monitoring, with Senate Minority Leader Schumer voting against. This stablecoin bill cloture vote came the same week as Treasury Secretary Bessent testified to the Senate Appropriations committee that the Treasury Department is estimating the U.S. Dollar denominated stablecoin market to grow to $2 trillion by the end of 2028. House Financial Services and Agriculture Committees Markup CLARITY Act : June 10, 2025 Background: The House Financial Services and Agriculture committees held separate hearings to mark up the CLARITY Act with the Financial Services committee focused on the SEC related-elements, while the Agriculture committee worked through the CFTC-related provisions. The biggest change was the protection for crypto developers, wallet makers, and infrastructure providers (previously a separate bill dubbed the Blockchain Regulatory Certainty Act introduced by Representatives Emmer and Torres). The bill passed through the Agriculture committee on an overwhelming 47-6 vote. The vote in the Financial Services committee was a closer 32-19. Analysis: The Agriculture committee’s overwhelmingly bipartisan vote came right around the start of the Financial Services committee markup, and this fact was harped on regularly by bill proponents as a reflection of bipartisan bill support. The Financial Services markup process was choppier, going well into the night with roughly 40 amendments offered without any expectation of being approved. The current draft would give the CFTC spot market authority over most digital assets, but there is seemingly a push by opponents to give the SEC more power in this area. House Financial Services Committee Holds Crypto Hearing: June 4, 2025 Background: The House Financial Services Committee held a hearing entitled American Innovation and the Future of Digital Assets: From Blueprint to a Functional Framework to discuss issues related to digital asset regulation. Witnesses included the Chief Legal Officer for Uniswap Labs, Katherine Minarik, and former CFTC Chair Rostin Behnam. Proponents of passing digital asset legislation aimed at encouraging its development in the United States emphasized in the hearing the need for legislative certainty to protect consumers and ensure companies are not leaving the United States to pursue building products and services with blockchain technologies. Opponents cited concerns with the President’s  conflicts of interest and argued digital assets should change to meet existing laws rather than making new laws for digital assets. Analysis: This was just a warmup to the CLARITY Act markup. This hearing started with Ranking Member Waters stating in reference to the CLARITY Act “the only thing clear about this bill is we need to start over.” Republicans pulled a surprise attendance at minority day as well, where typically only the minority party members would attend. The House Agriculture Committee also held a digital asset hearing, but that was less dramatic. There is still much to be done in the regulatory environment, and further changes can be expected including whether what has been dubbed the “DeFi Purity Test” provisions by some is included in whatever the final bill is. Briefly Noted: 401K Updates: Our last Bi-Weekly update highlighted recent changes from the Department of Labor related to inclusion of crypto in 401(k) plans. Our employment law colleagues here at Polsinelli wrote a larger update on this and how it affects plan managers worth reading here. Joint Statement on Validator and Developer Protections: The largest advocacy organizations in the digital asset industry put out a joint statement encouraging the Blockchain Regulatory Certainty Act (a bipartisan bill introduced by Representatives Emmer and Torres) be added to the CLARITY Act. It looks like it worked as it was added to the new bill language, so good work all around on this. SEC Roundtable on DeFi: The SEC roundtable discussion on the agency’s potential role in decentralized finance is worth going back and watching if you did not catch it live. The intro from Chair Atkins was great, as were the additions from Michael Mosier on privacy and data communications systems. CFTC Chair Nomination Hearing: Brian Quintenz had his confirmation hearing on June 10. It is widely expected he will be confirmed, but the fact that he will likely be the sole CFTC Commissioner shortly after confirmation (if he is confirmed) is an interesting wrinkle. Samurai Motion to Dismiss: The developers behind bitcoin privacy tool Samourai Wallet moved to dismiss the DOJ’s unlicensed money transmitter related charges last week. “[The DOJ’s legal theory is] akin to charging an encrypted messaging app developer with conspiracy because it may know that some customers use the app to communicate about financial crimes. Or charging a burner phone manufacturer because it may know some customers use the phones to facilitate drug crimes.” DeFi Education Fund and Blockchain Association also wrote an amicus advocating for dismissal (even though the judge took a rare route and denied requests for amicus submissions). Crypto Company IPOs: Circle’s shares opened at $69.50 on the New York Stock Exchange after its IPO priced at $31. It joins Coinbase as one of the limited publicly traded crypto companies. Gemini has also apparently has confidentially filed for an IPO with the SEC as did digital asset exchange Bullish. There are also expectations for other businesses in the space to explore going public in the near future. SOL Spot ETF Filings: All the major players filed their S-1 prospectuses with the SEC to try to be in the first batch of SOL ETFs which everybody expects to happen. The big issue remains staking, which these vehicles need to be able to do to be competitive with spot buying on the open market. SEC Withdraws Rule Proposals: The SEC has formally withdrawn most of the rule proposals issued under the prior administration, including several proposed rules which would have had significant implications on DeFi and crypto custody. It is a rare move to see rule proposals formally retracted rather than fading silently into the background, so this signifies an attempt to create a “clean slate” for upcoming expected rule proposals under Chair Atkins. Coinbase State of Crypto Report: The Coinbase yearly State of Crypto research is out. Biggest findings are in the cover photo, including that 60% of Fortune 500 executives surveyed said their companies are currently working on blockchain initiatives. They also did a livestream with various big names in crypto and policy going through the results and plans for the upcoming year. Conclusion: As the first half of 2025 wraps up, the digital asset policy landscape is entering a critical phase. Stablecoin legislation appears poised for Senate passage, while the broader market structure bill continues to spark heated debate in the House. Meanwhile, key regulatory and enforcement developments—including the SEC’s rule withdrawals, the DOJ’s evolving theories on developer liability, and growing IPO activity—suggest a transitional moment for Web3 in the United States. With bipartisan momentum behind certain reforms and a growing chorus pushing for clarity, the next few months will be essential in shaping the legal infrastructure for blockchain and digital asset innovation. 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.

The past two weeks brought some notable progress for the industry, though it still often feels like “regulation by lack of enforcement” rather than a truly proactive approach. The SEC clarified that most proof-of-work mining activities do not amount to securities transactions—a welcomed statement for miners but limited in scope. Meanwhile, Ripple announced a potential settlement that would end the SEC’s appeal, continuing a trend of non-fraud crypto cases winding down without generating long-term clarity. On Capitol Hill, the Senate’s markup of its own stablecoin act signals a significant step forward yet also highlights a lack of consensus necessary for any final bill. Finally, in a notable display of bipartisan alignment, both chambers of Congress overwhelmingly passed legislation overturning the IRS’s crypto broker reporting rules, demonstrating the possibility of constructive actions in areas where consensus can be reached. These developments and a few other brief notes are discussed below. SEC Clarifies That Most Proof-of-Work Mining Activities Are Not Securities Transactions: March 20, 2025 Background: The SEC’s Division of Corporation Finance released a statement clarifying its view that most proof-of-work (“PoW”) mining activities do not qualify as securities transactions under federal securities laws. The statement applies specifically to “Protocol Mining” activities involving “Covered Crypto Assets”, which are defined as crypto assets tied to the functioning of a public, permissionless PoW network. According to the release, whether through self-mining or pooled mining, miners perform the essential “work” themselves. Under the Howey test, one crucial element for a transaction to be deemed a security is that profits must flow primarily from the “managerial or entrepreneurial efforts of others.” Because PoW miners generate rewards by contributing their own computational power, the SEC concluded that these returns are not derived from someone else’s management. Thus, PoW mining generally fails this aspect of the Howey test, placing it outside the scope of federal securities laws. Analysis: It’s important to note that releases like these do not create binding law and each set of facts can differ and may yield different legal results, which may make certain PoW mining fall outside of this safe-harbor-like guidance. Still, the statement signals that, under typical PoW mining arrangements, participants who merely contribute computational power to validate transactions and receive rewards likely do not cross into securities territory, including through pooling arrangements. This may allow more risk-averse entities to contribute compute to mining or provide services to mining pools, which only serves to strengthen network resilience and efficiency. Ripple CEO Announces Pending Settlement With SEC: March 19, 2025 Background: Ripple has announced that the SEC will drop its appeal of the portion of the ruling against it in Ripple. This will bring an end to at least part of the case originally brought in 2020 during Jay Clayton’s term as Chairman of the SEC. This will still need to be approved at the next meeting of the commissioners, and it is unclear what this dismissal will entail. Representatives of Ripple have stated that they are evaluating what to do with their own cross-appeal relating to institutional investor sales. Still, there wouldn’t be an announcement like this if a deal was not in place, so now it is just a waiting game to see the details. Analysis: Ripple was one of the few digital asset issuers from the ICO boom that had the resources to fully litigate against the SEC, and it has been doing so for half a decade. And litigate they did, with over 25 filings related to the “Hinman Speech” documents alone. Combined with the dismissal of the Coinbase matter and its pending appeal, there is still no binding precedent from higher courts on the applicability of the Howey test to digital assets. Stablecoin Senate Markup Developments: March 13, 2025 Background: The Senate Banking Committee had a markup of the GENIUS Act, which is the Senate’s version of a stablecoin bill. Even before the markup and vote, there were some changes made due to bipartisan efforts to reach an agreement on how stablecoins should be registered and monitored in the U.S. The bill passed through committee on an 18-6 vote, with five Democrats (Warner-VA, Kim-NJ, Gallego-AZ, Rochester-DE and Alsobrooks-MD) voting in favor, meaning the 4 most junior Democrats on the committee (along with Warner) crossed party lines to vote in favor of the GENIUS Act. Analysis: Senator Warren predictably tried to propose amendments that would have killed the viability of the bill (to the delight of traditional banks), but all those proposals failed. It can be expected there will be closed door work on the bill to address the concerns of Democrats who want some changes to the bill to help it receive as much bipartisan support as possible. The House is also working on its own bill, holding a hearing on stablecoins and CBDCs this week, and the Senate Banking Committee also passed a bill regarding debanking that went along party lines. House Votes to Overturn IRS Crypto Broker Reporting Rules: March 11, 2025 Background: The House voted overwhelmingly in favor of repealing the IRS broker rule change, which was adopted in the final months of President Biden’s term, which would have made all self-custodial wallet providers, DeFi protocols and even arguably internet service providers themselves reporting entities for any digital asset transaction. The vote was 292-132 in the House and 70-28 in the Senate. It will go to the Senate again before being signed by President Trump, who has stated he intends to sign as soon as it hits his desk. Analysis: The IRS broker rule, as finalized, was overly broad and aggressive, potentially capturing industry participants like self-hosted wallet providers, automated market makers, validators and possibly even ISPs. This might be a “played yourself” moment because some classes of entities in the digital asset space could logically be included as reporting entities under broker reporting rules. If the bill goes into law as expected, any such rule will need to come from Congress now. Briefly Noted: SEC Likely to Abandon Reg ATS Rule Changes for Crypto: Acting Sec Chair Mark Uyeda gave a speech saying he directed staff to kick the tires on (i.e., abandon) a proposed rule change that would expand the definition of an "exchange" in a way that might have looped in certain DeFi protocols and service providers. Geofenced Airdrop Costs to Americans: Dragonfly released its State of Airdrops report for 2025, which shows that Americans missed out on as much as $2.6 billion in potential revenue (and the U.S. missed out on taxing that revenue) by policies that resulted in Americans being disqualified from those airdrops. Leadership Changes at Crypto Policy Leaders: Amanda Tuminelli is taking over as CEO of industry advocacy group DeFi Education Fund. Meanwhile, Cody Carbone deserves congratulations on his recent promotion to CEO of the Digital Chamber. Those organizations are in great hands under their leadership. Come in and Register: Now that crypto firms can actually have a dialog with the SEC without fear that opening the dialog will lead to investigations and hostile actions, a record number are filing for various approvals at the agency. Crazy how that works. CFTC Withdraws Swap Exchange Letter: The CFTC withdrew its prior Staff Advisory Swap Execution Facility Registration Requirement which arguably required DeFi participants to register with the agency and which 3 DeFi platforms were charged with disobeying in 2023. This may signal an intent to ease the prosecution of decentralized platforms for failing to register as swap execution facilities. OFAC Removes Tornado Cash Designations: In another huge industry development, OFAC has finally removed protocol addresses from its sanctions list, which is a huge win for software developers and privacy advocates everywhere. SEC Hosts First Crypto Roundtable: The SEC’s first crypto roundtable is available to view. Not many major takeaways, but it's good to see these conversations occurring in public forums. This is ahead of the expected SEC Chair Atkins’ hearing before the Senate. Stablecoin Legislation Update: Ro Khanna (D-CA) said he believes stablecoin and market structure legislation gets done this year at the Digital Assets Summit on March 18, 2025, stating there are 70 to 80 Democrats in the House who view this as an important issue to maintain American dollar dominance and influence. Bo Hines also stated stablecoin legislation will get done in the next few months. SEC Permits Some Rule 506(c) Self-Certification: Rule 506(c), which allows for sales of securities to accredited investors while using general advertising and solicitation, historically has required independent verification of accredited investor status, such as through getting broker letters or tax returns. In a new no-action letter, the SEC clarified that issuers can rely on self-certifications of accredited investor status as long as the minimum purchase price is high enough and certain other qualifications are met. Conclusion: Although not legally binding, the SEC’s acknowledgment that most proof-of-work mining activities are not securities transactions remains a welcomed development for the industry. Meanwhile, the potential conclusion of the SEC’s appeal against Ripple carries both positive and negative implications. On one hand, it suggests that the SEC may follow through on ending non-fraud crypto litigations; on the other, it underscores the ongoing uncertainty in crypto rulemaking absent further regulatory clarity. As the Senate and House each work through their own crypto bills and rules, legislative activity around digital assets is likely to remain robust in the near future. 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.

Three of the SEC’s key enforcement actions—all extensively covered in BitBlog and widely seen as emblematic of the agency’s adversarial stance toward the industry—are reportedly being halted or dismissed. The SEC has agreed in principle to drop its case against Coinbase without any penalties or required changes in business. The SEC also agreed in principle to drop its case against Uniswap for operating an unlicensed securities exchange. Both parties in SEC v. Binance have jointly requested a 60-day litigation stay. Meanwhile, highlighting that the challenges facing this emerging industry are not confined to the United States and its regulation, an international digital asset exchange suffered the largest known hack of its ETH wallets, reigniting concerns over the security of digital asset platforms. Additionally, there are ongoing and potential personnel changes within the U.S. government, particularly in the CFTC and Department of Commerce, with new leadership thus far demonstrating and advocating for positions that are supportive of the industry. These developments and a few other brief notes are discussed below. SEC v. Coinbase Dismissal Pending Commission Approval: February 21, 2025 Background: The SEC staff have agreed in principle to dismiss its action against Coinbase where the SEC had alleged that it was operating as an unregistered securities exchange, broker and clearing agency, along with unregistered offering charges against its staking-as-a-service program. Given that two of the three current commissioners have publicly opposed the agency’s actions against digital asset companies, the commission is likely to approve the dismissal recommendation, effectively bringing the matter to an end. This decision would also eliminate the pending interlocutory appeal before the Second Circuit, which was set to review certain rulings from the Motion to Dismiss stage. Analysis: It is unusual to see a dismissal such as this one announced before final approval, but the timing may be strategic. With only three commissioners currently in place, the likely dissenting vote, Commissioner Crenshaw, could effectively block commission action to formally dismiss the case. One has to imagine that the portions of the cases against Binance and Kraken that have similar causes of action with similar legal theories are also likely to be dismissed. Another key question is whether other exchanges that delisted tokens alleged to be securities in response to these lawsuits, will reconsider and reintroduce them to their trading platforms. The outcome of these cases could significantly impact how digital asset exchanges approach compliance and token offerings moving forward. Bybit Exchange Suffers Largest Known Exchange Hack in History: February 21, 2025 Background: Bybit (a digital asset exchange based in Dubai that is not available to U.S. users) announced it suffered unauthorized access to various ETH wallets, resulting in roughly $1.4 billion being stolen from the platform. To put into perspective, in 2024 $2.2 billion is estimated to be the combined amount stolen from all platforms for the year, meaning 2025 will likely dwarf that number. The hack is currently believed to be the work of the North Korean hacking organization the Lazarus Group, which was also behind the similar Phemex hack earlier this year. Bybit announced it still has the funds to cover customer withdrawals, and operations remain active. Analysis: While the roughly 850,000 Bitcoin stolen in the infamous Mt. Gox hack is worth more in today’s dollars, this is likely the largest cryptocurrency hack in dollars at the time of the hack and one of the largest, if not the largest, heists of all time. It also makes the hackers one of the largest owners of ETH, as the over 400,000 ETH stolen is more than double the amount held by the Ethereum Foundation itself. Brian Quintenz Tapped to Lead CFTC: February 11, 2025 Background: It is being fairly widely reported that President Trump plans to nominate a16z’s Brian Quintenz to lead the CFTC. Quintenz previously served as a commissioner at the CFTC from 2017 to 2021. He is currently the Global Head of Policy at venture firm a16z’s crypto investment arm, and if he is confirmed, he will replace the current acting Chair, Pham. He is the first potential CFTC chair to announce his nomination on Farcaster, the digital asset native social network. Analysis: If you read his prior statements on digital assets and DeFi, it is clear why the digital asset legal community is largely supportive of this pick. He is also no stranger to prediction markets, which are likely to be a hot topic for regulation in the upcoming years. He recently wrote about being excited about governments putting bonds onChain. SEC v. Binance Joint Stay of Litigation Requested: February 11, 2025 Background: The parties in SEC v. Binance are requesting a 60-day pause in the litigation, citing the reason as “new SEC Acting Chairman Mark T. Uyeda launched a crypto task force dedicated to helping the SEC develop a regulatory framework for crypto assets. The work of this task force may impact and facilitate the potential resolution of this case.” Since the Court in Binance agreed to the stay request and with SEC v. Coinbase currently stayed pending an interlocutory appeal decision from the Second Circuit (and likely soon to be dismissed, as discussed below), that just leaves SEC v. Payward (i.e., Kraken) in the exchange cases ongoing post-election. Analysis: The stay request is document 296 in the case’s court file if that is any indication of how fiercely litigated the SEC v. Binance case has been over the past roughly 1.5 years. Considering on the same day, the SEC asked the Court to ignore certain allegations from their Amended Complaint in reaching a determination on the pending Motion to Dismiss indicates there was possibly an order from on-high to enter a holding pattern in all digital asset litigation with approaching deadlines. But no way to know until the dust settles if that was the case. Briefly Noted: Uniswap Labs Says SEC Probe Has Been Closed: Consistent with the Coinbase dismissal but different due to Uniswap’s decentralized nature, Uniswap Labs, the tech company behind the decentralized Uniswap protocol, announced that the SEC has also dropped its investigation for purportedly running an unregistered securities exchange, among other things. There is still the open question of whether decentralization really matters for bringing this type of claim and, if so, how much it matters.  SEC Dismisses Dealer Rule Appeal: The SEC has decided to not go forward with their appeal of two challenges to the proposed expansion of the term “dealer” under applicable securities laws. Well done by the Blockchain Association and the Crypto Freedom Alliance of Texas, among others. The expanded definition had the potential to capture all kinds of traditional finance activities that historically had never been regulated, such as proprietary high frequency trading. SEC Launches Cyber Fraud Unit: The SEC has formed a Cyber and Emerging Technologies Unit, which will go after, in part, “fraud involving blockchain technology and crypto assets.” This makes sense to focus on fraud and consumer harm vs. trying to fight digital asset businesses that are trying to be good actors in an unclear regulatory environment. SEC Crypto Task Force Meeting Logs: The SEC is posting meeting logs of its crypto task force meetings, which is really cool. So much of crypto has been built on open source and community development that making these task force submissions and meetings transparent just fits. There is also a list of questions that the SEC is seeking public input on answering. Please reach out to any of the listed authors if you are a company that wishes assistance in submitting such responses. Nasdaq Proposes Rule for Trading Digital Assets: The Nasdaq exchange is proposing a rule change to permit the listing and trading of digital asset-based investment interests. Secretary of Commerce Confirmed: Howard Lutnick, formerly of Cantor Fitzgerald, has been confirmed as the new Secretary of Commerce. He has said a ton of positive things about crypto in the past, so another ally in a high-ranking position is always good. Nation-State Rug: The President of Argentina tweeted out about a memecoin, $LIBRA, which reached a market cap of almost $4 billion before insiders cashed out, making over a hundred million in the process and tanking the price of the token. Great thread explaining it all here. The fallout from the Argentina memecoin rug $LIBRA is ongoing, and it can be expected this will have significant repercussions down the line depending on the role of seemingly trusted service providers in the schemes. SEC Commissioner Says Memecoins Not the SEC’s Concern: The very term “memecoin” implies that investors are not relying on the efforts of others to generate profits—a key factor in determining whether an asset qualifies as a security under U.S. law. If that weren’t already clear, SEC Commissioner Hester Peirce, who also heads the Crypto Task Force, recently reinforced this point, stating that the SEC’s jurisdiction is limited to securities. She emphasized that the regulation of many memecoins likely falls under other federal agencies, such as the CFTC, FTC, and others that oversee financial instruments that are not stock-like securities. This statement, while not actionable precedent, reflects an ongoing debate over the appropriate regulatory framework for digital assets and highlights the need for greater clarity in interagency enforcement efforts. House Financial Services Subcommittee Holds Digital Asset Hearing: The House Financial Services Subcommittee recently held a hearing titled A Golden Age of Digital Assets: Charting a Path Forward. With legislators pushing an aggressive schedule to advance various digital asset bills, a rapid succession of hearings on these issues is expected. This hearing signals continued momentum in shaping the regulatory framework for digital assets and highlights the urgency among lawmakers to address key policy questions surrounding the industry. With the aggressive schedule put forward by many legislators to get various digital asset bills done, there is going to be an equally fast paced group of hearings on these issues. Conclusion: As personnel changes continue within the U.S. government and crypto-related industries, we can expect ongoing developments on the litigation front, further shaping the regulatory landscape for digital assets. The SEC’s decision to dismiss its case against Coinbase, along with other high-profile enforcement actions, signals a potential shift in regulatory strategy. Meanwhile, the recent Bybit Exchange hack, though not directly affecting U.S. users, underscores the urgent need for safe exchanges to ensure the secure access and custody of digital assets, as well as the need for more clarity involving self-custodial solutions. Alongside anti-money laundering and fraud detection and prevention, these issues will remain central to regulatory efforts in the evolving crypto ecosystem. 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.

The first weeks of February have been eventful for digital asset regulation, with major policy shifts, legal battles and legislative initiatives shaping the future of Web3. The SEC’s formation of a dedicated crypto rulemaking task force, Coinbase’s latest legal maneuvering, the CFTC’s scrutiny of sports-related prediction markets, and Senate hearings on stablecoins signal an evolving regulatory landscape. Key developments include renewed scrutiny over bank relationships with crypto firms and the SEC’s shifting stance on spot crypto ETFs. As the U.S. government reassesses its approach to digital asset oversight, key figures in Congress, and the SEC have signaled a strong desire for reforms and meaningful legislation. However, significant hurdles remain—not least of which is the relatively short window Congress has to pass legislation before the election cycle takes over. These developments and a few other brief notes are discussed below. SEC Forms Crypto Rulemaking Task Force: January 21, 2025 Background: On his first day as acting SEC Chair, Mark Uyeda announced that the SEC has “launched a crypto task force dedicated to developing a comprehensive and clear regulatory framework for crypto assets.” Commissioner Peirce has been tapped to lead the task force, which according to SEC press release, “will collaborate with Commission staff and the public to set the SEC on a sensible regulatory path that respects the bounds of the law.” Further, its focus will be “to help the Commission draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks and deploy enforcement resources judiciously.” The task force has since solicited comments by e-mailing crypto@sec.gov and setting up a meeting request form here. Analysis: Commissioner Peirce's Token Safe Harbor Proposal 2.0 from 2021 remains one of the most well-structured and thoughtful regulatory approaches to digital assets from any regulator, making her an ideal choice to lead this task force. While it is unclear how this initiative will interplay with the Third Circuit’s recent rulemaking ruling, it seems increasingly likely that some form of crypto regulation will emerge from the SEC in the coming months or years. The challenge ahead is significant—defining 'decentralization,' ensuring oversight to prevent fraud and abuse and fostering innovation without stifling legitimate actors is a delicate balance. If anyone is equipped to navigate this, it’s Commissioner Peirce. Coinbase Files Petition for Permission to Appeal at Second Circuit: January 21, 2025 Background: The lower court in the SEC v. Coinbase matter previously stayed the matter and granted permission for Coinbase to ask the Second Circuit to hear its interlocutory appeal of matters decided on its Motion for Judgment on the Pleadings. The Second Circuit still has to agree to hear the matter, and in its opening brief, Coinbase implores the appellate court to weigh in on whether digital asset transactions in secondary markets are investment contract transactions. Analysis: Amicus filed by the Blockchain Association and the Chamber of Commerce also encouraged the appellate court to take up this issue. Newly appointed Chair of the Senate Finance Services Digital Asset Subcommittee, Senator Lummis, also weighed in, asking for the Second Circuit to take up the issue. Administrations come and go, but case law is enduring, so this is still a very important case and will set legal precedent for years to come. The “ecosystem theory” provided by the SEC and endorsed by the lower court makes no sense. Bitcoin, Ether and other assets that the SEC had admitted are not securities have gigantic “ecosystems,” and it also makes no sense as to how an “ecosystem” can register with the SEC. Strong appellate case law on these issues would alleviate the need to rush into expansive legislation that could have unknown externalities (including benefitting incumbents to the detriment of new entries), even if they do provide a level of clarity. Joint Press Conference Held on Bipartisan Roadmap to Digital Asset Legislation: February 4, 2025 Background: “Crypto and AI Czar” David Sacks held a press conference with Senate Banking Chair Tim Scott, House Financial Services Chair French Hill, House Agriculture Chair Glenn “GT” Thompson and Senate Agriculture Chair John Boozman to discuss the previously issued Executive Order titled Strengthening American Leadership in Digital Financial Technology and how the Executive and Legislative branches planned to work together in establishing a clear framework for U.S. digital assets and their issuers. Analysis: The main takeaway seemed to be that stablecoin legislation is on the immediate horizon, which is discussed below as well as related to Senator Hagerty’s GENIUS Act being released the same day as the press conference. It also appears that FIT 21 (passed through the House last year) will be the starting point for a market structure bill, but as I have previously covered, there are still significant hurdles to overcome to make that market structure bill fit for purpose. There was recognition by all the speakers that digital assets are going to be foundational in financial services for the foreseeable future, so creating a framework to ensure U.S. dominance in the sector will be crucial in maintaining the current dominance of American financial markets. CFTC and SEC Announce Digital Asset Agendas: February 4, 2025 Background: In a statement titled “The Journey Begins,” Commissioner Peirce put forward her plans as the leader of the newly formed SEC Crypto Task Force. While at the CFTC, Acting Chair Pham announced a plan to “Refocus on Fraud and Helping Victims, Stop Regulation by Enforcement” and various task force realignments at the agency. Both seem intent to remain focused on bringing actions against fraudsters or bad actors while removing enforcement focus from good actors who are attempting to abide within the bounds of commodities and securities laws when applied to blockchain-enabled cryptographic technologies. Analysis: Commissioner Peirce’s statement is especially well done. “In this country, people generally have a right to make decisions for themselves, but the counterpart to that wonderful American liberty is the equally wonderful American expectation that people must decide for themselves, not look to Mama Government to tell them what to do or not to do, nor to bail them out when they do something that turns out badly.” The Digital Chamber, Blockchain Association and others have already announced organized working groups to assist the agencies in reaching sound policies that protect against fraud while preserving American freedoms and innovations. There seems to be renewed hope that a sensible and transparent framework for operating a digital asset company in the United States is feasible in the next few years. Congress Holds Hearings on Debanking (Chokepoint 2.0): February 5-6, 2025 Background: The Senate Banking Committee held a hearing titled Investigating the Real Impacts of Debanking in America on February 5, followed shortly thereafter by a House Financial Services Committee hearing titled Operation Choke Point 2.0: The Biden Administration's Efforts to Put Crypto in the Crosshairs on February 6. While both had an aim at determining the scope of debanking and potential solutions to legally operating individuals and companies being refused banking services, the House’s hearing focused especially on digital assets and had testimony from Coinbase head of legal Paul Grewal and NYU Professor Austin Campbell, both of whom emphasized the disproportionate impact debanking has had on digital asset participants. Analysis: Directly before the Senate’s hearing, Senator Cramer (R-ND) reintroduced his Fair Access to Banking Act, which would require banks to provide impartial and risk-based explanations for granting or refusing lending or other banking services. The FDIC also released 175 documents related to its supervision of banks that engaged in, or sought to engage in, crypto-related activities before the hearings (previously withheld despite FOIA requests/litigation over those requests; also, read this bench slap transcript in that FOIA action if you are ever having a bad day and need a pick-me-up). This was a great section of the think pieces referenced below about the effect debanking can have on ordinary people and the need for access to DeFi for people that want more control over their own finances. CFTC Investigates Sports-Related Prediction Market Contracts (February 9, 2025) Background: The CFTC has opened an inquiry into the legality of sports-related prediction market contracts, reinforcing its oversight of event contracts under the Commodity Exchange Act. In a February 9 statement, the agency confirmed it is reviewing the regulatory status of these products and assessing whether they constitute unlawful gaming or derivatives trading. In response, Robinhood preemptively delisted its prediction contracts, citing regulatory uncertainty. However, Kalshi and Crypto.com kept their markets active through and past the Super Bowl, arguing they fall within existing CFTC exemptions. Analysis: The CFTC’s scrutiny signals a potential crackdown on sports-related event contracts, an area that has long existed in a regulatory gray zone. Until last year’s case between Kalshi and the CFTC, the agency took the position that betting contracts generally are binary options that are subject to the agency’s regulation and oversight. Further, it remains unclear how these fit within the framework of the two federal statutes that explicitly address sports betting, the Wire Act and the Unlawful Internet Gambling Enforcement Act, particularly if the Department of Justice adjusts its interpretation of those laws. Briefly Noted: Polsinelli Releases Tech Transaction and Data Privacy Report: The Polsinelli annual Tech Transactions and Data Privacy Report is out, which breaks down the information companies should stay informed on regarding tech and data privacy legal issues for 2025, including a breakdown of Web3 topics to pay attention to. SEC Pauses Certain Investigations and Cases. On February 11, the SEC and Binance filed a joint motion to stay the agency’s lawsuit against Binance for 60 days. The rationale was that the SEC’s joint task force is working on regulations that may “impact and facilitate the potential resolution of this case. Additionally, it appears that the SEC has sent a number of close-out letters in recent weeks, formally closing investigations into certain other crypto companies.   Senate Stablecoin Bill Introduced: Senate Banking Committee member Bill Hagerty (R-TN) has introduced a bipartisan Senate stablecoin bill (Senator Gillibrand (D-NY) is a co-sponsor) as a companion to the House bill passed through their financial services committee last year. The House also dropped a discussion draft bill. Bills like this for discrete digital asset issues combined with knowledgeable people in administrative leadership roles make total sense. SEC Scores Win on Major Question Defense Against Kraken: The SEC successfully struck Kraken’s Major Question defense (but since there doesn’t need to be discovery on the issue, left open the ability for Kraken to assert again later) but failed to get due process and fair notice defenses tossed. Senate Confirms Treasury Secretary: Scott Bessent has been confirmed as the new Treasury secretary, replacing Janet Yellen. He is viewed as “pro-crypto,” so one can hope for some common sense rulemaking around digital asset tax reporting and compliance during his tenure. SAB 121 Repealed: The Controversial SEC Staff Accounting Bulletin 121 (SAB 121), which essentially foreclosed publicly traded banks from taking custody of digital assets for their customers by requiring digital assets be listed as liabilities on the banks’ balance sheets, has been withdrawn. This comes after both the House and Senate passed a bipartisan resolution to withdraw the rule, which was vetoed by President Biden. Tornado Cash Sanctions Lifted: It looks like the U.S. government will likely not be appealing the decision that overturned the OFAC sanctions of Tornado Cash, and there is no en banc review, so it is heading back to the District Court for either a nationwide vacatur or a more limited ruling. This does not, however, eliminate sanctions against the legal persons who allegedly performed bad acts using Tornado Cash, and wallets believed to be associated with North Korea remain on OFAC’s blacklist. KuCoin Enters Plea Deal: Kucoin agreed to pay $300 million in unlicensed money transmission penalties, and its founders entered deferred prosecution agreements related to operating a digital asset exchange without proper money transmission licenses. Conclusion: As regulatory and legislative efforts accelerate, 2025 is shaping up to be a pivotal year for the digital asset industry. The formation of the SEC Crypto Task Force, bipartisan movement on stablecoin and market structure legislation, and ongoing legal challenges against regulatory overreach indicate that the framework governing digital assets is evolving in ways that could significantly impact the industry's trajectory. 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.

In the last few weeks, decisions by regulatory agencies and courts overseeing cryptocurrency disputes have dominated the Web3 legal news. This can be expected to continue, even as Congress comes back from its August break, as those agencies look to close out their financial year on September 30 and look to set budgets and agendas for the next year. However, with both the SEC and CFTC already embroiled in significant lawsuits against well-funded digital asset industry participants, those agencies must be feeling a strain on resources at this point. Meanwhile, settlements for actions dating back to pre-2023 conduct continue to be finalized, as both the industry participants and agencies overseeing those participants look to put prior alleged misdeeds to rest and move forward with ongoing business.    These developments and a few other brief notes are discussed below. NFT Secondary Marketplace OpenSea Receives SEC Wells Notice: August 28, 2024 Background: The NFT marketplace OpenSea has reportedly received a Wells notice from SEC staff indicating the SEC’s staff intends to recommend a lawsuit for securities law violations be brought against the platform operator. At its peak in early 2022, over $6 billion of NFT sales a month occurred on its platform, but those numbers have sharply declined as competitors like Magic Eden and Blur emerged and NFT sales generally declined. There is no word yet as to the content of the Wells notice or what NFT sales will be at issue in any action brought by the agency. Opensea has pledged $5 million in legal defense fees for any creators on the platform similarly targeted by the agency. Analysis: It is easy to imagine that the transactions alleged to be unregistered securities transactions will be sales involving Impact Theory or Stoner Cats, which the SEC has previously alleged to be securities and settled with the issuers thereof (over dissents from Commissioners Peirce and Uyeda). The charges could also stem from trades of Uniswap liquidity pool tokens or similar ERC-1155 types of tokens, which may resemble financial products. With outstanding Wells notices against Robinhood, UniSwap, and now OpenSea, there can be expected a flurry of new SEC lawsuits in the months leading up to and following the upcoming Presidential election, with Chair Gensler currently expected to leave his position at the SEC regardless of the election’s outcome. Uniswap Settles With CFTC: September 4, 2024 Background: The CFTC issued an Order filing and settled charges against Uniswap for an agreed-upon fine of $175,000. Commissioners Mersinger and Pham issued separate dissenting statements. The Order does not accuse Uniswap of creating the futures products at issue but instead states that “by operating a front-end user interface (the Interface) that facilitated and provide[d] a purchaser with the ability to source financing or leverage from other users or third parties,” Uniswap meets the definition of an “offeror” of the futures products under the applicable statute. Analysis: Anybody can still buy and sell the futures products the CFTC takes issue with by interacting directly with the application or through using a block explorer such as etherscan. The CFTC’s issue is merely with the interface provided by Uniswap, i.e., making it easier to interact with these assets. This begs the question of exactly how user-friendly a website needs to be to make it an “offeror,” according to the CFTC. Commissioner Mersinger had an especially strong dissent, stating, “This case has all the hallmarks of what we have come to know as regulation through enforcement: a settlement with a de minimis penalty that bears little relationship to the conduct alleged, sweeping statements about the broader industry that are not germane to the case at hand, and legal theories that have not been tested in court.” Coinbase Partially Wins in Discovery Dispute with the SEC: September 5, 2024 Background: Coinbase has partially won its Motion to Compel certain discoveries in the lawsuit brought against the exchange by the SEC. In an Order issued orally by Judge Failla, the Court held that “I agree with Coinbase that it should be able to defend itself against these very significant charges by obtaining at least some of the evidence it seeks in discovery. And as I have hinted at in the past, there’s a degree to which the SEC is the architect of Coinbase’s current discovery demands. By pleading the complaint as it did, it is the SEC who set the parameters of the universe of permissible discovery.” Analysis: This is just the first discovery skirmish in this high-profile litigation, and there can be expected further disputes over documents that the SEC logs as protected from discovery under the deliberative process privilege or others. The SEC also gained a partial victory in resisting efforts by Coinbase to get discovery into certain aspects of Chair Gensler’s communications. However, the SEC will be required to conduct substantial efforts at document collection, production, or privilege logging, which could limit resources the agency has to devote to other ongoing and anticipated lawsuits in the digital asset space such as those mentioned above. This discovery battle is seemingly part of a two-part strategy by Coinbase, which also has requested documents through a FOIA action in a separate court. Kalshi Predictive Markets Wins Lawsuit on Summary Judgment Against the CFTC: September 9, 2024 Background: Kalshi predictive markets won its lawsuit against the CFTC after the agency sought to block the company from offering prediction markets on U.S. election outcomes. Due to the proximity to the upcoming election, the CFTC has filed an emergency motion to stay the ruling pending an expedited appeal. Kalshi first brought this lawsuit in November of 2023, after the CFTC issued a final order, prohibiting Kalshi from offering prediction markets on certain federal elections due to Kalshi’s status as a federally regulated exchange. Analysis: CFTC Chair Behnam has made regulation of prediction markets a priority at the CFTC, with the agency proposing rulemaking regarding prediction markets earlier this year. Coinbase has commented on the CFTC’s proposal regarding the regulator entering an area that has been traditionally left to the states. Others in the space have also joined in the opposition to the CFTC’s proposed expansion of authority. While the memorandum with the reasoning for the Court’s decision has not been released yet, this could be a major blow to the agency in imposing regulations on prediction markets, which often use cryptocurrency and smart contracts to manage and settle event outcome payouts. Briefly Noted: SEC Reserves Rights to Challenge Distributions in FTX Bankruptcy: The SEC has filed a document in the FTX bankruptcy reserving the agency’s “rights to challenge transactions involving crypto assets" and specifically, payments made in stablecoins. MakerDAO Moves Towards Freezable Stablecoin: MakerDAO is moving DAI to “USDS” which will be the upgradable format of the stablecoin that has transfer and freezing functionalities that USDC and USDT have. While DAI will still exist, since all the support and liquidity will likely transfer, one of the last remaining major censorship resistant stablecoins is probably not long for this world. SEC Commissioner Calls for Crypto Registration Form: SEC Commissioner Uyeda said in a recent fireside chat that the SEC needs a custom S-1 registration form for digital asset securities. “I hope at some point, whether it’s Gensler or any of his successors, will think about, we’ve now had a fair amount of regulatory uncertainty on digital assets, maybe we ought to move forward with some legislation or rulemaking,” Uyeda said. SEC Fines Advisory Firm for Crypto Custody Failures: The SEC hit Galois Capital Management LLC with a $225,000 fine for “failing to comply with requirements related to the safeguarding of client assets, including crypto assets being offered and sold as securities.” The Order/press release does not state which of the tokens were “crypto assets that were offered and sold as securities” and thus improperly stored on FTX (or Fireblocks), so it is hard for others to know how to comply going forward based on this Order alone. Robinhood Settles with California Regulators over Prior Cryptocurrency Transfer Restrictions: Robinhood settled with the California DOJ over old (2018-2022) cryptocurrency trading restrictions.  The good thing about self-custody options is that you are not limited by the platform you buy digital assets on for where those assets can be used/sold. Robinhood has allowed users to transfer digital assets to self-custody wallets since 2022. Conclusion: The legal and regulatory landscape for the cryptocurrency and broader Web3 space remains highly dynamic, as recent actions by the SEC, CFTC, and other authorities demonstrate. With the end of the fiscal year approaching, agencies like the SEC and CFTC are pushing forward with key enforcement actions despite strained resources, while major players in the digital asset space continue to navigate ongoing litigation and regulatory uncertainty. As we move toward 2025, the outcome of these disputes—particularly those involving high-profile platforms like OpenSea and Uniswap—will have lasting implications for the future regulation of the industry. Industry participants should continue to monitor these developments closely as they may reshape how digital assets are treated under U.S. law in the coming years. 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.

It was a busy two weeks in Web3 law, as Binance lost in an appeal that could have wide-ranging jurisdictional implications outside of just digital assets. Coinbase also went on the offensive against the SEC in appealing the SEC’s denial of rulemaking, and Coinbase was supported by many industry stakeholders as amicus a week later. This all came around the same time as the House of Representatives held a hearing titled “SEC Overreach: Examining the Need for Reform” and the administrative agencies overseeing U.S. intellectual property registration released their long-awaited study on non-fungible tokens (“NFTs”). These developments and a few other brief notes are discussed below. Binance Loses Appeal With Far Ranging Jurisdictional Implications: March 8, 2024 Background: Binance lost on an appeal that previously dismissed the cryptocurrency exchange from a class action lawsuit on jurisdictional grounds. While Binance has requested a rehearing en banc in front of the Second Circuit, this was a blow to an exchange that recently settled with the DOJ/CFTC and is still facing a lawsuit against the SEC. The case was previously dismissed at the district court level under the presumption against extraterritorial application of U.S. securities laws to foreign entities. Summary: Binance denied having a principal place of business in any jurisdiction, which was the basis for the appellate court overruling the prior dismissal. The Second Circuit determined that because plaintiffs’ alleged (1) Binance’s use of Amazon Web Services for much of its infrastructure made that U.S. centric; and (2) Binance’s U.S. infrastructure made it more likely to be used by U.S. individuals, that Binance’s lack of physical offices made that the best thing to look to when looking at where a transaction was completed. This was a Motion to Dismiss, so the Court was required to accept the infrastructure claims as true, and it’s very possible that these claims will be rebutted through evidence on discovery. But this is still a blow, which makes it more likely for decentralized companies to be subject to U.S. securities laws based on their web services infrastructure even if they put into place attempts to weed out U.S. buyers. Coinbase Appeals SEC’s Denial of Rulemaking for Digital Assets: March 11, 2024 Background: In July of 2022, Coinbase petitioned the SEC for rulemaking regarding digital assets, requesting sufficient rules to create market certainty on whether the Commission would view a particular digital asset to be an “investment contract” subject to registration and oversight by the SEC. After challenging the SEC’s lack of action on the exchange’s petition, the SEC formally denied the request, clearing the way for judicial review of that denial. Coinbase has now filed a 78-page brief seeking such a judicial review. Summary: You can look at the chart on page 12 of the brief (document page 16) to get the gist of the argument. The primary author is Eugene Scalia, who has played a part in overturning numerous recent laws and regulations and gets more leeway on stylistic decisions. Pages 40-46 explaining the unworkable nature of existing securities laws with blockchain functionalities was probably the best part of the briefing (and reads like a summary of the Paradigm 3-part series on the subject). As expected, Coinbase continues to avail itself to all avenues of judicial review of the SEC’s actions (and inactions). The wheels of justice turn slowly but grind exceedingly fine. Copyright, Patent, and Trademark Offices Release Study on NFTs: March 12, 2024 Background: The U.S. Copyright and U.S. Patent and Trademark Offices released their collaborative study on the impact of NFTs on IP law and policy. The big takeaways were (1) the recognition of the value NFTs can bring to artists and brands and (2) the insistence that existing law is sufficient to address infringement concerns related to NFT applications. Summary: This study was the result of the President’s Executive Order on Digital Assets from September 2022. The study determined that incorporating NFTs into existing intellectual property registration and recordation practices is not necessary or advisable at this time, as these technologies can be registered under existing laws without the need for specialized carve-outs. The main takeaway from the study was the executive agencies’ willingness to interact and receive feedback from interested stakeholders through various roundtable discussions and open-door meetings. It will be interesting to see if existing doctrines, such as the first sale doctrine, will continue to apply to digital works when the change of ownership of those digital works does not require the creation of a “copy” of that digital work. Amici Support Coinbase Appeals SEC’s Denial of Rulemaking for Digital Assets: March 18, 2024 Background: The industry continues to show up in filing amicus briefs on important cases, this time with amicus briefing filed in support of Coinbase’s appeal of the SEC’s denial of digital asset rulemaking. Briefs were filed by Paradigm, LEJILEX, the Texas Blockchain Council, the Crypto Council for Innovation, and the U.S. Chamber of Commerce. This level of legal activism is not something often seen in commercial endeavors, but is becoming commonplace in the digital asset industry, where collaboration of unaffiliated stakeholders and decentralization are part of the industry’s fabric. Summary: As we previously stated in our breakdown of the Coinbase briefing, the key to many of these briefings is demonstrating the illogical nature of the SEC’s “come in and register” talking points while failing to provide a route to registration that is possible based on the technology at issue. Paradigm’s brief especially weighed in and crystalized this point with specific cites to applicable Code of Federal Regulations sections. The Chamber of Commerce’s support was also strong. “The SEC’s belated, conclusory denial is a textbook example of agency action that is arbitrary, capricious, and an abuse of discretion—in other words, action that must be set aside under the APA. Whatever discretion agencies ordinarily possess, a refusal to undertake rulemaking cannot stand if it is ‘plainly misguided.’ House Subcommittee Holds Hearing on SEC Oversight: March 20, 2024 Background: The House Subcommittee on Capital Markets held a hearing titled “SEC Overreach: Examining the Need for Reform,” which included witnesses from the Cato Institute, the Heritage Foundation, the Center for American Progress, and the Committee on Capital Markets Regulation. While the hearing did not focus specifically on digital assets, the topic was hit on at various points throughout the hearing. Summary: The witness from the Heritage Foundation had especially strong words against the agency, stating, “Perhaps the leading area in which the Commission has been irresponsible is the area of digital assets, or crypto assets… If you were to write a book on how not to regulate, the Commission’s modus operandi in this area would be the first chapter.” There were also remarks from Congressman French Hill, the potential next head of the Financial Services Committee, regarding the SEC’s approach to digital assets and recent court decisions involving digital assets. KuCoin Charged With Violating BSA and Commodity Exchange Act: March 26, 2024 Background: The CFTC and Department of Justice filed parallel civil and criminal actions against the companies operating the KuCoin exchange. In the civil complaint, the CFTC alleges that KuCoin illegally dealt in off-exchange commodity futures transactions and leveraged, margined, or financed retail commodity transactions, operating in the US without registering as a futures commission merchant, swap execution facility, or designated contract market.  The criminal complaint reportedly is charging them with violating the Bank Secrecy Act, operating an unlicensed money transmitter business, and conspiracy to violate the Bank Secrecy Act and operate as an unlicensed money transmitter business. Summary: This isn’t the first time KuCoin has landed in hot water, as it was recently barred from operating in New York and was effectively kicked out of Canada. It shouldn’t be a huge surprise that an exchange offering otherwise regulated products without either geofencing US IP addresses or requiring basic KYC verification would get in trouble. Interestingly, the CFTC press release provides that they “failed to impose any IP address restrictions during the relevant period to prevent U.S. customers from trading commodity interests or account for commonly used technology such as virtual private networks (VPNs) that could potentially circumvent IP address restrictions.” It is unclear how one would prevent VPN users from accessing the exchange short of blocking all VPNs (which is untenable for many reasons, not the least of which is that about 30% of all internet users are using a VPN, usually for completely legitimate reasons), or why someone would need to block VPNs when they’re not geofencing to begin with. The CFTC also made it a point to clarify that Ether is a commodity subject to CFTC jurisdiction, perhaps to prevent the SEC from asserting regulatory jurisdiction over the asset. Briefly Noted: Ethereum Foundation Reportedly Under Investigation: While not independently confirmed, numerous sources have reported that the Ethereum Foundation may be under investigation by the SEC, purportedly relating to Ethereum’s shift from a proof of work validation mechanism to a proof of stake mechanic. This could also involve an effort for the SEC to classify ETH as a security since earnings from staking are easier to analogize to some traditional securities products than earnings from work. This may also be an effort for the SEC to distance itself from the Hinman Speech, where the then-head of the Division of Corporate Finance declared that “current offers and sales of Ether are not securities transactions,” particularly given the looming May deadline for the SEC to approve or deny a potential Ethereum exchange traded fund.  Bitcoin Fog Developer Convicted: Roman Sterlingov was convicted on all four counts of money laundering for his involvement with crypto-mixer BitcoinFog. This conviction is likely to be appealed, particularly over some claimed logical leaps taken by the DOJ’s cryo-tracing experts. Court Determines Craig Wright is not Bitcoin Creator: A Court determined Craig Wright is not Satoshi, despite his sister’s testimony that he pretended to be a ninja well into his adulthood. This is the result of a multi-year litigation battle over Mr. Wright’s claims of being the primary author of the Bitcoin Whitepaper, attributed to the pseudonymous “Satoshi Nakamoto.” SEC Issued Sanctions in Digital Asset Case: While we will not comment on the contents of the Court’s Order, it is a development worth noting that the Court in SEC v. Debt Box issued an Order requiring the SEC to pay certain costs and fees as a sanction in that case. Conclusion: The past two weeks have marked a pivotal period for Web3 law, characterized by significant legal developments that highlight the ongoing tension between regulatory bodies and the rapidly evolving digital asset industry. The appeal loss by Binance not only sets a precedent for jurisdictional reach over decentralized entities but also emphasizes the complexities of applying traditional securities law to the unique nature of digital assets. Coinbase's bold move to challenge the SEC’s stance on rulemaking, backed by considerable industry support, underscores the sector's call for clear, applicable regulations that foster innovation while ensuring market integrity. Moreover, the House of Representatives' hearing on "SEC Overreach" and the release of the study on NFTs by U.S. IP agencies collectively signal a growing recognition of the need to adapt legal frameworks to the realities of the digital age. As the legal landscape continues to evolve, these developments serve as a reminder of the delicate balance that must be struck between regulation and innovation in the digital asset ecosystem. The industry’s resilience and willingness to engage in legal battles reflect its commitment to establishing a regulatory environment that is both fair and conducive to growth. This period may well be looked back upon as a watershed moment in the journey towards achieving a harmonious coexistence between digital asset innovations and regulatory oversight. In addition, SDNY denied Coinbase summary judgment on most of its claims in their case against the SEC, though they did succeed in getting the claim regarding self-custodial wallets dismissed.  We’ll have more on this decision soon.  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.

On January 3, 2022, the Commodity Futures Trading Commission (CFTC) announced an order against and settlement with Polymarket, a blockchain-enabled prediction market that allows users to “bet” on the occurrence of certain future events, for offering off-exchange event-based binary options contracts that constituted “swaps” and failure to obtain designation as a designated contract market (DCM) or registration as a swap execution facility (SEF). Polymarket describes itself as a “decentralized information markets platform” that allows users to bet on their beliefs.  Users build a portfolio based on forecasts, buying and selling “shares” based on how a future event resolves, such as whether Bitcoin will be worth more than a certain amount on a certain date or whether a particular candidate would win a political election.  The CFTC determined that these shares instead are binary options contracts that constitute swaps and are thus subject to the CFTC’s jurisdiction and related regulatory obligations.  Under the U.S. Commodity Exchange Act (the CEA), as amended by the derivatives regulatory reform provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, swaps generally can only be offered on a bilateral basis among eligible contract participants, or over a platform that is registered as a DCM or SEF.  Specifically, the CFTC noted the use of an algorithmic “automated market maker” (AMM) to price premiums for the options based on relative demand for each position, with trading volume and liquidity automatically adjusting based on demand and other factors.  Market participants were charged a 2% fee on each transaction which was used to compensate the liquidity providers, although Polymarket itself claimed to have reaped no profits. The definition of “swap” as a category of regulated product under the CEA is very broad, and could be read to encompass most financial contracts that provide for an exchange of value on the basis of some external reference like the occurrence of an event or the price of some asset or index, even where those contracts are not commonly referred to among market participants as a swap.  The principal exclusions from the definition of “swap” are products that are subject to an alternate regulatory regime, such as options on securities that are subject to the jurisdiction of the U.S. Securities and Exchange Commission (the SEC).  Therefore, any offering of financial contracts whose value is linked to the occurrence of an event or the price of some asset or index runs the risk of enforcement action by the CFTC to the extent they are not already subject to an alternate regulatory regime. The SEC has taken similar action against providers of financial contracts linked to the price of securities.  In 2015, the SEC instituted an enforcement action against the Sand Hill Exchange, which was billed as a platform for investors to purchase contracts linked to the price of pre-IPO technology companies, arguing that the contracts constituted “security-based swaps” subject to the SEC’s jurisdiction and associated regulatory requirements.  Accordingly, there is also a risk of enforcement by the SEC against issuers of financial contracts linked to the price of digital assets that the SEC has determined to be securities. Because the betting contracts were deemed swaps, the CFTC found that Polymarket violated Section 5h(a)(1) of the Commodity Exchange Act and Regulation 37.3(a) thereunder which prohibit the operation of a facility that offers a trading system or platform in which more than one other market participant has the ability to execute or trade swaps with more than one other market participant unless such facility is registered as a SEF or a DCM. Under the order, Polymarket is required to cease offering access to trading in noncompliant markets and to wind down those markets unless the offering, solicitation or trading in those markets complies with CFTC regulations.  Polymarket was also ordered to pay a $1.4 million civil penalty.  While Polymarket did not admit or deny the findings in the order, it is required to cooperate with the CFTC on an ongoing basis and is prohibited from making statements denying the findings or conclusions of the order and from giving the impression that the order is without factual basis. The CFTC previously has granted limited no-action relief for operators of prediction markets.  For example, in CFTC Letter No. 14-130, the CFTC granted no-action relief for Victoria University of Wellington, New Zealand, to operate a submarket for binary contracts concerning political elections and economic indicators.  Importantly, nobody was to receive compensation for operating the market, which was being used for educational purposes, with strict limitations on the number of contract participants, the size of the contracts, the maximum “bet,” and how the site would be advertised, including prominent disclaimers that the proposed market is unregulated, experimental, and being operated for academic purposes.  Similar relief was granted to the University of Iowa in 1993 for the operation of Iowa Electronic Markets. This could create significant regulatory burdens for a provider that seeks to launch as a commercial enterprise a platform for trading event contracts, whether linked to cryptocurrency or other events.  Providers could proceed under an existing regulatory model, such as the CFTC’s futures and options regulatory regime, the CFTC’s swap regulatory regime, or, potentially for contracts relating to securities, the SEC’s securities or security-based swap regulatory regime.  Each would subject the platform to conditions and criteria imposed by the relevant regulators and would require regulatory approval prior to launch.  See, for example, the current CFTC review of the proposal by Eris Exchange, LLC to offer event contracts linked to sports on a CFTC-registered futures exchange, or the rejection by the CFTC in 2012 of a proposal by the North American Derivatives Exchange to list event contracts related to certain political events. The CFTC order continues its trend of bringing enforcement actions against participants in the crypto industry.  For instance, in September 2021 the CFTC filed charges against 14 cryptocurrency options exchanges, many of whom falsely claimed to be regulated by the CFTC, and settled charges with cryptocurrency exchange Kraken for allegedly offering margined retail commodity transactions in digital assets to U.S. customers who were not eligible contract participants. Per public statements, the CFTC apparently is also looking at more conventional DeFi swaps facilities, such as Uniswap and Sushiswap.  It may also be considering whether the very presence of an AMM within a DeFi protocol might be viewed as operating a swap execution facility (or an alternative trading system, if the digital assets in question are securities rather than commodities) and whether staking or lending of tokens in liquidity pools could be deemed entering into a regulated commodities option.  Furthermore, this raises questions regarding other prediction-based platforms and decentralized autonomous organizations (DAOs) attempting to prove the governance theory of futarchy (a theoretical form of government where decisions are made by prediction markets to determine which policies would have the most positive effect). The settlement may also give the CFTC an angle to bring enforcement actions against those participating in, rather than operating, certain DeFi swaps markets, due to their status as major swap participants.   On the other hand, the CFTC’s order goes into significant detail about how Polymarket was not decentralized, but rather internally decided on the outcome of any bet and resolved any dispute. Per the order, “Polymarket’s market resolution conditions are defined solely by Polymarket. Any dispute or ambiguity in the market resolution—i.e., the determination of which contracts are winners and which contracts are losers—is resolved solely by Polymarket’s ‘Markets Integrity Committee’, which is staffed solely of Polymarket personnel.” This focus on centralization raises the question whether the outcome might have been different for a fully decentralized platform. Going forward, other operators of blockchain-enabled prediction markets are likely to pay close attention to whether Polymarket is able to continue running a prediction market in the United States and if so, how it complies with the conditions of its settlement with the CFTC.