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.

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 most important development of the last two weeks is likely the release of a revised bipartisan digital asset market structure bill in Congress, which now gives real momentum to the possibility of comprehensive legislation. At the same time, the SEC is continuing to reposition its posture, pulling back from aggressive litigation, acknowledging areas outside its jurisdiction such as staking, and signaling a more measured approach as we await the first report from its new Crypto Task Force. Meanwhile, the courts continue to shape the legal boundaries of decentralized finance, as seen in the closely watched ruling overturning fraud charges in the Mango Markets case. These developments and a few other brief notes are discussed below. Bipartisan Market Structure (“CLARITY Act”) Bill Text Released: May 29, 2025 Background: After releasing draft language of an unnamed market structure bill a few weeks ago, a revised and now titled version, the CLARITY Act, dropped last week. Sponsored by House Financial Services Committee Chair French Hill, the bill has five Republican and three Democratic co-sponsors, all members of either the House Financial Services or House Agriculture Committees. It is expected to be fast-tracked for markup in the Financial Services Committee, as early as June 10th, so this could move quickly through committees. Broader House timing remains unclear, however, as Congressional attention is divided among numerous competing priorities beyond digital asset regulation. Analysis: The sponsors appear to have seriously considered industry feedback, and several technology-specific issues flagged in the prior version were meaningfully addressed. For example, many pointed to the definition of “Decentralized Finance Trading Protocol,” previously criticized as overly broad, has been revised and now more closely tracks the drafters’ likely intent. There was a hearing earlier this week in the House Financial Services Committee (which we will cover in the next Bi-Weekly update), which was designed to discuss digital asset regulation more broadly but focused heavily on this bill as well.  SEC Releases Guidance That Certain Proof of Stake Staking Activities Do Not Implicate Securities Laws: May 29, 2025 Background: The SEC Division of Corporate Finance put out a “Statement on Certain Protocol Staking Activities” clarifying its view that certain proof-of-stake blockchain protocol “staking” activities are not securities transactions within the scope of the federal securities laws. This follows related guidance on Proof-of-Work mining which was put out in March. “Accordingly, it is the Division’s view that participants in Protocol Staking Activities do not need to register with the Commission transactions under the Securities Act or fall within one of the Securities Act’s exemptions from registration in connection with these Protocol Staking Activities.” Analysis: This likely clears the way for staking in ETH ETFs or other ETFs linked to proof-of-stake blockchain assets, which may be approved in the near future (although there are still tax and other securities law issues that could make this complicated). It is unclear how this might affect the prior Kraken consent order, as many of the staking services offered by Kraken now appear to be “Ancillary Services” under this guidance. It is great to see all this guidance coming out, but until the guidance is formalized into rulemaking or until there is action from Congress in this area, then the industry is left with few, if any, assurances those viewpoints will continue under different leadership. SEC Moves to Dismiss Binance Case with Prejudice: May 29, 2025 Background: The SEC has asked the Court to dismiss the agency’s case against the various Binance entities and its founder, Changpeng Zhao (“CZ”), with prejudice, which would bring an end to the cases brought under the prior administration against the biggest U.S. digital asset exchanges, which we have been covering on the BiBlog. This follows previously dismissing cases against Coinbase and Kraken and closing investigations into OpenSea, Circle, and others shortly after the change in administration and resignation of prior SEC Chair Gary Gensler. Analysis: As we noted in our 2024 year-end digital asset rundown, the cases against various exchanges were bet-the-company litigation for all the exchanges sued. If it was ruled that sales on the platforms of exceedingly common tokens like SOL were securities transactions, that would have made it difficult for most individuals to transact in digital assets in the United States, particularly those lacking experience interacting with decentralized finance. With these lawsuits behind the exchanges, all eyes turn to formal guidance and rulemaking from the SEC/CFTC and whether there will be comprehensive digital asset legislation out of Congress, which is currently being considered by both chambers. Conviction Overturned in Mango Markets Exploit: May 23, 2025 Background: District Court Judge Arun Subramanian has overturned the fraud convictions against Mango Markets exploiter Avraham (“Avi”) Eisenberg, ruling that venue was improper since there was no evidence that the routing engine for Avi’s trades were in New York. The more interesting ruling, though, was finding there was insufficient evidence of falsity to support a wire-fraud charge (see ruling starting at pg. 26). The Court ruled that because the user terms and conditions didn’t make intent to repay a condition upon borrowing, and because Avi didn’t make any false representations about the value of his assets (he just exploited an oracle into making those false representations for him), the government could not support a fraud conviction, ruling “[o]n a platform with no rules, instructions, or prohibitions about borrowing, the government needed more to show that Eisenberg made an implicit misrepresentation by allowing the algorithm to measure the actual value of his collateral.” Analysis: This case raises broader questions about what level of human interaction is needed for “wire fraud,” where the alleged fraud is primarily being perpetrated against an algorithm and not a person. There remains the issue that Avi sued Numeris, Ltd. before the Mango Markets trading activities, claiming it was fraud for others to artificially increase the price of tokens to borrow against knowingly inflated values, similar to what Avi did in his exploit. It seems disingenuous to claim “code is law” for his actions while he previously asked the government to save his funds when a protocol that he was using had a similar exploit. Avi is still going to jail on other charges to which he pled guilty. It will be interesting to see how the case law regarding the extent “code-is-law” holds up in the use of permissionless protocols. Briefly Noted: 401K and Bitcoin Reserve Updates: The Department of Labor has retracted guidance discouraging retirement managers from considering cryptocurrency as an investment option in 401(k) plans. This came as Whitehouse Crypto Czar David Sacks was at a major Bitcoin conference in Vegas where he talked about how the announced Bitcoin strategic reserve is progressing. Reputational Risk Ban Passes House Committee: The House Financial Services Committee advanced on a 33-19 bipartisan vote a bill that would prohibit federal banking agencies from considering “reputational risk” when supervising, examining, or regulating depository institutions. SEC Crypto Task Force Updates: The SEC is set to release its first Crypto Task Force Report in the upcoming months; meanwhile Commissioner Peirce delivered a great speech about the importance of the SEC setting clear rules of the road for the space (including noting where the SEC doesn’t have jurisdiction). Emmer and Torres Reintroduce Right to Code Law: Tom Emmer (R-MN) and Ritchie Torres (D-NY) have reintroduced legislation that would protect the developers of non-custodial blockchain software developers and providers from being classified as money transmitters. This would be huge in convincing developers to stay in the United States when developing blockchain-enabled technologies. CFTC U.S. Persons Guidance: The CFTC put out some helpful guidance on what they consider to be U.S. persons subject to CFTC jurisdiction in an internet age. This guidance provides that where the company’s high-level officers primarily direct, control, and coordinate the company’s activities is most important for determining whether the company is considered a domestic entity for CFTC jurisdictional purposes. SafeMoon CEO Found Guilty of Fraud: Braden Karony, the former CEO of SafeMoon, was convicted on three counts of fraud after he was ruled to have diverted millions of tokens, which he said were “locked,” and sold those tokens for personal gain. Investment Company Act Status of ETFs Questioned: The SEC Division of Investment Management, in a letter to a crypto ETF operator, stated that, in light of recent developments, it is unsure that the ETFs are investment companies that can register under the Investment Company Act of 1940. Generally, a company wouldn’t be an investment company if, among other things, less than 40% of its assets constituted investment securities. Registration statements, application requirements, and ongoing reporting requirements are different for investment companies and other issuers, and certain crypto ETFs (including Bitcoin ETFs) already register as non-investment companies. This calls into question whether the SEC might be exploring rule changes more tailored towards this type of entity.    Conclusion: These developments mark a potential turning point in the digital asset regulatory landscape. With Congress moving forward on bipartisan legislation like the CLARITY Act and federal agencies such as the SEC and CFTC issuing meaningful (if still preliminary) guidance, the pieces of a more coherent framework are starting to take shape. However, the regulatory environment remains fragmented and uncertain, especially absent formal rulemaking or statutory clarity. As agencies shift direction and courts weigh in on key enforcement matters, market participants should remain vigilant, engage with regulators, and prepare for a fast-evolving legal landscape where the line between code and law continues to be tested. The Polsinelli Blockchain+ team will continue monitoring these rapid developments and provide updates as the situation unfolds. 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 Polsinelli Blockchain+ team attended Consensus last week in Toronto, where a key takeaway was the increasing engagement by major traditional financial players with the blockchain industry, both through integrating the technology into their products and services and through broader involvement with the ecosystem. Much of this activity seems tied to the growing perception that meaningful legislative and administrative progress is on the horizon, which would offer the regulatory clarity these institutions have been waiting for. Congress has been active over the past few weeks, with much of the focus on the Senate stablecoin bill, which recently cleared the cloture hurdle—a critical procedural step and arguably the closest Congress has come to enacting meaningful crypto legislation. The House also saw developments, including the release of a market structure proposal and the last-minute cancellation of a planned joint committee hearing due to concerns raised by some representatives about the President’s business ties to the digital asset space. In parallel, several administrative agencies issued updates on federally regulated banks’ permitted involvement in digital assets, and there were notable developments in ongoing litigation. These developments and a few other brief notes are discussed below. Senate “GENIUS” Stablecoin Bill Passes Cloture: May 19, 2025 Background: After weeks of political jockeying, the GENIUS Act received more than the 60 votes needed for cloture (with 16 Democrats voting in favor) and now proceeds to limited floor debate in the Senate. The Senate Banking Committee released a fact sheet outlining what the bill does and does not do with respect to stablecoin issuance and use in the United States. Senate Democrats also circulated their own summary highlighting what they saw as wins from negotiations between the bill’s committee passage and the recent vote. Analysis: Senator Warner (D-VA) issued a statement supporting the bill, saying: “Many senators, myself included, have very real concerns about the Trump family’s use of crypto technologies… But we cannot allow that corruption to blind us to the broader reality: blockchain technology is here to stay. If American lawmakers don’t shape it, others will – and not in ways that serve our interests or democratic values.” It is refreshing to see a senior member of Congress prioritize the importance of this technology and the need for the U.S. to take a leadership role, even while holding legitimate concerns about other aspects of the industry. As such, this bill marks a major milestone for digital asset regulation in America. Several amendments were added during the negotiation process. Notably, the bill prohibits stablecoin issuers from paying interest directly to holders, and from most public companies that are not otherwise in the banking business from issuing stablecoins without clearing certain additional requirements. Joint House Agriculture and Financial Services Committee Roundtable for Market Structure: May 6, 2025 Background: The day after the Market Structure 2.0 draft was released (discussed below), a joint House Agriculture and Financial Services Committee meeting was scheduled to occur. Witnesses included industry representatives and former CFTC Chair Rostin Behnam. However, the proceeding did not become an official “hearing” because unanimous consent was required, and Ranking Member Maxine Waters objected. Instead, it continued as a “roundtable” discussion with the witnesses who had traveled to D.C. to testify. Meanwhile, those opposing the hearing held their own separate “roundtable” down the hall, focused largely on concerns regarding President Trump’s family’s involvement in digital assets. Analysis: While it was disappointing that a full and balanced committee meeting did not take place, we can find some encouraging data in that members chose to walk out. One way to interpret the walkout is that opposition to crypto legislation is shifting from a partisan divide to a generational one. The average age of those who boycotted the hearing was 70.4, highlighting a potential age gap in attitudes toward the technology. Many of the opponents are at least framing their objections not as concerns about the technology itself, but as a way of expressing their discomfort with the President’s family’s involvement in space. It remains to be seen whether these concerns will stall broader legislation that would provide consumer protection regulation to the industry as a whole, including the President’s affiliated businesses, given that this same controversy already slowed, though did not appear to stop, the passage of the comparatively less controversial stablecoin bill discussed above. Market Structure 2.0 Initial Draft Released: May 5, 2025 Background: The currently unnamed bill that replaces FIT21 as the next attempt at comprehensive market structure regulation for digital assets was released last week. It largely follows the same format as FIT21 but includes important changes that are generally seen as improvements by the digital asset community. One major revision replaces the term “decentralized systems” with “mature blockchain systems,” shifting the threshold for when a blockchain is considered decentralized to whether it is—or could be—controlled by a single entity or affiliated group. Another key change creates a baseline that digital assets are commodities, but then reiterates that they are only commodities if they are not securities (which was already the case under current law). The draft also clarifies that digital assets themselves are not securities, but rather can be sold in securities transactions. Analysis: Gabe Shapiro, a thoughtful legal commentator and frequent critic of regulatory overreach in crypto, posted a detailed breakdown of the bill that is worth reviewing. Justin Slaughter, a former SEC and Hill staffer who often highlights the political dynamics behind crypto legislation, also shared a thread noting, among other things, that Japan passed a market structure bill before the FTX collapse—likely one reason why FTX Japan was among the few subsidiaries where customers didn’t lose funds. Given that the U.S. divides financial regulatory authority between the CFTC and SEC, it’s likely that any legislation will continue to reflect that split, which could lead to substantial compliance and legal costs for market participants, especially exchanges. Still, this draft appears well-intentioned and is a meaningful improvement over FIT21. Briefly Noted: DOJ Disclosure Issues in Samourai: According to recent filings in the criminal case against the Samourai Wallet privacy-preserving software creators, the DOJ failed to disclose evidence that  FinCEN representatives told DOJ staff that “under FinCEN’s guidance, the Samourai Wallet app would not qualify as a ‘Money Services Business’ requiring a FinCEN license.” Stocks On Chain: There were several updates related to on-chain stock trading. Commissioner Peirce gave a speech about allowing stocks to be issued, traded and settled on blockchains, and Compound founder’s project Superstate announced plans for bringing stocks on-chain and tradable in DeFi. Tuongvy Le and Austin Campbell released this awesome article (and Twitter threads giving summaries along with useful infographics) on how cryptographically secured addendum-only ledger technology can offer a fundamentally better way to own and trade stocks. Good timing with the SEC roundtable on this issue, the same week as well, with the new SEC Chair delivering opening remarks. SEC FAQ Guidance: The SEC released a set of frequently asked questions (“FAQs”) relating to the application of certain broker-dealer rules to crypto activities. While the SEC said these “simply reiterate what our rules already say or do not say,” many broker-dealers were waiting for this type of guidance to go through with various crypto brokering activities. SEC v. Ripple Deal Rejected: Judge Torres denied the parties’ joint request to rule in favor of a proposed settlement, which would finally end the SEC v. Ripple matter. It appears that the judge is just looking for the parties to do more of the required legwork to obtain the relief requested, but the ongoing delays are unlikely to please either side. Bill to Ban Federal Officials in Crypto: Various Democrats have proposed a bill that would ban the creation and promotion of cryptocurrencies by the President, Vice President, Congress, and Senate-confirmed Cabinet members.   Yuga Sells Punks IP: It appears like the Infinite Node Foundation (NODE) has acquired the CryptoPunks IP, which was purchased by Yuga Labs a few years ago from the creators, Matt Hall and John Watkinson (who are the highest selling living artists due to $3.07B in CryptoPunk sales volume). Handing off this historic intellectual property to a full-time, non-profit steward makes sense. CFTC Commissioner to Lead Blockchain Association: Commissioner Mersinger of the CFTC will be taking the role of Blockchain Association CEO after she steps down from her role at the CFTC at the end of this month. There were still three years left on her term, so her leaving to join one of the leading industry groups in the space is interesting timing, with market structure bills expected to get heavy congressional attention in the upcoming months. Office of Comptroller Update: OCC-regulated banks are now permitted to provide custody services for customers as well as other services, such as record keeping and buying/selling those assets at the direction of the customer. This is long overdue. Combined with promising statements for the Treasury Secretary,  we are starting to see a path for traditional financial institutions to interface with DeFi on behalf of clients. Quoted in GlobeSt.com “Blockchain in Real Estate Moves Beyond Hype, But True Transformation Remains Elusive”: BitBlog editor Stephen Rutenberg was recently quoted in GlobeSt.com on the evolving use of blockchain in real estate. The article explores how the technology is gradually addressing longstanding inefficiencies while raising deeper questions about automation, fairness, and legal design. Conclusion: The last two weeks have offered a compelling snapshot of how digital asset regulation is evolving from theoretical frameworks to real-world implementation, with significant activity across all three branches of government. From the Senate’s forward momentum on the GENIUS stablecoin bill, to the House’s increasingly detailed market structure proposals, to administrative updates from the SEC, DOJ, OCC, and others, the regulatory landscape is rapidly taking shape. Meanwhile, traditional financial institutions are moving beyond the exploratory phase and actively engaging with blockchain technologies, underscoring the urgency for regulatory clarity. While political entanglements, especially those involving high-profile figures, continue to create friction, the overall trend suggests a maturing ecosystem where bipartisan and intergenerational engagement will be essential. The coming months are likely to be pivotal, and the Polsinelli Blockchain+ team will continue to monitor and analyze developments to help clients navigate this dynamic legal and regulatory environment. 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.

As the Polsinelli Blockchain+ team gears up for Consensus 2025 next week in Toronto — where Stephen Rutenberg, Daniel McAvoy and Jonathan Schmalfeld will be attending — the regulatory momentum in Washington appears to be accelerating, particularly in Congress, where there is active movement on both stablecoin and market structure legislation. These developments, along with a Supreme Court petition that could have major implications for financial privacy, are among the key updates summarized below. Senate Moves Forward with “GENIUS” Stablecoin Bill: May 2, 2025 Background: A revised version of the Senate’s bipartisan stablecoin bill — the “GENIUS Act” — has been introduced, with a floor vote expected before the Memorial Day recess. Key changes include a prohibition on stablecoin issuers offering “a payment of yield or interest” on their issued payment stablecoins, along with enhanced illicit finance provisions. The bill also bars the sale of stablecoins in the U.S. by non-U.S. entities and allows for issuance under state regimes, provided the regime “meets or exceeds” federal standards, as determined by a three-member review panel consisting of the Treasury Secretary, Federal Reserve Chair and FDIC Chair. Changes aimed at addressing concerns about DeFi were also included, though they appeared only in an unpublished draft. Possibly in response to those revisions or other outstanding concerns, a group of nine Democrats — generally considered supportive of crypto — sent a letter indicating they could not support the bill in its current form. Analysis: The GENIUS Act represents the closest Congress has come to passing meaningful legislation on crypto in the U.S. However, challenges remain. One potential obstacle is the push by some lawmakers to link the stablecoin bill to broader market structure legislation, which is advancing in Congress but is not as far along. Industry advocates have pushed back on this proposed combination, warning that tying the two together could stall momentum — and, given the limited window for congressional action this session, could result in no bill being passed at all. Another hurdle is the apparent erosion of support among key Democrats. With 60 votes needed in the Senate to overcome procedural hurdles, bipartisan support is essential. A delay — or worse, the failure — of even this relatively “vanilla” legislation risks letting political dysfunction once again derail progress in the digital asset space. Coinbase Files Amicus to SCOTUS Over IRS John Doe Subpoenas: April 30, 2025 Background: Coinbase has filed an amicus brief in support of a petition challenging the IRS’s use of John Doe summonses — which compel platforms to disclose user data without individualized suspicion. The case was brought by a Coinbase customer over the IRS seeking to compel Coinbase to turn over a broad swath of “John Doe” customer information without any probable cause that any particular user broke the law. This follows a similar brief filed earlier by the DeFi Education Fund. If the Court agrees to hear the case, it could have broad implications for financial privacy — not just in digital assets — and may lead the Court to revisit the scope of the Third-Party Doctrine. Analysis: In the digital age, sharing financial or location data with a third party is often not voluntary, but required for basic participation in modern life. The Third-Party Doctrine, a legal rule that allows the government to access data you’ve shared with third parties without a warrant, was developed in an era before modern financial technology and many argue it no longer fits how people transact today. With a more privacy-sensitive court, this case presents a real opportunity to revisit the boundaries of government surveillance over financial data. Briefly Noted: Richard Heart SEC Matter Over: The SEC has announced it will not be amending its complaint against Hex founder, Richard Heart, after the case was previously dismissed on jurisdictional grounds. Regardless of views on project, there should be broad agreement that giving a podcast interview in the U.S. and using open-source code developed here are not sufficient grounds for asserting global regulatory jurisdiction. Federal Reserve Retracts Supervisory Guidance: The Federal Reserve Board has retracted guidance that required banks to obtain their approval before implementing any activity that involved crypto, including basic or low-risk use cases. If stablecoin legislation passes, banks are expected to become more active in digital asset custody, providing safer options for customers, which should be in everyone’s best interest. FTC Goes After “Crypto Trading” Venture: The FTC is going after a series of multi-level-marketing businesses that sold “crypto-trading” courses. Fraud of this type has always been more appropriate within the FTC’s domain, rather than what we’ve seen over the last few years with the SEC attempting to broaden its jurisdiction by classifying crypto assets as securities simply to bring them under the purview of the SEC’s anti-fraud powers. Stablecoin Updates: A number of relatively minor stablecoin-related developments surfaced last week in addition to the Senate updates discussed above, including SoFi exploring its own issuance, Tether posting $1 billion in Q1 profits (with a U.S. expansion in the works), an expected vote in the Senate on the GENIUS Act before Memorial Day, and Visa working with Bridge for a stablecoin-backed payment card. Although each of these updates may seem incremental on their own, collectively they underscore the central role stablecoins now play in the digital asset ecosystem and the growing attention they’re receiving from both industry and regulators. Treasury Presentation on Digital Money: Buried on page 98 of the Department of Treasury’s update to the Treasury Borrowing Advisory Committee was a surprisingly thoughtful primer on stablecoins and their potential impact on traditional banking. The timing is notable, as this update comes on the heels of Tornado Cash securing at least a partial victory with a federal court rejecting Treasury’s attempt to dismiss the Tornado Cash lawsuit on the grounds that the case was moot following revisions to the sanctions made after the lawsuit was filed. On this topic it’s worth listening to this Miachel Mosier chat about how Tornado wasn’t a complete victory. Solana Policy SEC Submission: One of the first big published projects from the Solana Policy Institute is its recent submission to the SEC, “Proposing the Open Platform for Equity Networks”  which is worth a read. Also recommended is this industry submission to the SEC regarding staking. SEC Chair’s First Public Remarks on Crypto: In his first public comments since taking over, Chair Atkins emphasized the need for “practical, durable” rules and a more constructive relationship with the digital asset industry. While delivered at a roundtable hosted by the SEC’s Crypto Task Force, the remarks mark a notable shift in tone from the agency’s prior enforcement-first approach. Galaxy Digital Moves for Public Listing: Galaxy Digital has confirmed plans to go public on Nasdaq, marking a major step for the firm, which originally filed an S-1 back in 2022. The move signals renewed confidence in both the regulatory environment for digital assets and broader public market conditions. Digital Chamber Initial SEC Submission in Response to Request for Information: As previously discussed, the SEC’s Crypto Task Force has requested industry feedback on a wide range of questions related to the regulation of digital assets. The Digital Chamber of Commerce is coordinating a major response effort in partnership with leading law firms to provide detailed answers to each question. Polsinelli Blockchain+ attorneys are involved in several of these responses. The first response, led by Sidley Austin, was published last week. Updated FIT21 Market Structure Bill Released: House Financial Services and Agriculture Committees have published an updated discussion draft of the crypto market structure bill, previously known as the Financial Innovation and Technology for the 21st Century Act (FIT21). We will have a larger update on the proposed legislation and a failed attempt at a joint hearing on digital assets in the House in our next Bi-Weekly update.   Law360 Publishes Polsinelli Guidance on Crypto Customer Risk: Jason Noto, a member of the Polsinelli Blockchain+ team, recently authored an article for Law360 titled “Risk Control Tips For Banks With Cryptocurrency Customers,” offering practical guidance for financial institutions navigating crypto-related compliance and risk management challenges. Conclusion: The last two weeks suggest that while momentum is building toward a more structured regulatory environment for digital assets, there’s still a real risk that this historic opportunity could be squandered. We’ll be watching closely as these developments unfold and continuing to engage where it matters. We look forward to seeing many of you at Consensus. 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.

With Bitcoin hitting record highs and breaking a barrier long seen as aspirational, and with a new administration making key appointments, the year is ending with much excitement and momentum for the digital assets industry. A surge in M&A activity among Web3 companies is setting the stage for 2024, as these companies seek to solidify their business strategies and position themselves for growth in 2025. However, not all year-end developments are positive. Litigation remains a significant challenge for the industry, with the SEC opposing Binance’s most recent dismissal efforts and Coinbase facing lawsuits over its delisting of competitive assets. As 2024 comes to a close with digital assets seemingly gaining traction in the U.S., the industry remains optimistic that 2025 could be the year crypto breaks into mainstream consumer applications and sees broader public adoption across various use cases. We’re also proud to share that the Blockchain+ practice at Polsinelli, which the BitBlog is a part of, has been recognized by Chambers and Partners as a leading firm in blockchain and cryptocurrency. These developments and a few other brief notes are discussed below. House Financial Services Committee Holds Hearing on FinTech: December 4, 2024 Background: The final meeting of this congress for the House Financial Services Committee was entitled Innovation Revolution: How Technology is Shaping the Future of Finance and was dedicated to discussing developments in financial technologies, including blockchain-enabled technologies. The Digital Chamber sent a letter ahead of the hearing to request certain digital asset-focused efforts be made a priority in the next Congress. There was also testimony from the CEO of the Stellar Foundation and the CEO/Co-Founder of Anchorage Digital. This was Chair McHenry’s last hearing as he is set to retire, so he asked it to be dedicated to an issue he is passionate about regarding improving the financial sector through technological innovation. Many in attendance on both sides of the aisle wore his trademark bowtie in recognition of his Congressional leadership over the years. Analysis: The hearing had a few interesting moments, like French Hill’s questioning of the digital asset representatives about how both had been debanked. Or Brad Sherman bringing out a poster board of President-elect Trump’s prior tweets disparaging crypto. The general theme from Republicans was building on Chair McHenry’s groundwork in trying to encourage American FinTech. The Democrats’ theme was bipartisan collaboration on things already in the works, like the stablecoin bill that passed Committee. Rep. Hill will be taking the gavel from current Chair Patrick McHenry when McHenry retires from public office in January. Rep. Hill was the head of the digital asset subcommittee, so he will be especially focused on that during his time leading the House Financial Services Committee. SEC Files Response in Opposition to Binance Motion to Dismiss: December 4, 2024 Background: The SEC has filed its memorandum in opposition to the latest attempts for early dismissal by the Binance entities in the case where the SEC accuses those entities of being unregistered securities brokers/dealers. As we previously covered, the Binance entities focused their dismissal efforts on the seemingly arbitrary nature of the SEC classifying ETH/BTC as commodities. Binance argued there was a lack of pooling of funds by the issuers of the tokens at issue, claiming the SEC’s allegations are an “investment of money and a common enterprise” instead of the required “investment of money in a common enterprise.” The SEC’s response argues the issuers of the tokens at issue “are targeting secondary market investors with widespread promotions touting purchases of the assets as investments in an enterprise whereby the issuers’ ongoing efforts to increase demand for the assets may lead to an increase in their value.” Analysis: The outstanding question remains: what facts apply to the tokens at issue in this case that don’t also apply to Ether, making Ether a commodity but the tokens at issue securities? The SEC also claims, “Secondary market sales, by definition, mean an investor does not put funds ‘in the hands of the issuer’” (pg. 15), which seemingly ignores that the vast majority of investment contract law is regarding the sale of goods bundled with some sort of service agreement, which could be sold in a secondary market transaction and would still result in the issuer (who also provides the services) getting money. Of the exchange cases, this judge seems to be the one most willing to push back on the SEC’s positions at the motion to dismiss stage, so we will wait to see how this pans out. New Proposed SEC Chair Announced: December 4, 2024 Background: President-elect Trump has officially announced he plans to nominate Paul Atkins for SEC Chair to replace current Chair Gary Gensler. Atkins is a former SEC Commissioner, advisor to the Digital Chamber, and the co-chair of the Digital Chamber’s Token Alliance. He also was on a podcast entitled “Keep Your Government Hands Off My Crypto,” if that gives any sense of how he personally feels digital asset regulation should be handled. He also has firm roots in TradFi, having served as the chair of a stock exchange and founding the compliance firm Patomak Global Partners, which primarily caters to financial services companies. Analysis: It is impossible to overstate what a change this is expected to be at the SEC. Already, there is an expectation that the Ethereum ETF products will be permitted to participate in staking and share those staking rewards with holders, along with a host of other changes to existing policies. While it is fair to be cautiously optimistic, after the industry was burned by Chair Gensler despite his experience as a professor at MIT teaching a course on digital assets, it appears that there will be a workable path to clear compliance with U.S. law for digital asset participants in the near future. The official mission statement of the SEC is to (1) protect investors; (2) maintain fair, orderly, and efficient markets; and (3) facilitate capital formation. Atkins’ history is firmly grounded in all three and will hopefully provide more balance to an agency that has prioritized perceived investor protection over the other two. Coinbase Sued Over Wrapped Bitcoin Delisting: December 13, 2024 Background: Coinbase has been sued over its decision to delist wrapped Bitcoin (“wBTC”) while at the same time releasing Coinbase’s own competitive wrapped Bitcoin product (“cbBTC”). For those unfamiliar, Bitcoin can be “wrapped” by exchanging one Bitcoin on the Bitcoin network for a token on a different network, which can serve as a proxy for the deposited Bitcoin and be exchanged at any time for that same Bitcoin back. This allows users to use their digital asset on different networks. The providers of the wrapped proxy token charge fees on the exchanges, and in return for those fees, promise to keep the Bitcoin exchanged for the wrapped version of that Bitcoin safe. The lawsuit accuses Coinbase of violating various antitrust laws by delisting a competitor product over feigned security concerns. Analysis: This is certainly an interesting case that will be worth following. The Complaint itself is worth reading, if nothing more than for the paragraphs mocking memecoins, including paragraph 67, which reads: “[t]he webpage for Dogwifhat announces proudly that the cryptocurrency is ‘LITERALLY JUST A DOG WIF A HAT,’ with a parody of promotional language crossed out in red. A scrolling ticker across the top of the website repeatedly informs purchases that ‘I mean bro, it’s literally a dog wif a hat.’ The dog does, indeed, have a hat—and Coinbase chose to list this coin six days before delisting wBTC.” While there are certainly different risks (and possibly regulatory treatment) involved with a wrapped token, which requires trusting the custody of the underlying asset, versus a memecoin, the lawsuit does seem to raise issues worth considering on the centralization of on and off ramps to digital assets. Briefly Noted: Polsinelli Blockchain Team Ranked by Chambers and Associates: Chambers and Partners, a leading legal industry ranking organization, has recognized Polsinelli in its recently released Chambers FinTech Guide 2025, with Polsinelli earning a ranking in the FinTech Legal: Blockchain and Cryptocurrencies category. It is an honor to have our commitment to navigating the unique financial technology landscape and the complex field of Web3 recognized. Avalanches Raises with $250 Million Private Token Sale: Avalanche has sold $250 million of locked tokens. Avalanche has gained attention as one of the front runners to be the primary layer-1 blockchain in Web3 gaming. Japanese Crypto Exchange Goes Public: Japanese crypto exchange Coincheck went public on the Nasdaq through a $1.3 billion SPAC merger. This is the first shoe to drop, as more crypto companies will be looking to go public after the turnover at the SEC, reportedly including stablecoin giant Circle and others. Corporate Transparency Act on Pause: While not directly crypto related, the injunction issued against enforcement of the Corporate Transparency Act is certainly important for crypto companies, especially those who do not have the identifying information for their participants that could be deemed control persons under the Act. We’ll need to wait to see if this is a temporary respite or if something more permanent is on the horizon. Heavily Redacted FDIC “Pause Letters” Revealed: The court overseeing the Coinbase FOIA action against the FDIC has released the heavily redacted responsive letters. There was also a subsequent order regarding these heavy redactions, ordering the FDIC “cannot simply blanket redact everything that is not an article or preposition.” Compound Plaintiffs Seek Service Via Community Proposal: The Plaintiffs in the Compound class action are seeking to serve the DAO via proposal on the DAO’s governance page, which anybody with the necessary tokens can make. We have seen service via NFT, but this is a new one. Conclusion: Looking ahead, as the dust settles around these regulatory disputes, market shifts, and industry realignments, the broader Web3 ecosystem is gearing up for its next phase. With Congress poised to reassess policy priorities, a new SEC Chair in the wings, and industry participants seeking more transparent pathways to compliance, the stage is set for meaningful progress. If 2025 indeed proves to be the year digital assets permeate everyday consumer applications, it will have been forged in the crucible of a rapidly evolving legal, financial, and technological environment. The emerging patterns of thoughtful engagement with lawmakers, refining of product offerings, and increased public awareness—fueled by both controversy and innovation—suggest the next chapter may well see crypto moving from the fringes toward more mainstream acceptance and utility. 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.

After a relatively quiet October for Web3 legal developments, November has kicked off with significant activity, primarily centered around ongoing lawsuits and regulatory enforcement actions. In addition to these legal developments, the recent election results indicate a shift in the U.S. administration, with incoming leadership signaling a strong focus on crypto and digital assets. Coupled with a new Congress that appears to be more pro-crypto than its predecessor, we can expect rapid developments in Web3 law through the end of 2024 and into 2025. That said, the new administration may also pose unintended challenges for the industry. Increased focus on national security concerns could lead to restrictions on certain projects or activities in the U.S., along with potential disruptions in trade and strained alliances, all of which will require careful navigation. The potential implications of this shift are significant. While many uncertainties remain, there are growing reasons for both optimism and caution. This could be a once-in-a-lifetime opportunity to shape legal frameworks and protections for digital assets. From updates to the IRS tax code to potential changes in securities laws, the regulatory landscape could evolve to better reflect the reality of digital assets. As we move forward, it’s essential for legal professionals and industry experts to remain informed and engaged. By advocating for thoughtful regulation, the U.S. can maintain its leadership in fostering a safe, secure, and innovative environment for digital assets. These developments and a few other brief notes are discussed below. SEC Seeks to Dismiss Declaratory Judgment Action by NFT Creators: October 28, 2024 Background: The SEC has filed a Motion to Dismiss in a declaratory judgment action brought by various NFT creators seeking clarity that the digital artworks they sold were not unregistered securities transactions under federal securities laws. The SEC’s motion, made under Fed. R. Civ. P. 12(b)(1), argues that the agency is protected by sovereign immunity from having its enforcement discretion challenged and that the claims are not ripe because the SEC has not yet brought charges against the particular plaintiffs who are bringing the action against the SEC. Analysis: As stated by one Plaintiff: “Respectfully, I’m asking the SEC to explain why I can’t do exactly what Stoner Cats did,” referring to the action by the agency against the creators of the online comic series Stoner Cats, which was fined $1 million by the SEC and ordered to destroy all remaining digital art in the creator’s possession. It seems like the agency has been backed in the corner, on one hand stating that the action is not ripe, while at the same time arguing that the rules for digital assets based on 1940’s “investment contract” case law are clear despite multiple courts disagreeing with the agency on that point. Amicus Support Action for Token Airdrop Clarity: October 28, 2024 Background: Coinbase, a16z/Paradigm, and Coin Center have filed amicus briefs in support of an action brought by a Texas apparel company seeking a declaratory judgment that its potential token airdrop to merchandise purchasers does not violate federal securities laws. The SEC had previously moved to dismiss on procedural grounds stating that the SEC is immune from being required to answer the action and that the action’s claims under the Administrative Procedure Act are not ripe. Analysis: The a16z/Paradigm brief says it well at pg. 16, stating, “Given the similarity between the allegations against [Justin Sun] and other companies and the facts presented by Beba, it is unsurprising that the SEC has offered no explanation why the threat of enforcement is not credible.” In reality, it seems that the main thing that has prevented the SEC from bringing lawsuits against virtually all digital asset participants to date is seemingly a lack of resources. The amicus all strike a similar tone—after years of attempting to get guidance from the SEC and Congress on how to operate legally compliant digital asset companies, the only recourse left is either the courts or abandoning the U.S. entirely. Oral Arguments on SEC v. Heart Motion to Dismiss Occur: October 31, 2024 Background: On Halloween, there were oral arguments heard in the SEC v. Heart case on the Defendants’ Motion to Dismiss. The SEC has alleged that Hex founder Richard Heart and three unincorporated entities that he allegedly controls conducted unregistered offerings of crypto assets that allegedly raised more than $1 billion from investors. The dismissal arguments mostly centered around the extra-territorial approach the SEC has applied to the case, but also included discussions of the allegations of fraud and the propriety (or lack thereof) of naming software as named entities in a lawsuit. Analysis: The Blockchain+ team has been following this case, and we were quoted in a Bloomberg law article about it earlier this spring, so it feels appropriate to continue to follow as the case raises important issues applicable for many companies seeking to avoid U.S. jurisdictional laws regarding digital assets. It appears that the SEC has abandoned the argument that it can name software as a defendant in a lawsuit. It also appears the SEC may be claiming that the actions that allegedly give rise to jurisdictional claims (fall of 2022) occurred after the alleged securities offering occurred (spring of 2022). It remains unclear if or how one can retroactively make an offering a “U.S. offering” based on actions that occurred after the alleged sales. Blockchain Gaming Developer Receives SEC Wells Notice: November 1, 2024 Background: Blockchain-based gaming infrastructure developer Immutable Pty Ltd. has reportedly received a Wells notice from the SEC informing the company of anticipated agency action related to certain sales of IMX tokens in 2021. According to the SEC Enforcement Manual, a Wells notice is generally only issued after SEC staff have completed their investigation but before making a formal recommendation to the Commission. Here, Immutable claims the Wells notice was issued mere hours after first being contacted by the SEC informing the company of the investigation. Analysis: The IMX token is listed on Binance, Kraken, and Coinbase, so it is surprising the SEC is targeting Immutable instead of the plethora of token issuers of the tokens named in the SEC’s lawsuits against those exchanges. It is possible the SEC is seeking to have active litigation against a wide range of actors (such as the recent market maker targeted actions) from exchanges to issuers to developers—so this is the “gaming” developer the agency has its eyes set on. FOIA Requests Reveal Banks Blocked from Accepting Digital Asset Customers: November 2, 2024 Background: Coinbase has revealed that it has unearthed at least 20 documents from its successful FOIA requests to the FDIC where the agency tells banks to “pause” or “refrain from providing” or “not proceed” with offering crypto-banking services. This is an ongoing request, and Coinbase recently served additional requests on the FDIC so more documents can be expected. The Coinbase head of legal stated: “We’ll keep pushing to get clarity from our regulators through FOIA requests and any other means necessary.” Analysis: The “shadow cap” of not allowing banks to have more than a certain percent of their customer deposits be from digital asset companies is something that was suspected to be a part of Chokepoint 2.0 and which a Silvergate executive Declaration seemed to support. It will be interesting if further documents are made public or if anything will come of these efforts, as it is expected the incoming administration will replace current banking regulatory heads with individuals who are more open to digital asset companies obtaining traditional U.S. banking services. Binance Entities Move to Dismiss SEC’s Amended Complaint: November 4, 2024 Background: Back in September, the SEC filed an Amended Complaint against Binance, and the redline revealed the primary changes were adding facts to try to avoid there being a ruling as a matter of law on certain third party token sales (also, an added footnote about how the SEC didn’t mean “crypto asset security” when the SEC said, “crypto asset security.”). Binance U.S. has now moved to dismiss the over 800-paragraph Amended Complaint. Binance’s foreign entity also moved to dismiss, available here. Binance U.S.’s main argument is that the SEC cannot articulate any distinguishing factors as to why the tokens the agency named were sold in securities transactions, while Ether and Bitcoin were not, stating “the legal requirements of Howey do not shift based on the SEC’s enforcement whims.” Binance U.S. is also focusing on the lack of pooling and classifying the SEC’s allegations as an “investment of money and a common enterprise” instead of the required “investment of money in a common enterprise.” Analysis: The Motion to Dismiss filed by Binance U.S. included 19 exhibits, which is unusual, as such motions typically cannot rely on external evidence or facts. However, the SEC’s heightened fact pleading also means the agency incorporated documents by reference into the Amended Complaint, which the Court can consider in reaching its determination. Binance U.S.’s exhibits primarily point to listing pages for Bitcoin and Ether, stating if those listing pages do not convert BTC/ETH into securities, then listing pages from other assets with identical information cannot support security law violation allegations. Binance U.S. also (probably smartly) stayed away from the “investment contracts require contracts” arguments, which it previously lost on, instead leaning into the lack of pooling in a common enterprise. Briefly Noted: Regulation by Enforcement Tracker Launched: The Blockchain Association has launched a great website showing data behind the SEC’s “regulation by enforcement” approach against America’s leading crypto companies. This and the awesome effort spearheaded by Polygon Labs to start preparing a list of real world positive use cases are great resources. SEC Commissioner Rebukes Approach to Crypto (Again): Commissioner Peirce recently gave a speech titled Hobs and Hobbes: Wharton FinTech Lecture where she reiterated her negative view on how the SEC has approached digital asset regulation. “Rather than working with crypto market intermediaries and token issuers to facilitate registration, we have brought enforcement actions for failure to do the impossible: register with a Commission that has failed willfully to articulate a viable path to registration.” SEC Moves to Dismiss Some Kraken Defenses: The SEC has moved for judgment on the pleadings on Kraken’s Major Question, Lack of Fair Notice, and Due Process affirmative defenses, claiming these were decided on Motion to Dismiss as being inapplicable. The Court is unlikely to dismiss any of these affirmative defenses, which would cut off discovery into these issues by Kraken and be an appealable issue the Court has no reason to create, but it is something worth monitoring. Fairshake PAC Performance: According to Stand with Crypto, a bipartisan group of 257 candidates rated “pro crypto” won their House elections along with 16 in the Senate (as opposed to “anti-crypto” rated candidates, which only won 115 and 12 seats in the House and Senate, respectively). The biggest wins were Yadira Caraveo (D-CO), Sarah McBride (D-DE), and Bernie Moreno (R-OH) winning over their anti-crypto opponents in part on the backs of crypto-PAC spending in their favor. Also Richie Torres (D-NY), who was expected to win but has been a staunch advocate for sensible digital asset laws and will continue to be a force in the House. Combined with some massive wins in the primaries, the industry’s lobbying efforts are something that politicians will certainly factor into ongoing policy decisions. FTX Sues Various Platform Users: FTX filed ~25 lawsuits recently seeking to claw back funds from various individuals that received funds from FTX, including Anthony Scaramucci, the alleged Compound governance attacker, Deltec Bank, Binance founder CZ, and others. That said, this is seemingly an aggressive approach to clawbacks and such, which may or may not have merit, so whether these lawsuits go anyway is yet to be seen. Hong Kong Moving Forward in Crypto: The Hong Kong Stock Exchange is introducing bitcoin and ether index prices in November and looking into tax issues and trading platform licensing. Conclusion: November marks an inflection point in the ongoing regulatory and legal battles shaping the future of digital assets in the U.S. and beyond. With a pro-crypto Congress set to take office, pressure is mounting on regulatory bodies to provide clearer guidelines, yet agencies like the SEC remain steadfast in their enforcement-first approach. As illustrated by Binance's legal defenses and the increasing amicus support from industry advocates, the crypto sector is actively pushing back on the lack of clear regulatory frameworks, fighting for operational clarity and fair treatment under the law. At the same time, global developments, like Hong Kong's proactive stance, highlight the competitive pressures facing U.S. regulators and lawmakers. The combination of ongoing legal battles, shifting political priorities, and the potential for new policies presents both opportunities and challenges for the industry. The only thing certain is that we are in for an interesting ride. 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’s fitting that our second October Web3 legal update arrives on Halloween, as many in the industry might find the current legal landscape for digital asset products and services quite spooky. While the past few weeks have seen relatively few major legal developments, there have been significant updates in ongoing litigation and intense maneuvering for the upcoming administration, regardless of who it may be. As we approach the election, this will be our last update before we hopefully know who the next president will be—an outcome that could have substantial implications for the regulatory direction of the Web3 sector as we move through 2024 and beyond. These developments and a few other brief notes are discussed below. Coinbase Looking for Summary Judgment in Freedom of Information (“FOIA”) Action: October 15, 2024 Background: Coinbase has asked for permission to file for partial summary judgment in its pending FOIA action against the SEC. Coinbase initially sought certain documents regarding the SEC’s investigation into the conversion of the Ethereum network from proof-of-work to proof-of-stake, which the SEC refused to produce under a claim of investigatory privilege. Now that the SEC has announced it has closed that investigation, Coinbase is claiming that privilege no longer exists and is asking the Court to force the SEC to produce such documents. Analysis: These FOIA requests occurred long before the SEC brought charges against the largest digital asset exchange in the U.S., but the two actions are certainly intertwined at this point. Coinbase partially won its fight to compel some discovery documents from the SEC in the ongoing direct litigation between Coinbase and the SEC, while these ongoing proxy fights also continue. In addition to requests for documents from the SEC, Coinbase is also pursuing FOIA requests against the Federal Deposit Insurance Corporation and others. While using the FOIA as a tool in litigation against a government entity is not common, if Coinbase is successful here, it may become a trend for addressing regulators perceived as not playing fair or being transparent. Financial Industry Regulatory Authority (“FINRA”) Publishes Metaverse Update: October 24, 2024 Background: FINRA, the self-regulatory organization that regulates broker-dealers, among other things, released a publication on The Metaverse and the Implications for the Securities Industry. In FINRA’s press release about the publication, it stated in part: “Staff from FINRA’s Office of Financial Innovation (OFI), which is part of the Office of Regulatory, Economics and Market Analysis (REMA), launched a research initiative focusing on the opportunities and risks that the metaverse may present for the industry. This initiative led to the publication of this report. As part of our research, OFI staff engaged with more than two dozen stakeholders, including securities firms and other financial institutions, hardware and software providers, academics, industry observers, and government entities.” Analysis: The publication is mostly a recitation of what is otherwise known: regulations that apply in the real world also apply in the “metaverse,” which FINRA defines as “the next evolution of today’s internet.” While there are heavy warnings about the risks of firms trying to function in this new iteration of the internet, the Report also states how much opportunity there is, stating it is “expected, by some, to contribute over $3 trillion to global Gross Domestic Product (GDP) by 2031.” Of particular note is the attention given to the use of gaming assets along with the discussion of data visualization, digital twins, and virtual trading applications in the financial sector. Crypto Council Asks Supreme Court to Consider Issue of Internet Infrastructure Based Jurisdiction: October 25, 2024 Background: The Crypto Council for Innovation has filed an amicus brief asking the United States Supreme Court to determine if the location of third-party hosting servers can be considered as a valid factor in determining if certain transactions fall under U.S. securities laws. Full brief here. This support of Binance’s request to appeal to the Supreme Court comes in response to the Binance v. Anderson case, where the Second Circuit ruled that the extraterritoriality doctrine established in Morrison v. National Australia Bank—which held that U.S. securities laws do not apply to transactions occurring outside the United States—was inapplicable when the entity being sued uses servers in the United States to process certain challenged transactions. Analysis: The Web3 space has been subject to some expansive interpretations by the SEC regarding jurisdiction and venue, such as in the claims against Richard Heart, where the agency argued that his use of Uniswap code—developed in New York—created a forum hook in the E.D.N.Y.) or claiming jurisdiction over Justin Sun and the Tron Network because Justin Sun often travels in the United States. Given the growing prevalence of cross-border transactions and the complexities of modern internet networks, it would not be entirely surprising if the Court accepted this case or one like it for appeal. Additionally, allowing jurisdiction merely because hosting servers (or nodes) are located in the U.S. could create a dangerous precedent not only for Web3 but for users of the internet in general. Briefly Noted: Venture Firm Release Annual State of Crypto Report: a16z has released its annual State of Crypto Report, and among its most interesting findings are the data points showing the use of crypto is at an all-time high based on monthly active wallets, with its key uses being in stablecoins and DeFi. SEC and Ripple Plan to Appeal: The SEC filed its required form in the Ripple litigation appeal (potentially 1 day late), stating they will be appealing the ruling regarding sales on secondary marketplaces and in-kind payments not being “sales” but is not appealing the underlying ruling that the XRP token itself is merely a line of computer code and not a security. Ripple will likewise be appealing certain rulings regarding “essential ingredients” of a securities transaction and issues surrounding fair notice. CFTC Briefs Appeal of Election Prediction Markets Case: The CFTC has filed its opening brief in the Kalshi federal election prediction markets case. While this case is important for crypto as many prediction markets are offshore and use stablecoins for payments, it is also equally important as one of the first cases post-Loper Bright regarding agency authority to reach the appellate level. SEC Announces Examination Priorities for 2025: The SEC’s Division of Examinations released its 2025 examination priorities. The only change of note for crypto was, in two instances, shortening “crypto asset securities” to just “crypto assets.” Conclusion: While the last few weeks of October have been relatively quiet for new legal developments in the Web3 space, it is clear that the groundwork is being laid for significant future shifts. Coinbase’s push for transparency through its FOIA action against the SEC and the ongoing jurisdictional challenges highlighted by the Crypto Council’s appeal to the Supreme Court underscore the evolving legal landscape. Meanwhile, FINRA’s focus on the metaverse, coupled with ongoing high-profile litigation like the SEC and Ripple appeals, demonstrates the ongoing tug-of-war between innovation and regulation. As we move into 2025, the priorities and decisions from key regulatory entities, influenced by the upcoming election and the new administration, will shape the direction of the Web3 industry, potentially altering the balance between risk, opportunity, and compliance in this rapidly changing digital frontier. 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 last two weeks have seen a flurry of Congressional hearings addressing key digital asset issues, alongside several noteworthy consent judgments against industry participants from the SEC. These fast-paced developments are expected to continue through the end of September, when both the CFTC and SEC conclude their fiscal years, as they strive to optimize their results for 2024. While there almost certainly won’t be crypto legislation passed this year, Congress looks to set the stage for potential digital asset legislation in the upcoming lame duck session after the November elections and beyond. These developments and a few other brief notes are discussed below. Congress Holds Hearing on Decentralized Finance (“DeFi”): September 10, 2024 Background: The House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing entitled Decoding DeFi: Breaking Down the Future of Decentralized Finance. It featured testimony from Rebecca Rettig (Chief Legal and Policy Officer at Polygon Labs), Peter Van Valkenburgh (Coin Center’s Director of Research), and others. The Committee Memorandum is available here. The Digital Chamber provided a nice summary of the hearing, available here. Analysis: The fact that DeFi has even reached the level of importance to warrant a Congressional hearing is a big step for this burgeoning subset of the digital asset industry. This does not mean that the hearing was totally supportive of DeFi, with Representative Sherman and others using the hearing as a platform to make unsubstantiated claims that DeFi’s primary use is for tax evasion. These assertions were effectively countered by Van Valkenburgh stating that “Tax evasion is a crime. It should be aggressively policed…I do not, however, think that tax evasion and its existence warrant a 100% surveilled and controlled financial system.” The fact that subsets of digital assets remain a partisan issue is somewhat disheartening, but not entirely unexpected. eToro Settles with SEC and Delists Virtually All Crypto Assets: September 12, 2024 Background: Trading platform eToro USA LLC has agreed to pay $1.5 million to settle charges that it operated an unregistered broker and unregistered clearing agency in connection with its trading platform that facilitated buying and selling certain crypto assets as “securities.” While the platform will continue to permit trading of BTC, ETH, and BCH (Bitcoin Cash), all other digital assets such as LTC (Litecoin), DOGE, and others will be removed. The Order curiously mandates that eToro immediately stop selling those assets while simultaneously requiring the company to sell those assets or otherwise refund customers within 180 days. Analysis: It is unclear why BCH will be permitted to continue being traded on the platform despite not being meaningfully different from Litecoin. Could it have something to do with BCH having “Bitcoin” in its name? The requirements of the settlement do not appear to give eToro a feasible path forward to operate its U.S. business. This is disappointing considering that prior to the settlement, eToro seemingly tried to follow SEC guidance in that it de-listed assets that the SEC named in other lawsuits as securities, obtained a BitLicense and other state regulatory licenses, and otherwise acted cautiously in an attempt to remain in compliance. It looks like the only way for eToro to comply with the forced sell aspect of Order will be to sell overseas (likely at deep discounts), which will then be passed on to customers. As mentioned above, we expect more of these settlements/actions to flow in leading up to SEC’s September 30 fiscal year end.  Flyfish Club Settles with SEC over NFT Restaurant Membership Sales: September 16, 2024 Background: The SEC issued an Order against Flyfish Club, the creators of restaurant club passes in the form of NFTs. Flyfish Club NFTs represented membership in the private dining club, for which holders of the NFT could digitally verify such membership and make reservations at the restaurant, but the Staff took the position that the NFTs were marketed as securities because they could be resold for a profit. As usual, Commissioners Peirce and Uyeda dissented. As a part of the agreement, Flyfish Club agreed to destroy any NFTs in the company’s possession that it hasn’t sold, not take royalties on any ongoing secondary sales, and pay a $750,000 fine, among other things. This order was issued only a few days before the opening of the restaurant and did not prevent its opening or help the token holders obtain their membership benefits. Analysis: The fact pattern in FlyClub closely resembles that of Silver Hills Country Club v. Sobieski, a California state court case from 1960. That court found that the country club memberships at issue were being sold as securities and did so through the creation of the “risk capital” test. That test almost exclusively looks at whether a seller is seeking risk capital to develop a business venture. The fact that the memberships were transferable led that court to determine that they represented “risk capital.” In the FlyClub order, while the SEC tries to connect the violations to the Howey test, this could be seen as a move towards the SEC adopting the risk capital test. It’s important to note that the risk capital test has never been recognized by any federal court in the United States. It is also interesting that the SEC has now entered two settlements with two consumptive NFTs and did not require the project to cease and desist, nor did it require a repurchase offer. This contrasts with most SEC settlements with and lawsuits against issuers of utility tokens, in which the SEC demanded that the project shut down. At least the people who want to eat can be fed. House Financial Services Committee Holds Hearing on SEC Approach to Digital Assets: September 18, 2024 Background: Following up on the DeFi hearing the week before, the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing entitled Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets. It featured testimony from Dan Gallagher (former SEC Commissioner), Michael Liftik (former Deputy Chief of Staff to SEC Chair White), and others. The Committee Memorandum started with the following Introduction: “The Securities and Exchange Commission (SEC) has long struggled with the application of the United States’ securities laws to the digital asset ecosystem. Under Chair Gensler, the SEC has prioritized and pursued an enforcement and regulatory agenda to the detriment of the digital asset ecosystem.” Analysis: The battle lines of crypto supporters (led by Ritchie Torres (D-NY) and French Hill (R-AR)) vs. detractors (led by Stephen Lynch (D-MA) and Brad Sherman (D-CA)) stayed consistent in this hearing. The detractors echoed SEC Chair Gensler’s position that 1940's-era court cases on securities laws are fit for purpose in regulating the digital asset industry. On the other side, industry participants and Congressional supporters argued that updated rules would ultimately better protect consumers while keeping innovation in America. Even Maxine Waters (D-CA) responded, “That’s odd,” when learning established FinTech Robinhood attempted to follow SEC registration procedures but was denied registration without further explanation. SEC Charges DeFi Platform with Securities Law Violations: September 18, 2024 Background: The SEC has charged the creators of the Rari DeFi platform with acting as unregistered brokers. MATIC, LINK, FTM, UST, and RGT were listed as “crypto assets offered and sold as securities” in the Complaint. The Complaint and Order are vague as to whether the Agency is alleging that only the Rari-operated liquidity pools (which the Rari team would algorithmically rebalance) are what caused the violations, or if any pool (including user-created pools that Rari had no contact with other than providing a front end to access those pools) were also violations of securities laws. Analysis: Rari was literally created by high schoolers. So it shouldn’t be shocking that it suffered a protocol hack and lost $80 million. This also very likely led to upset individuals reporting them to the SEC, which started the investigation leading to these charges. The hack exposed that the protocol was DeFi in name only, as it exhibited significant centralized control beyond just the interface. DAO votes were either ignored or delayed, along with other questionable practices. Interestingly, unlike nearly all previous settlements, this one went to great lengths to avoid labeling the tokens as “digital asset securities.” This is significant, as the SEC has consistently struggled to win this argument in courts across the country. That said, this isn’t great precedent, particularly with the looming Uniswap Wells notice still outstanding. Briefly Noted: Members of Congress Ask for SEC Stance on Airdrops: Representatives Emmer and McHenry have sent a letter to SEC Chair Gensler regarding the agency’s official stance on airdropped tokens. The letter stated, “The ethos of crypto and blockchain technology is premised on decentralization. The SEC’s regulatory approach seems to make the goal of decentralization impossible to obtain. Details Emerge Regarding Collapse of Silvergate Bank: The recently filed Declaration of the then Chief Administrative Officer of Silvergate Bank (Elaine Hetric) reveals that the bank was solvent at the time of its closure, and it was only closed due to actions from financial regulators (the Federal Reserve, FDIC, and OCC), which hampered its ability to be an ongoing business. This raises troubling questions about due process and other related issues. Details Emerge Regarding Former President Trump’s Proposed DeFi Platform: It appears the proposed DeFi platform backed by former President Trump will include a Reg D/S token sale with locked tokens and no venture or presale allotment. The platform appears to primarily just be providing an attractive interface on top of existing technology with an intention to provide easy access to DeFi. The platform may find it challenging to comply with the transfer restrictions imposed under the securities law exemptions from registration that they are relying on. NFT Bill Gets Attention in House: In light of the Flyfish settlement, the Digital Chamber-backed NFT bill becomes even more critical. The bill seeks to provide clarity that digital versions of real-world assets that are not typically deemed securities do not become securities merely through tokenization. SEC Files Proposed Amended Complaint in Binance: The SEC v. Binance Amended Complaint dropped, and looking at the redline, it appears that the SEC is prepared to go forward with claims against many tokens despite early statements that its proposed amended compliant would alleviate the Court’s need to reach a determination on those issues. Also of note, the SEC complaint included a footnote about how the SEC didn’t mean that a crypto asset is necessarily a security when they previously used the phrase “crypto asset security.” Kraken Files Answer in SEC Lawsuit: The Kraken Answer in SEC v. Kraken also dropped, in which Kraken denies everything, like most answers do. The affirmative defenses are worth a close reading, especially the free speech affirmative defense claiming that the SEC is retaliating against Kraken for being critical of the SEC in certain Congressional testimony. Conclusion: As the flurry of regulatory and legislative activity surrounding digital assets continues, the upcoming weeks could be critical in shaping the future of the industry. The Congressional hearings and SEC actions discussed here illustrate the growing importance of decentralized finance, the increasing scrutiny on platforms dealing with digital assets, and the persistent friction between regulators and industry participants. With the CFTC and SEC looking to finalize their fiscal year and Congress preparing for potential action in the lame duck session, the digital asset space is poised for further developments. As always, the industry remains in a state of flux, with major legal, regulatory, and technological shifts on the horizon. 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.

As the end of summer approaches, litigation in the digital asset industry has remained hot. In the SEC’s cases against various exchanges, ongoing discovery fights are starting to play out in court filings, and one can expect these fights to remain contentious throughout the various lawsuits. Meanwhile, the case against Ripple Labs has finally reached its conclusion (for now), and California has taken the step of being the first state to begin moving car titles to the blockchain. These developments and a few other brief notes are discussed below. Coinbase files Motion to Compel Production of Documents in Case Against SEC: July 27, 2024 Background: Coinbase has filed a Motion to Compel the SEC to produce certain documents in the agency’s case against the exchange. This comes after oral arguments on a related issue occurred, with the judge warning Coinbase against overreaching in its document requests. Coinbase is looking to compel the production of, among other things, (1) documents related to SEC meetings with Coinbase and others prior to the litigation; (2) documents related to tokens named in dispute/staking functionalities at issue; and (3) documents related to speeches Chair Gensler gave on digital assets in his personal capacity. Analysis: This is seemingly a part of a two-part strategy by Coinbase, which also has requested documents through a FOIA action in a separate court. The Hinman speech documents saw the light of day thanks to the Ripple litigation, and one can expect more documents that are unfavorable to both parties will be eventually forced to be disclosed in this action as they are in most litigation matters. The SEC has opposed the motion, and a ruling on the issue can be expected shortly with the judge fully briefed on the dispute. Artists Sue SEC Over Agency’s Position Regarding NFTs: July 29, 2024 Background: Kentucky Law professor Brian Frye and Song a Day creator Jonathan Mann have sued the SEC in a declaratory judgment action regarding determinations by the agency that NFTs can be investment contracts that require registration with the SEC prior to sale. Professor Frye had previously released a contemporary art project where he sold NFT copies of his no-action letter to the SEC regarding this topic, which the SEC did not respond to. Analysis: It is slightly disappointing that the Plaintiffs in this case did not bring up the prior restraint on free speech or other arguments from the Original Public Meaning of Investment Contract article by Edward Lee, but still an interesting Complaint to read, complete with pictures. The Taylor Swift tickets are a great example of how entitlement to future benefits does not equal investment contract, even if they can be sold for profits based on efforts of the artist. Also highlighting the damages in the SEC’s cases thus far have included burning the art at issue was a nice touch. SEC Plans to Seek Leave to Amend Complaint Against Binance Regarding Certain Token Sales: July 30, 2024 Background: The SEC filed a document in the case against Binance stating the agency’s intent to seek leave to amend its Complaint against various Binance entities “including with respect to the ‘Third Party Crypto Asset Securities’” which the SEC originally named as SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI. It is unclear what those amendments will be, but the SEC claims it will “obviate[e] the need for the Court to issue a ruling as to the sufficiency of the allegations as to those tokens at this time.” Analysis: On July 11, the Court held a hearing on whether the claims regarding third-party tokens other than BNB survived after the Court dismissed allegations regarding secondary trading of the Binance-issued token. At least one of the tokens named (MATIC) has a migration in the works, which could hamper the SEC’s claims for injunctive relief as to that token as currently pled. We will need to wait until there is an actual proposed Amended Complaint to determine how the SEC is planning to address the secondary sales ruling regarding BNB in its strategy regarding the currently remaining tokens at issue. This seemingly strategic retreat by the SEC very likely has something to do with the ongoing discovery fight in Coinbase discussed above over documents regarding secondary tokens named. Damages Ruling Issued in Ripple Labs Lawsuit: July 30, 2024 Background: Ripple Labs was issued a civil penalty of $125,035,150 for illegal sales of securities in the form of $XRP tokens and other contractual arrangements (a total of 1,278 transactions) with institutional investors, falling short of the roughly $2 billion that the SEC was seeking in the action. This comes after the same Court ruled that blind bid/ask sales of the digital asset $XRP were not securities transactions. This is now a final judgment in the action, so it can be expected both sides will appeal certain aspects of the various rulings in the case. Analysis: While it’s hard to look at a 9-figure damage number and call it a win, this was objectively a win for Ripple. This is the first time the SEC litigated to a final judgment against a digital asset industry participant without the end result being a complete shutdown of the development company. While there will be appeals and the litigation will continue, Ripple was one of the most aggressive with their initial coin offering (ICO) and has one of the more centralized validator sets out of most current major blockchain projects with a token, so seemingly a win for the industry as a whole as well. Briefly Noted: IRS Updates Crypto Brokerage Form: The IRS has updated its crypto brokerage tax form 1099-DA. Form 1099-DA, which monitors "digital asset proceeds from broker transactions," is slated to go at least partially into effect in 2025. Prior drafts of the form required individuals to submit a digital wallet address and to note whether assets are a "non-covered security,” both of which appear to be removed in the current draft form. Senate Bill to Form Bitcoin Strategic Reserve Published: Senator Lummis has submitted a bill to have the United States buy Bitcoin as a strategic reserve. As explained by the Senator, “[t]he BITCOIN Act establishes a strategic Bitcoin reserve to serve as an additional store of value to bolster America’s balance sheet and ensure the transparent management of Bitcoin holdings of the federal government.” BitClout Founder Charged With Criminal and Civil Fraud: The once pseudonymous BitClout founder “Diamondhands” (AKA, Nader Al-Naji) has been charged with civil and criminal fraud by the SEC and DOJ. The former Thirty-Under-Thirty award winner will face charges related to capital formation efforts and statements he made regarding the functionalities of the platform he was building. California Moves Car Titling to the Blockchain: California is moving car title tracking to the blockchain. California's Department of Motor Vehicles has digitized 42 million car titles and will allow the transfer of those titles to occur on the Avalanche blockchain. Industry Actors Oppose CFTC Proposed Prediction Market Rules: Coinbase has commented to the CFTC’s proposal regarding the CFTC’s propose to regulate prediction markets, something that has traditionally been left to the states to regulate. Others in the space have also joined in the opposition to the CFTC’s proposed expansion of authority. Mango Markets Alleged Exploiter Seeks New Trial: Avraham 'Avi' Eisenberg has requested a new trial and for his conviction to be overturned in the case against him regarding his alleged exploit of decentralized finance platform, Mango Markets. The issues on venue shopping and how there can be “fraud” against automated computer code are worth watching and likely will be raised on appeal regardless of which side wins on those issues. Conclusion: As we move toward the end of summer, the digital asset industry continues to be a focal point of intense litigation and regulatory scrutiny. The recent developments in the SEC’s ongoing cases against major exchanges, the conclusion of the Ripple Labs lawsuit, and California’s innovative step to move car titles to the blockchain all highlight the dynamic and rapidly evolving nature of this space. With discovery disputes heating up in the courts and new legislative initiatives emerging, the intersection of law, technology, and digital assets remains a critical area to watch. As these cases progress, they will likely shape the regulatory landscape and influence the future of digital assets in profound ways. The outcomes will not only impact the entities involved but also set precedents that could define the industry’s legal framework for 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.

The last week of June saw a flurry of legal developments in quick succession. The SEC sued Consensys, the developers of the largest self-custodial digital wallet (MetaMask). The IRS released its digital asset tax rules. The Court in SEC v. Binance ruled on Binance’s Motion to Dismiss. And that was just on June 28. While the first week of July had a welcome slowdown in legal news, we expect a busy summer with the anticipated incremental developments in ongoing digital asset cases and new cases being filed frequently. These developments and a few other brief notes are discussed below. Coinbase Sues SEC and FDIC over FOIA Requests: June 27, 2024 Background: Coinbase has filed lawsuits against the SEC and the FDIC regarding those agencies’ alleged failure to comply with Coinbase’s Freedom of Information Act (“FOIA”) requests. In a Twitter thread, Coinbase’s head of legal said, “@SECGov has claimed sweeping authority but refuses to provide any rules, let alone consistent or coherent ones. While @FDICgov pressured financial institutions to cut off the industry from the banking system, today we filed lawsuits under the Freedom of Information Act for requests we made over a year ago seeking important information to which we, and the public, are entitled.” Analysis: Due to the various carveouts and end-arounds, it is very hard to get anything of substance through a FOIA request unless the requesting party is willing to file a lawsuit to enforce it. Even then, it takes a sophisticated legal team and a war chest to successfully pursue these matters. Even if documents are ultimately produced, it will probably be a while before those documents see the light of day. This is likely a part of Coinbase’s litigation strategy to have multiple bites at the apple in seeking documents from the SEC through both this action and Coinbase’s litigation against the agency. Court Rules on Binance Motion to Dismiss in Suit Against the SEC: June 28, 2024 Background: The Court in SEC v. Binance ruled on the Binance Motion to Dismiss, allowing a majority of the SEC’s claims to advance to discovery but dismissing some major portions of the lawsuit, most notably those related to secondary trading. The nearly 90-page Order gave a strong rebuke of the “investment contracts require contracts” argument but an equally strong rebuke of the SEC’s “embodiment” theory that digital assets can “embody” an investment contract scheme. Judge Jackson dismissed the SEC’s allegations regarding the secondary sales of BNB being plausibly alleged to be securities transactions, as well as the SEC’s claims surrounding the Binance “Simple Earn” program and the Binance dollar-pegged stablecoin BUSD. Analysis: Polsinelli will be publishing a separate article shortly breaking down the various developments in the SEC’s cases against digital asset exchanges Coinbase, Binance, and Kraken. In the Binance ruling, Judge Jackson did not mince her words, stating “the SEC seemed to speak out of both sides of its mouth” at the hearing on the Motions to Dismiss and “the agency’s decision to oversee this billion-dollar industry through litigation—case by case, coin by coin, court after court—is probably not an efficient way to proceed, and it risks inconsistent results that may leave the relevant parties and their potential customers without clear guidance.” But just as in Coinbase, any major questions doctrine or “investment contracts require contracts” defenses will need to wait for appellate courts to have any chance of success. Coinbase has alerted Judge Failla of the Binance ruling, claiming it “further supports Coinbase’s motion for certification” for appeal. SEC Sues MetaMask Wallet Developers, Consensys: June 28, 2024 Background: The SEC has filed a lawsuit against the creators of the MetaMask digital wallet, Consensys Software Inc., alleging the digital wallet’s staking and swapping functionalities violate federal securities laws. The SEC’s lawsuit was brought in the Eastern District of New York, while developers’ declaratory judgment action is pending in the Northern District of Texas over those wallet functionalities, so there is a jurisdictional fight underway to start the matter off. That separate matter was recently scheduled for expedited briefing, so it appears on track to go forward despite the SEC’s new lawsuit in a separate court. Analysis: This comes shortly after the SEC declined to pursue an action against Consensys with respect to ETH possibly being a security, so this isn’t all bad news. Judge Fallia ruled against the SEC on its similar wallet-swapping claims brought against Coinbase, so the SEC’s choice of jurisdiction (bringing the lawsuit to New York court instead of Texas, the venue of the currently pending Consensys action) could be controversial. This Complaint contains some troubling arguments regarding the “efforts of others,” while the SEC is seemingly discouraging developers from having their smart contracts audited (paragraph 279 of the Complaint). The SEC’s mission statement is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This seems like an example of mission drift, which the SEC has been more than happy to charge investment advisers with in the past. The SEC also named the staking services offered by Lido and Rocket Pool as securities offerings without naming the corporate entities behind those projects themselves. Briefly Noted: SCOTUS Opens Floodgates for Regulatory Challenges: The Supreme Court gave the SEC and other regulatory agencies a triple whammy in the past couple of weeks. While not directly crypto-related, these developments weaken the SEC’s ability to enforce questionable positions, may affect some of the ongoing lawsuits the SEC has brought into the space, and give plaintiffs greater ability to challenge regulations and interpretations. First, they ruled that the SEC can’t bring certain civil claims in administrative courts because it violates the right to trial by jury. The next day, they formally overturned Chevron, which generally required that courts give deference to regulators’ interpretations of the laws they were created to administer. And the next week, they basically eliminated the statute of limitations to bring claims under the Administrative Procedures Act. SAB 121. IRS Releases Digital Asset Broker Reporting Rules: The IRS dropped its final digital asset broker reporting rules. While the agency punted on how to deal with DeFi or self-custodial wallet applications, the rules appear to require operational compliance starting in 2025. You can read a more detailed breakdown of the rules here. VanEck Files for SOL Spot ETF: VanEck is the first to take the plunge, filing an S-1 with the SEC to offer spot SOL ETF. It is unlikely this application will move forward or be formally denied until after the upcoming Presidential election. SEC Battles Exchange Hopeful in Texas Court: LEJILEX has filed a Motion for Summary Judgment in its case against the SEC, requesting a declaration that its planned exchange operations do not violate federal securities laws. The same day, the SEC filed their Second Motion to Dismiss, which is an odd procedural posture for a case to have summary judgment motions (typically brought at the end of a case) overlapping with motions to dismiss (typically brought at the beginning of a case). MiCA Stablecoin Rules Go into Effect: After the European Union’s MiCA stablecoin rules went into effect, it appears that Circle is the only qualified stablecoin issuer, with all other stablecoins blocked from EU exchanges. EU platforms are also offering alternatives to stablecoins like gold NFT as they wait for more EU-qualified stablecoin issuers to emerge. Amicus Filed in Support of Custodia Bank: Various amicus briefings were filed in support of Custodia Bank’s appeal of its master account rejection, including briefs filed by the Wyoming Secretary of State and Attorney General, members of the House and Senate Banking Committees, the Digital Chamber, former Senator Toomy, and the Blockchain Association. Conclusion: The recent flurry of legal actions in late June, including the SEC's lawsuit against Consensys and the court ruling on Binance's Motion to Dismiss, highlights the rapidly evolving regulatory landscape for digital assets. With Coinbase suing the SEC and FDIC over FOIA requests, and the IRS releasing new digital asset tax rules, it is evident that this summer will be pivotal for the industry. As stakeholders navigate these complexities, staying informed and seeking expert legal advice will be crucial to effectively manage the ongoing and forthcoming legal challenges. 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 focus in Web3 law the past few weeks has been on jurisdictional issues when litigating matters involving borderless digital asset transactions. This is expected to be an ongoing issue, as courts work through these challenges in both civil and criminal claims. Digital asset developers and users often have very little control over limiting transactions to certain jurisdictions without requiring the counterparty to perform identity verification (which raises a whole host of other issues), so these are not going to be easy determinations to make. There were also developments in pending stablecoin legislation, and the IRS is looking to finalize its digital asset reporting form for upcoming tax years. These developments and a few other brief notes are discussed below. Richard Heart Moves to Dismiss SEC Lawsuit Related to HEX/PulseChain: April 8, 2024 Background: Richard Heart has filed a Motion to Dismiss in the SEC’s case against him related to the $HEX cryptocurrency and PulseChain blockchain. Heart, the founder of PulseChain, is known for flashy displays of wealth which even industry participants have criticized. However, as a U.S. citizen who is a resident of Helsinki, Finland, the case raises interesting issues as to the extraterritorial reach of the SEC in borderless digital asset cases. Summary: While Richard Heart is a controversial figure on social media, the legal arguments around Heart’s jurisdictional defenses are something to watch. In this case, the SEC is trying to use the fact that PulseX is a Uniswap fork (i.e., took the same Uniswap opensource code with slight changes) as an E.D.N.Y. forum hook. It is a case worth following on that aspect alone, as it will have massive implications on what is required to create jurisdiction over international digital asset transactions. SEC Investigating Decentralized Finance Platform Uniswap: April 10, 2024 Background: The SEC issued a Wells notice to the Uniswap Foundation, signaling the agency’s intent to bring a suit against the DeFi giant. While the contents of the notice have not been made public, Uniswap’s Founder and Chief Legal Officer both had strong words against the agency. Taking the dispute public before any charges have been filed has been criticized by some and applauded by others. Summary: When FTX/3AC/Terra/Celsius failed, platforms like Uniswap, Coinbase, Kraken, and others were designed and run well enough to honor billions in user withdrawals at a rate that would bankrupt any bank with fractional reserves. If anything, the ability of Uniswap to handle such dramatic outflows showed the resiliency that DeFi is capable of. Also, interesting points from Gabe Shapiro and the Uniswap civil case on how the market maker smart contracts potentially at issue are not run by Uniswap. But since this is just a threat of a lawsuit at this point, the legal community will need to wait to see what the lawsuit itself looks like, and if it has anything to do with the recent fee switch proposal by Uniswap. Lummis-Gillibrand Payment Stablecoin Act Proposed in Senate: April 17, 2024 Background: Senators Lummis and Gillibrand have released proposed legislation titled the Lummis-Gillibrand Payment Stablecoin Act which incorporates some elements of their previously proposed omnibus crypto legislation but is focused exclusively on stablecoins. This is also distinct and has many important differences from the stablecoin legislation which has passed the House Financial Services Committee but has yet to be put up for vote for the full House. Cap Hill Crypto does a great job as always breaking down the bill. Summary: Apparently, Congresswoman Maxine Waters thinks the stablecoin bill in the House is “very, very close — very close” after previously trying to kill it in committee, and noted crypto-critic Sherrod Brown has reportedly said he is open to advancing a stablecoin bill under certain conditions, so it is looking increasingly likely that some version of stablecoin legislation has a (slim) chance of passing this year. It seems reasonable for depository institutions like banks or certain merchants to only be permitted to custody stablecoins that are provably backed 1-to-1 by the issuing entity (like Circle for USDC) so long as consumers have the choice to own and use other stablecoins. Avoiding another Terra/Luna and making dollar substitutes actually be back by dollars is something that should be generally supported. But this new bill faces criticism from various industry groups. Mango Markets Exploiter Convicted in Criminal Trial: April 18, 2024 Background: Avraham “Avi” Eisenberg was convicted on one count of commodities manipulation, one count of commodities fraud, and one count of wire fraud related to his role in the $110 million exploit of the digital asset platform Mango Markets. Avi previously admitted to his actions online, referring to his actions as a “profitable trading strategy” and asking “What are you gonna do, arrest me?” There will likely be an appeal on issues such as the choice of the New York forum for this trial, and the exclusion of Avi’s proposed expert testimony from being considered by the jury. Summary: Avi did not testify in the trial related to his Mango Markets exploit in 2022, but he was still convicted. While this was (likely) the correct result on the commodities manipulation count, it does bring to light flaws in a system where three different agencies (DOJ, CFTC, and SEC) all brought cases against Avi and all define the token at issue (MNGO) as different things. It also creates potentially problematic implications going forward if the use of a smart contract governed protocol in certain ways can be “fraud” despite no deceiving statements being made and those actions not meeting the required elements under the Computer Fraud and Abuse Act. You can read more about the conviction including quotes from Jonathan Schmalfeld in the Bloomberg Law article Crypto Trader’s Fraud Conviction Undercuts Exchange Code Defense. Briefly Noted: IRS Releases Draft Crypto Reporting Form: The IRS released a draft crypto reporting form which includes reporting by un-hosted wallet providers. Not sure if the IRS realizes that all that is required for an un-hosted wallet is something that can record the required amount of seed phrase words, i.e., a piece of paper. Coinbase Requested Interlocutory Appeal on Investment Contract Issues: Coinbase is seeking an interlocutory appeal of its Motion for Judgment loss regarding investment contract issues. Seemingly with a smart strategic move of not seeking review of the staking determination and limiting it to an issue which the SEC itself has stated is important enough for interlocutory appeal in its Ripple litigation. Generally, interlocutory appeal requests are denied, but with a case of this importance, it is possible that Judge Failla does want input from the Court of Appeals for these issues of law. Senate Republicans Release Counter to Senator Warren Bill: Senate Republicans have released a counter to the Senator Warren bill, which they titled the "Ensuring Necessary Financial Oversight and Reporting of Cryptocurrency Ecosystems Act" ("ENFORCE Act"). This has very little chance of passing but is instead a counter proposal to potentially make Senate Democrats back off certain aspects of their currently pending legislation. Conclusion: In recent weeks, the complex web of jurisdictional issues surrounding digital asset transactions has brought new challenges and developments to the forefront of Web3 law. From Richard Heart's jurisdictional defense against the SEC to the resilience of DeFi platforms like Uniswap, these cases highlight the evolving legal landscape in which digital assets operate—transcending traditional boundaries and questioning established regulatory frameworks. The proposed Lummis-Gillibrand Payment Stablecoin Act and the SEC's scrutiny suggest a shift towards greater regulation and oversight, while the conviction of Mango Markets' exploiter underscores the judicial system's effort to adapt to new forms of financial manipulation. As these developments unfold, they not only shape the immediate legal strategies of involved parties but also set precedents that will influence the future of digital asset regulation. The ongoing legal and legislative efforts signal a critical phase in defining the balance between innovation and regulation in the ever-evolving domain of cryptocurrencies. 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 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