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.

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.

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

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.

While the nation was preoccupied with the significant developments in the Presidential race, advocates and promoters of the blockchain ecosystem were particularly attentive to the news, given the perception that the current administration is unfriendly to many within the industry. This upheaval comes during a period of relative optimism in the industry, given the current period of rising prices for digital assets, the addition of more digital asset exchange traded products available to the public, and certain high-profile investigations by the SEC coming to a close without litigation. While Web3 legal developments seem to be looking up, there are still roadblocks, such as the ongoing litigation against various digital asset exchanges, which the Polsinelli Blockchain+ team analyzed in detail in our recent article here. As we enter the heart of summer and what is certainly an historic presidential campaign, the last few weeks have left many in the industry with a sustained sense of hopeful optimism in the potential for meaningful legal acceptance of digital assets in the United States. These developments and a few other brief notes are discussed below. Amicus Briefs Come Out in Support of Declaratory Judgment Action Against SEC: July 10, 2024 Background: Paradigm has filed an amicus brief in support of Lejilex’s action against the SEC pending in the Northern District of Texas. The Digital Chamber also filed in support of the action against the SEC, as did Coinbase and a coalition of seven state Attorney Generals. Many of the briefings focused on the major questions and doctrine issues, and if that has any chance of victory at a district court level, a Northern District of Texas judge is probably the best shot of that happening. Analysis: While we often cover amicus briefs in the “Briefly Notes” section of these updates, this ground swell of support at the district court level for an exchange that doesn’t even operate yet warranted a fuller breakdown (the fact Paradigm cited to Commissioner Pierce’s Dissent in LBRY, where she quoted BitBlog author Jonathan Schmalfeld, helps too). The Digital Chamber’s brief, where they cite the forthcoming article The Original Public Meaning of Investment Contract by Edward Lee, was an especially fascinating read. Combined with the expediting briefing in the Consensys declaratory judgment action, the Lone Star State is going to be issuing some major rulings in the (relatively) near future. People can donate to support Lejilex’s efforts here. Paxos Prevails; Avoids Litigation After SEC Wells Notice Regarding BUSD: July 11, 2024 Background: Paxos has been notified by the SEC that the agency staff will not be recommending an enforcement action be brought against the entity in connection with BUSD. This is following a ruling in the Binance case that the sales of BUSD on the Binance platform did not constitute securities transactions. Binance stopped offering BUSD in December of 2023 after Paxos was ordered by the New York Department of Financial Service to stop issuing it, but this is still seen as a win for the industry generally and a sign that perhaps the SEC is backing off its position regarding fully back stablecoins being securities. Analysis: Honestly, the fact that the SEC is even issuing letters ending investigations is a step in the right direction. This comes the same week as the SEC agreed not to pursue charges against Hiro as issuers of the now-(mostly)failed Stax token, which was registered through Reg-A, resulting in the token’s slow death due to regulatory restrictions. This doesn’t mean all stablecoins are fine in the SEC’s eyes, especially algorithmic coins like those at issue in the Terra/Luna matter, but it is better than nothing. Presidential Election Shakeups Seen as Advantageous for Crypto: July 15, 2024 Background: Former President Trump has announced that Ohio Senator J.D. Vance will be his Vice-Presidential running mate in the upcoming presidential election. Senator Vance is a well-known proponent of the digital asset industry who, prior to being announced as the potential VP, was working on his own legislation in the Senate similar to FIT21 in the House. Now that Biden has dropped out and endorsed Kamala to be the Presidential nominee, it appears regardless of who wins there will be an administration change and a potential associated change in policy on digital assets. Analysis: An increasingly pivotal aspect of the presidential election is the prominence of cryptocurrencies as a significant issue, influenced by several digital asset factors. One is the role that prediction markets are playing in the election, with these markets again being the earliest and most reliable source of Trump’s pick. Another is that Vance is a Bitcoin owner who has preached the value of self-custody and pushed back at the SEC’s regulation by enforcement in the industry. However, industry participants may want to temper expectations at this point, as politicians and policy makers are hard to predict. For example, many thought Gensler, a former MIT professor who taught courses on blockchain technologies, would be pro-crypto, which turned out to be incorrect. However, the selection of Vance certainly signals that a change of administration could result in a historic opportunity for the industry to flourish in the U.S. While Kamala Harris has yet to take a firm position on crypto, the hope is that she will not be as firmly anti-crypto as the current administration. Topping all of this off, Donald Trump is expected to attend and speak at the upcoming Bitcoin conference in Nashville this weekend, and as of publication, event organizers extended an invitation for Kamala Harris to speak as well. Spot Ether ETF Launches: July 23, 2024 Background: In our May 29, 2024 Bi-Weekly update, we covered the SEC rule changes that all but guaranteed certain spot Ether exchange-traded funds would be available to trade in the near future. The first of those products began trading on July 23, 2024. Some analysts are expecting spot Ether ETFs to reach over $4 billion by the end of the year, following the spot Bitcoin ETFs, which have been an objective success for the issuers of those products. Analysis: This has been inevitable since the SEC did a surprise aboutface and approved certain rule changes that implicitly acknowledged Ether as a commodity and not a security. Of the issuers approved for trading, none include Ether staking, meaning the blockchain fees required for trading of spot Ether will be purely deflationary, without any offsetting staking rewards. This is something that could change if the next leadership structure is more open to digital assets being made available to traditional investors. Briefly Noted: Polsinelli Publishes Update in Exchange Litigation: As mentioned in the introduction, the Polsinelli Blockchain+ team published an article analyzing where the various SEC lawsuits against digital asset exchanges currently stand and what to expect from those lawsuits in the upcoming year. Important Article Examining Technical Functionalities of MetaMask Wallet in Light of SEC v. Consensys: Daniel Barabander, the Deputy General Counsel at Variant venture capital, published an exceptional article breaking down the SEC’s lawsuit against Consensys and comparing the allegations in the Complaint to the technical functionalities of the swap feature in the MetaMask digital wallet. The article goes into great detail, including explaining how “setting slippage” is different than “setting a limit order” in transactions on DeFi protocols. Attorneys in the space are highly encouraged to read this article to better understand where DeFi and software integrates or conflicts with existing broker/dealer laws. CFTC Chair Testifies on Digital Assets in Senate: CFTC Chairman Rostin Behnam testified before the Senate Agriculture Committee regarding oversight of digital commodities. One big takeaway was his statement that 70-80% of the crypto marketise non-securities, which stands in stark contrast with his counterpart at the SEC, who has gone on record saying a vast majority of digital assets are securities. Republicans Add Crypto Policy to 2024 Official Policy: Republicans have stated they “will defend the right to mine Bitcoin and ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control.” They have also stood firm in opposition to the creation of a central bank digital currency. This marks the first time that digital assets have been included in an official party platform for either major U.S. political party. SAB 121 Repeat Effort Fails to Obtain Enough Votes to Override Veto: As many expected, the efforts to repeal Senate Accounting Bulletin 121 (which requires banks to list crypto safeguarded for customers to be listed as liabilities on their balance sheets) failed to garner sufficient votes in the House of Representatives to overcome President Biden’s veto. This limits the ability of individuals to have their digital assets safeguarded by trusted bank providers, even if it has been reported that the SEC has exempted certain banks from required compliance with this accounting rule. United Kingdom DAO Study Released: The Law Commission of England and Wales published a paper on DAOs to assist their legislative bodies with identifying areas of potential legal reform. The paper recommends further analysis be done on whether existing law should be reformed to facilitate the increased use of technology at a governance level where appropriate. Conclusion: The interplay between the ongoing political shifts and the blockchain industry's evolving landscape presents a pivotal moment for digital assets in the United States. While the current administration's stance has often been perceived as adversarial, recent developments such as the launch of spot Ether ETFs, successful resolutions to high-profile SEC investigations, and the growing support for pro-crypto legislation signal a potential turning point. The upcoming presidential election further adds to this dynamic, with candidates’ varying perspectives on digital assets offering a glimpse of potential policy changes ahead. As we navigate these transformative times, the blend of optimism and caution within the industry underscores the anticipation of a more legally recognized and integrated future for digital assets. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

The SEC’s litigation against the largest digital asset exchanges in America has been unfolding for over a year, beginning with the agency suing various Binance entities1 in June 2023, followed by actions against Coinbase Inc./Coinbase Global Inc. (collectively “Coinbase”), and Payward, Inc./ Payward Ventures, Inc. (collectively “Kraken”) shortly thereafter.   The cases have all advanced through the Motion to Dismiss briefing stage (for Binance and Kraken) and Motion for Judgment on the Pleadings stage (for Coinbase) with rulings in Coinbase and Binance completed on those issues and expected soon in Kraken. With these cases having been previously discussed in the Polsinelli Bi-Weekly updates, the various lawsuits have reached a point in litigation where it is now the opportune moment to assess where those cases stand, anticipate what to expect in the upcoming year, and explore their implications for the digital asset industry through  2024 and into 2025. BACKGROUND In June 2023, the SEC brought a lawsuit against the various Binance entities and their founder, Changpeng Zhao (together “Binance”). The Binance lawsuit alleges that sales of Binance’s own digital assets on its platform (BNB and stablecoin BUSD) along with facilitating the sales of various other cryptocurrencies on the Binance platform, constituted violations of securities laws.2 Shortly thereafter, the SEC brought a similar lawsuit against Coinbase, alleging sales of various cryptocurrencies3 on its platform were unregistered securities transactions, alleging the Coinbase wallet functioned as an unregistered broker/dealer, and that Coinbase’s staking services were also unregistered securities offerings. Finally, the SEC brought a lawsuit against Kraken, which had already settled allegations related to the Kraken staking services, alleging sales of various cryptocurrencies4 on its platform were unregistered securities transactions. Other than the Binance case related to BNB and BUS, none of the lawsuits named the issuers of the cryptocurrencies as defendants. At the time of filing of these cases, there was also additional litigation between Binance, Coinbase, and various regulatory bodies. Binance was facing separate lawsuits from the DOJ and CFTC which have since settled. Concurrently, Coinbase was involved in a lawsuit against the SEC concerning its request for rulemaking. This issue was rendered moot when the SEC declined to issue digital asset-specific rules, leading Coinbase to initiate a new and still ongoing appeal of that SEC decision. COINBASE MOTION FOR JUDGMENT ON THE PLEADINGS RULING Coinbase was the first of the exchanges to move to dismiss the SEC’s lawsuit, taking the unusual procedural posture of answering the SEC’s Complaint and then immediately moving for judgment on the pleadings. This is in contrast to a more standard litigation procedure involving the filing of a motion to dismiss, as both Binance and Kaken did. This strategy allowed Coinbase to supplement the factual record for the court’s consideration with the information provided in Coinbase’s answer. Coinbase argued that the digital assets sold on its exchange should not be classified as "investment contracts" under the Howey test and thus are not securities.5 Coinbase argued that purchasing the digital assets at issue on a secondary exchange did not give the buyers of those digital assets any contractual rights to the issuer’s income, profits, assets of a business, or otherwise impose any obligations for anybody to further develop the applicable digital asset’s network. This line of argument has been referred to as the “Investment Contracts Require Contracts” argument. Coinbase also argued that the “major questions doctrine” justified rejecting the SEC's classification of the digital asset transaction at issue as investment contract transactions. The major questions doctrine holds that significant regulatory decisions should be made by Congress, rather than regulatory agencies, on “major questions” that would significantly affect a substantially sized industry. Coinbase contended that accepting the SEC's legal stance would potentially have a crippling effect on the $3 trillion digital asset industry. Finally, as to the SEC’s allegations surrounding Coinbase’s digital wallet software and staking functionalities, Coinbase asserted that it did not function as a broker merely by making what it referred to as “passive software” available to customers. Coinbase further argued that the staking-as-a-service functionalities made Coinbase a service provider and not a securities issuer; a point which was emphasized by various amicus filed in support of Coinbase’s argument. Coinbase also argued that there was no risk of loss with Coinbase guaranteeing to cover any “slashing” or other staking penalties that may be assessed against customer assets. The SEC’s response insisted that the “Investment Contracts Require Contracts” argument was not supported by applicable federal precedent, and that investment contracts do not require the buyer of the investment contract to obtain further contractual rights, meaning that to the SEC there is no distinction between primary vs. secondary asset sales in determining if an asset is sold as an investment contract. With regard to the major questions doctrine, the SEC posited that the doctrine is not applicable in the enforcement context, and not otherwise applicable in this particular action. Oral arguments on the issues occurred on January 12, 2024. On March 27, 2024, Judge Failla of the Southern District of New York, issued her Order, allowing most of the SEC claims including those related to staking and secondary sales of digital asset claims to move forward. The lone claim dismissed was the claim regarding the Coinbase digital wallet. The court found that the Coinbase digital wallet is merely software, that connects users with third-party decentralized finance platforms, with those third-party platforms actually effectuating the digital asset transactions. As to the claims allowed to survive, the court found that even if no contractual relationships existed between tokens’ issuers and the secondary buyers on Coinbase, transactions for the tokens at issue could plausibly still be considered “investment contracts” under Howey. The court reasoned that because “token issuers, developers, and promoters frequently represented that proceeds from crypto-asset sales would be pooled to further develop the tokens’ ecosystems and promised that these improvements would benefit all token holders by increasing the value of the tokens themselves,” even downstream purchasers of those sales could still fit in within the Howey framework. The court also held that the risk of loss in the staking program, even if contractually covered by Coinbase, and the consideration in the form of the crypto asset to be staked was sufficiently alleged to survive at this stage in litigation. Finally, the court ruled that the digital asset industry is not of such importance as to invoke the major questions doctrine. On April 12, 2024, Coinbase filed a motion to certify an interlocutory appeal of the court’s decision to allow the staking and secondary sales claims to go forward. This request for an appeal remains pending. BINANCE MOTION TO DISMISS AND RELATED RULING The Binance entities sued by the SEC took the more standard procedural posture in their attempt to dismiss the SEC’s claims, filing motions to dismiss in September of 2023. Both the U.S. and international groups of defendants argued that the secondary trading of the digital assets at issue do not meet the “investment contract” standard from Howey and raised largely similar “Investment Contracts Require Contracts” arguments as Coinbase did. Both groups also argued that the SEC’s intrusion into the digital asset industry represents a violation of the major questions doctrine. The U.S. entities argued that the SEC failed to adequately plead its fraud allegations against them. The international defendants argued that they were jurisdictionally immune to most of the SEC’s claims and that the applicable statute of limitations foreclosed the SEC from bringing claims regarding the initial sales of the digital asset, BNB. The SEC’s response argued, similar to as in Coinbase, that securities laws are intentionally flexible, meaning applying a rigid “Investment Contracts Require Contracts” test would be contrary to the spirit of the law and the applicable legal precedent. Interestingly, this response was the first time the SEC shifted its stance on treating Ether as a security, aligning it with Bitcoin and claiming that neither of those digital assets were at issue in this litigation despite being the “largest crypto assets in existence…”. The court heard oral arguments on these issues on January 19, 2024. While the SEC stated in the Coinbase litigation that “the token itself is not the security”, during its oral arguments in Binance, the SEC also stated, that “the token itself represents the investment contract . . . the token represents the embodiment of an investment contract.” See SEC v. Binance, Case No. 1:23-cv-01599, Dkt. # 248, Fn. 15 (D.D.C. June 28, 2024) (quoting from oral argument). On June 28, 2024, Judge Amy Jackson, of the District of Columbia, issued her Order, allowing a majority of the SEC’s claims to advance to discovery, but dismissing some major portions of the SEC’s lawsuit. The nearly 90-page Order brushed off the “Investment Contracts Require Contracts” defense but also was very dismissive of the SEC’s “embodiment” theory under which the SEC argued that digital assets can “embody” an investment contract scheme. 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.” 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. She ruled that a consumer’s earning of a fixed interest rate for the lending of digital assets was unrelated to Binance’s entrepreneurial efforts and thus not an investment contract. She further dismissed the SEC’s claims surrounding the BUSD stablecoin, holding that the defining feature of the “stablecoin” was that its value would remain constant such that it would be difficult (if not impossible) to allege how buyers could reasonably expect a profit on it. All the remaining allegations, however, were permitted to advance to the next stage of litigation. SEC LITIGATION AGAINST KRAKEN AND RELATED MOTION TO DISMISS In November 2023, the SEC brought its lawsuit against Kraken, accusing the second-largest digital asset exchange in the United States of illegally allowing for the secondary trading of “digital asset securities” on its platform. This lawsuit was brought despite Kraken settling the SEC’s allegations regarding the Kraken staking functionalities earlier in 2023. Jesse Powell, the founder of Kraken, very strongly pointed out that Kraken’s cooperation and settlement with the SEC, including paying $30 million USD, appears to have done nothing to protect them from further litigation and insinuating that the SEC is unlikely to ever be satisfied with this industry: “I thought we settled all their concerns for $30 million in Feb. Now they're back for seconds?” He went as far as to encourage others in the space to avoid the U.S. entirely under its current regulatory regime. Kraken moved to dismiss the SEC’s lawsuit in February of 2024, largely following the argumentative framework in the Binance and Coinbase cases. All raise similar arguments regarding the token sales at issue not being “investment contracts” using the “Investment Contracts Require Contracts” argument and that the SEC’s regulatory overreach is contrary to previous agency positions and violates certain separation of powers principles. In a separate blog post explaining the Motion to Dismiss, Kraken stated that the day after Kraken testified to the House Financial Services Committee regarding the need to limit the SEC’s authority over the regulation of digital assets, an SEC official called Kraken stating the agency’s intent to sue them. Kraken further argued that the unique 9th Circuit Court of Appeals case law (where the Kraken case was brought),6 supported Kraken’s arguments regarding the secondary sales not being considered investment contracts. Another notable aspect of this case is the various amicus briefs filed in support of Kraken, including those filed by the Chamber of Digital Commerce, the Blockchain Association/DeFi Education Fund, Paradigm, and a group of State Attorney Generals. All of the amicus briefs call into question the seemingly shifting stance of the SEC on what is a “digital asset security” or an associated “ecosystem” as to turn involvement with a particular blockchain’s token enough to satisfy the elements under Howey. The State AG briefing was especially interesting, claiming the SEC is overstepping into the realm of general consumer protection reserved for the states. The hearing on Kraken’s motion to dismiss occurred on June 20, 2024, with Judge William Orrick, for the Northern District of California, opened the hearing by expressing his intent to adhere to the ruling in the Coinbase litigation discussed above, permitting the allegations that the secondary sales of digital assets are investment contracts to proceed. While Judge Orrick heard arguments on the “Investment Contracts Require Contracts” issue, he was firm in stating that he would not be listening to arguments regarding the major question doctrine, appearing to have already decided from the briefing papers that the doctrine was not applicable to this particular case. As of this publication date, a formal decision has not been issued on Kraken’s Motion to Dismiss. KEY TAKEAWAYS AND WHAT LIES AHEAD The differing holdings between the Binance and Coinbase cases regarding secondary sales of digital asset issues potentially create a split of authority on this issue. However, the SEC could argue that these differing outcomes merely reflect variations in facts rather than differing legal standards. The courts in both cases rejected the “Investment Contracts Require Contracts” arguments but arrived at different results in the Howey analysis. It is reasonable to expect further splits in authority following the ruling in Kraken, as well as from other similar pending cases such as the declaratory judgment action brought by Consensys, the SEC’s separate case against Consensys, and various other matters pending on these issues in courts across the country. Importantly, all of the courts having considered the applicably of the major question doctrine rejected it, largely agreeing that the major questions doctrine only applies if the industry in question resembles, in political and economic significance, those involved in prior Supreme Court cases, such as the tobacco industry in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000). This is an expected outcome at the district court level, but the major questions doctrine may be a stronger argument at the appellate court level or the Supreme Court if these cases reach that point. In particular, the current Supreme Court has demonstrated its willingness to limit the power of governmental agencies, most recently in the Loper case overturning the agency deference standard stated in Chevron and may be willing to use the major questions doctrine to protect digital assets from agency overreach without express congressional approval. For the time being, these cases are all scheduled to move through discovery and we can expect intensive litigation over various discovery issues similar to the fights in the Ripple litigation over communications related to the now infamous Hinman speech. Those fights have already begun, with Coinbase recently requesting documents from SEC Chair Gary Gensler’s personal email account. The arguments may gain an appellate fast track if there is an approved interlocutory appeal of the secondary sales or staking issues while the cases are ongoing. But, more likely, the exchanges will need to wait until discovery is completed and there is a ruling on the merits before a higher court has an opportunity to consider these issues, which could take years. Even if discovery is completed at a breakneck pace in the cases (as the exchange defendants all appear to be pushing for), there will not be a final judgment until late 2025 or early 2026, at the earliest. Between now and then, there may be a change in presidential administration or law, which could moot the issues or drive the parties to settle. For now, this is “bet is on the company” litigation for at least the U.S. portion of these exchanges. If courts side with the SEC, ruling that secondary sales of a vast majority of digital assets are securities transactions, it is hard to imagine how these key players in the industry can survive in the United States in their current form. The key use case for many digital assets is enabling consumers to self-custody and exchange these assets with minimal reliance on intermediaries. This capability is virtually impossible while complying with the SEC’s current interpretation of existing securities laws and regulations. However, if the exchanges win and the courts find that secondary transactions are not investment contracts, while that would be a boon for the exchanges, it would leave a regulatory gap and a potential “Market for Lemons” which may be equally harmful. While the Financial Innovation and Technology for the 21st Century Act (“FIT 21”) bill sailed through the House of Representatives with a bipartisan vote of 279-136, there is no indication it has anywhere near the support required to pass in the Senate, especially in the current congress which is on track to be one of the least productive Congresses in United States history. Until there is a consensus reached in the courts on the regulatory status of various digital assets or until there are enforceable rules or regulations specific to these relatively nascent technologies and associated products and services, the industry will continue as it has for much of the 2020s in a challenging regulatory environment which stifles innovation and drives projects out of the United States. Given the evolving and complex nature of digital asset regulations, it is critical that individuals and companies navigating this space retain advisors with specific expertise in the digital asset industry. These professionals possess the nuanced understanding necessary to effectively manage the intricacies of ongoing litigation, regulatory compliance, and strategic planning. As the legal landscape continues to develop, having knowledgeable advisors is crucial for navigating complexities and seizing opportunities within this dynamic sector. The challenge of building successful and compliant companies and projects is compounded when even the most reputable firms in the industry face intense regulatory scrutiny under questionable legal reasoning. Therefore, it is crucial for digital asset projects in the U.S. to adopt a long-term perspective, recognizing the opportunity to help develop potentially world-changing technologies and foster a dynamic asset class. [1] Binance Holdings Limited, BAM Trading Services Inc., and BAM Management US Holdings Inc. [2] The digital assets named as “crypto asset securities” in Binance were: BNB, BUSD, SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI. [3] The digital assets named as “crypto asset securities” in Coinbase were: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO (coins not named in Binance in bold). [4] The digital assets named as “crypto asset securities” in Kraken were: ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL (coin not named in Binance or Coinbase in bold). [5] The Howey test is a legal standard established by the U.S. Supreme Court in the seminal case of SEC v. W.J. Howey Co., 328 U.S. 293 (1946), which determines whether certain transactions qualify as “investment contract” transactions, subject to securities regulations. [6] Hocking v. Dubois, 885 F.2d 1449 (9th Cir. 1989) (en banc), cert. denied, 58 U.S.L.W. 3657 (U.S. Apr. 17, 1990) (No. 89-1023)

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.

On June 15, 2023, the Polsinelli Blockchain+ team put out our first Bi-Weekly rundown of some of the key stories in the Web3, blockchain, and crypto ecosystems curated by Polsinelli attorneys navigating the intersections of code, smart contracts, and U.S. law. That makes this June 27, 2024, post the first official post after passing the 1-year mark! You can catch up on all the past updates on the Polsinelli BitBlog and subscribe to get future updates in your email here. In the past few weeks, the Web3 legal space has seen multiple disputes and investigations seemingly come to an end, while others are just getting started. Terraform Labs is seeking to settle its dispute with the SEC and move on to focus exclusively on its ongoing bankruptcy proceedings, and the SEC has closed the door on its investigation into “Ethereum 2.0” (for now). While Ripple was able to defeat most of the private actions against it, some issues remain for trial, and the Kraken litigation against the SEC is on track for a busy year of discovery. These developments and a few other brief notes are discussed below. Terraform Labs and Founder Settle With SEC: June 12, 2024 Background: Terraform Labs has agreed to forgo its appeal and damages hearings after a jury found the company and its founder, Do Kwon, liable for securities fraud in April of this year. Instead, the company and founder have asked the Court to approve a settlement of ~$5 billion in fines, interest, and civil penalties. Do Kwon is personally on the hook for $204 million of the penalties, so I guess his size is not size anymore either.   Analysis: The SEC is getting basically everything it asked for in its damages briefing so this is about as white flag and waving a white flag gets. Terraform Labs already filed for bankruptcy in January of this year with estimated assets being under $500 million and the same amount of outstanding liabilities. The funds owed to the SEC under this settlement will be an unsecured claim in the bankruptcy matter, and the SEC will be left to seek its portion of whatever is left after Terraform Labs’ assets are used to pay secured creditors, administration expenses, and post-petition legal fees. So Terraform likely figured out that the difference between their proposed $3.5 million and the SEC’s suggested $5.3 billion was close to zero since the company would not be able to pay a significant portion of either of those fine options. Apparently, Terraform Labs has handed off control to the “community.” Following the settlement announcement, Ripple and the SEC exchanged jabs on whether this should change the analysis for damages in their case. SEC Calls off Investigation into Ethereum 2.0: June 18, 2024 Background: The SEC sent a letter to Consensys Software stating that the Commission staff does not intend to recommend enforcement action against Consensys relating to the SEC’s investigation into what the SEC is calling “Ethereum 2.0.” The investigation seems to be related to the switch by the Ethereum Network from validating transactions that occur on the network from “proof-of-work” to now using “proof-of-stake” for those validation functions. This switch in validation methodology inspired SEC to revisit the agency’s then director of enforcement statement in 2018 that proof-of-work Ether was not a security. The June 7 letter referred by the SEC is available here. Analysis: Is it a coincidence this decision comes within a week of the head of the SEC’s Crypto Asset and Cyber Unit in the Division of Enforcement announcing his departure? It is currently unclear if this decision is really the SEC deciding not to investigate Ethereum 2.0 or if this is just a temporary tactical strategy possibly to moot the Consensys lawsuit pending in Texas. Such a strategy would be similar to the SEC attempting to moot the Coinbase rulemaking request by stating it was “under consideration” despite ample evidence to the contrary. It will also be interesting to see if Consensys and separate Lejilex Administrative Procedures Act challenges to the SEC have the same success as a recent decision in that same federal district challenging a separate administrative agency action. Ripple Labs Mostly Defeats Securities Class Action but Issues Remain: June 20, 2024 Background: Ripple Labs mostly won on its Motion for Summary Judgement in a securities class action which was filed by various individuals shortly after the SEC brought a lawsuit against the developer of $XRP. The Court found that the plaintiffs’ federal securities claims were barred by the applicable statute of repose and that the state law claims also could not continue because the named plaintiffs lacked the necessary privity of contract with Ripple. The Court did, however, allow the individual claims for misleading statements to continue to trial. Analysis: While this is an important win for Ripple, the Order itself has some sub-optimal language on the Howey issue for surviving claims and it does not save Ripple from going to trial on the remaining claim. The Court found that plaintiffs sufficiently stated a claim that the $XRP tokens themselves are potentially securities which could give rise to a claim for misleading statements in connection with a security, even though plaintiffs bought the tokens on secondary marketplaces.   Kraken’s Motion to Dismiss SEC Case Likely to be Denied Following Hearing: June 20, 2024 Background: On June 20, 2024, the Court overseeing the SEC’s lawsuit against Payward Inc. (d/b/a, Kraken) telegraphed its intent to deny Kraken’s Motion to Dismiss during oral arguments on the motion. The Court was especially unphased with the Major Question Doctrine issue, denying the parties’ offers to present oral arguments at all on that issue. While Judge Orrick heard arguments on many of the remaining issues, he stated at the onset of the hearing that he was inclined to deny the Motion to Dismiss and follow the Order of Judge Failla in the agency’s lawsuit against Coinbase which the Polsinelli team provided a breakdown of in our April 15, 2024 Bi-Weekly update. Analysis: Attorneys for Kraken tried to distinguish the binding case law that Judge Failla was bound by in the Second Circuit as compared to the Kraken case in the Ninth Circuit, but that did not appear to sway Judge Orrick during the hearing as they focused on scheduling issues after oral arguments concluded (giving at least some indication that the Court expects the case to continue into discovery). Briefly Noted: PleasrDAO Sues Martin Shkreli: PleasrDAO is suing Martin Shkreli (AKA, “Pharma Bro”) regarding the never publicly released Wu Tang album purchased by the DAO during the latter’s DOJ-forced asset forfeiture and sell-off. This comes after the DAO hosted the first ever listening party for the album. Martin Shkreli has also claimed to be behind the $DJT “meme-coin,” with the alleged backing of Barron Trump. Article on Blockchain Patent Published: Polsinelli’s own Tom Isaacson recently published an article on overcoming common blockchain patent challenges which is worth reading for any individual considering seeking a patent over a blockchain-enabled innovation. Crypto Campaign Funding Continues to Grow: Fairshake, the pro-crypto super PAC, now has a total funding number of $169 million, with over $100 million still in its war chest, after Jump Crypto adds another $10 million to the pot. Another Major Departure in SEC Crypto-Enforcement Unit: David Hirsh, the head of the SEC’s Crypto Asset and Cyber Unit in the Division of Enforcement is leaving the agency. This follows the departure of Laden Stuart, who was involved with many of the agency’s heist profile digital asset cases. Ether ETFs Expected Approval This Summer: Gary Gensler said he expects the Ether ETF S-1 forms for issuers should be approved by this summer. Despite that, there is still seemingly lagging activity in those various S-1 applications. District Court Enforces Subpoena Against “Meme-Coin” Creator: A judge in the U.S. District Court for the Southern District of Florida has agreed to enforce a subpoena issued against the issuer of “Let’s Go Brandon” Coin (“LGBCoin”). The creator has asked for a stay in enforcement of the Order. Conclusion: As we celebrate the one-year anniversary of our Bi-Weekly updates, the past few weeks in the Web3 legal landscape have been notably dynamic. With major settlements, ongoing litigations, and regulatory shifts, we've observed significant movements that will undoubtedly shape the future of blockchain and cryptocurrency compliance and enforcement. From Terraform Labs' hefty settlement with the SEC to the evolving regulatory status of Ether, these developments highlight the evolving interaction between emerging technologies and established legal frameworks. We thank our readers for their continued engagement and invite you to subscribe for more insights and analyses that help navigate these complex intersections. Stay tuned to the Polsinelli BitBlog for further updates and expert commentary tailored to the blockchain and cryptocurrency community. 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.

Big news dropped in the past few weeks, which sent shockwaves across the industry: according to a recently filed lawsuit, the SEC has classified the second largest cryptocurrency, Ether, as a security in certain ongoing investigations for over a year now. While many expected such a revelation to come out eventually with the looming Ether spot ETF approval deadlines approaching, the scope and duration of the SEC’s investigation was news that the industry is still trying to come to terms with. There were also multiple developments related to criminal cases against digital asset privacy-preserving protocol developers worth noting, and the SEC is likely to bring enforcement action against the popular trading platform, Robinhood, related to its digital asset trading platform.  These developments and a few other brief notes are discussed below. MetaMask Wallet Developer Sues SEC: April 25, 2024 Background: Consensys, developer and provider of leading self-custody digital wallet MetaMask, has sued the SEC for declaratory and injunctive relief in the Northern District of Texas. The complaint is available here. The suit alleges that the SEC issued a Wells notice which warns of a very likely lawsuit against Consensys. The Consensys lawsuit seeks a declaration that (1) the purchase and sale of Ether are not securities transactions subject to the SEC’s jurisdiction; (2) the MetaMask wallet’s swapping functionalities are not subject to the agency’s broker-dealer registration requirements; and (3) the MetaMask wallet’s staking functionalities are not securities transactions. Summary: Consensys appears to expect the SEC’s Wells notice process would not result in lack of prosecution, suing the SEC in a favorable 5th Circuit instead of allowing the SEC to bring a lawsuit first. Similar to the Coinbase lawsuit, this lawsuit appears to be part of a larger play to create a potential circuit split if the rulings differ from the Coinbase case in S.D.N.Y. (2nd Cir.), Binance case in D.D.C. (Fed. Cir.), or Kraken case in N.D.Cal. (9th Cir.). The SEC must be running into a resource allocation issue at this point, as it is unclear whether the agency will have the resources in the crypto enforcement unit to litigate lawsuits against the above entities plus Uniswap plus the other outstanding litigation the agency has going on simultaneously. Various Developments in Blockchain Privacy Protocols Raise Questions on Permitted Levels of Privacy Preservation: April 24-27, 2024 Background: Samourai Wallet and associated Bitcoin mixing protocol developers were arrested and charged with conspiracy to commit money laundering and conspiracy to operate an unlicensed money-transmitting business. Relatedly, after those charges were filed, the FBI issued a warning that “[u]sing a service that does not comply with its legal obligations may put you at risk of losing access to funds after law enforcement operations target those businesses.” Also related, the DOJ has responded to Roman Storm's motion to dismiss regarding his involvement with Tornado Cash. Summary: Developments in the above cases will set legal precedent on when individuals can create privacy-preserving technologies that can be used for legal and illegal purposes alike. In Tornado Cash, for example, the DOJ takes issue with the defendants’ failure to program a backdoor for law enforcement into the protocol’s code. The most frustrating part of this response is the government (potentially intentionally) linking together the actions of disparate actors (developers, validators, relayers, and TORN token holders) into a single entity. It is also interesting that the DOJ seems to be taking the position that lack of control over funds at issue is not relevant to the “accepting value that substitutes for currency” aspect of the rules and regulations. All of the above could lead to U.S. citizens having fewer privacy tools available, putting their safety and funds at risk. Robinhood Served Wells Notice for Crypto Trading Services: May 6, 2024 Background: Robinhood Crypto has received a Wells notice from the SEC indicating the agency staff will recommend that the SEC file an enforcement action related to Robinhood’s crypto trading platform. You can read the Robinhood response here and the 8-K filing update here. Robinhood is the latest major operator in the space to receive such a notice, with the notice to Consensys discussed above and the Uniswap notice discussed in our previous update. Robinhood Crypto also lists less than two dozen digital assets and is far more selective with its listings than exchanges like Coinbase, Kraken, and Binance which were previously sued by the SEC. Summary: The combined actions indicate that offering retail participants access to any digital assets, other than Bitcoin, is viewed by the agency as a violation of applicable securities laws. The fact that the SEC seems to be keen to bring an action against Robinhood even after Robinhood removed some of the tokens alleged to be securities in the Coinbase/Binance suit from the Robinhood crypto trading platform shows that merely delisting assets which the SEC claims to be securities is not sufficient. It also is troubling if Robinhood’s CTO’s Congressional testimony on this subject is part of what led to this action. The Digital Chamber of Commerce and other industry groups have condemned this latest action by the agency. Robinhood’s founder has indicated he plans to fight the allegations if a lawsuit is brought by the agency. Briefly Noted: Custodia Appeals Master Account Loss: Custodia has appealed the decision to uphold the Federal Reserve Banks’ denial of access to a Master Account. Custodia’s novel business plan of charging customers for keeping 100% reserves instead of lending amounts deposited to third parties, along with their willingness to custody digital asset,** appear to be the primary reasons for the denial of Master Account access. Industry Groups Challenge Dealer Rule: The Blockchain Association and Crypto Freedom Alliance of Texas filed a lawsuit against the SEC challenging the new dealer rule which would have a huge impact on DeFi. It looks like the crypto bar has chosen Texas as its fighting ground for challenges to potential administrative overreach.  Binance Founder Sentenced to Four Months in Prison: Binance founder gets 4-month sentence after earlier pleading guilty to anti-money laundering violations. This timeline of legal issues that Binance and CZ have run into is phenomenal. Also a good article about the effect of the SEC case here which quotes Polsinelli attorneys Stephen Rutenberg and Jonathan Schmalfeld. Exodus Movement, Inc. Listed on New York Stock Exchange: Self-custodial digital wallet provider Exodus announced that its common stock has been approved for trading on the New York Stock Exchange. Available for desktop, mobile, and browser, the Exodus wallet allows users to secure, manage, and swap cryptocurrencies like Bitcoin, Ether, and others. It became the first company to have its common stock tokenized for blockchain-based trading. Conclusion: As the landscape of cryptocurrency regulation continues to evolve, recent actions by the SEC, including its classification of Ether as security and the issuance of a Wells notice to major platforms like Robinhood, underscore the complex interplay between innovation and regulation. These developments, coupled with ongoing legal challenges and enforcement actions, highlight a period of significant uncertainty and adjustment for the industry. As stakeholders navigate these turbulent waters, the outcomes of these legal battles will likely shape the future of digital asset regulation and the broader financial ecosystem. The industry's response, as well as the legal precedents set, will be critical in determining how technologies that preserve privacy and enhance user autonomy can coexist with regulatory frameworks designed to ensure market integrity and protect investors. **CORRECTION: An earlier version of this post incorrectly stated that Custodia accepts customers’ digital asset deposits. This has been corrected to clarify that Custodia offers digital assets custody services for customers but those assets are not accounted for as deposits on Custodia’s balance sheets. 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.

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

It was a busy week for digital assets with the Securities and Exchange Commission, as the agency was sued by a digital asset exchange hopeful and faces responses in its pending litigation against existing digital asset exchange Payward, Inc. d/b/a Kraken. Elsewhere in Web3 law, as the Department of Energy retracted its plan to survey Bitcoin mining operations, and Wyoming passed a law which creates a corporate structure for decentralized autonomous organizations (“DAOs”) modeled off the state’s existing structure for unincorporated non-profit associations (“UNAs”). All of this took place with Bitcoin and Ether reaching all-time highs in trading values, bringing back positive news and additional funding to the ecosystem.  These developments and a few other brief notes are discussed below. Exchange Hopeful and Texas Advocacy Group Sue SEC: February 21, 2024 Background: The Crypto Freedom Alliance of Texas and hopeful exchange platform LEJILEX have sued the SEC in a declaratory judgment action, seeking a ruling that LEJILEX’s planned actions to act as a centralized platform (named Legit.Exchange) for peer-to-peer and blind bid/ask trading of certain digital assets does not require registration with the SEC as a securities exchange, broker, or clearing agency. Summary: Former Solicitor General of the United States, Paul Clement, is a listed attorney against the SEC, as are various other highly accomplished appellate litigators. Combined with a favorable 5th Circuit forum and District Court Judge draw and this is certainly a case to pay attention to. It raises very similar issues to the defenses raised by exchanges currently litigating against the agency (as explained below) but lacks any potential bad factual baggage which those exchanges may have. The SEC can be expected to seek an early dismissal on standing or other jurisdictional grounds. Kraken Responds to SEC Lawsuit; Alleging the Lawsuit is an Attempt to Stifle Free Speech: February 22, 2024 Background: The digital asset exchange Payward, Inc. (aka, “Kraken”) has moved to dismiss the lawsuit filed against it by the SEC related to the facilitation of sales of certain digital assets.  Namely, ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL. In a separate blog post explaining the Motion to Dismiss, Kraken claims that the day after Kraken testified to the House Financial Services Committee regarding the need to limit the SEC’s authority over regulation of digital assets, an SEC official called Kraken stating the agency’s intent to sue. Summary: This Motion to Dismiss largely follows the framework of the Coinbase Motion for Judgment on the Pleadings and the Binance Motion to Dismiss. All raise similar arguments regarding the token sales at issue not being “investment contracts” and the SEC’s alleged regulatory overreach which is argued by the defendants to be contrary to previous agency positions and violates certain separation of powers principles. What is interesting about the Kraken suit is the blog post and motion outright stating that the SEC’s lawsuit is retaliation for Kraken’s Congressional testimony. “Crypto innovators in the United States should not have to fear retaliation for their political speech. They should be free to earnestly advocate for better law and more efficient markets. They should be free from intimidation by a politically compromised agency.” Multiple Amici Come Out in Support of Kraken and Opposition to SEC: February 27, 2024 Various amicus briefs were filed in the SEC vs. Kraken lawsuit, including briefs filed by the Chamber of Digital Commerce, the Blockchain Association/DeFi Education Fund, Paradigm, and a group of State Attorney Generals. All of the amicus briefs call into question the seemingly shifting stance of the SEC on what is a “digital asset security” or an associated “ecosystem” which the SEC has argued turns a particular blockchain’s token into something which satisfies the commonality element under Howey. Tl;dr: With this being an election year, any real change in law or administrative policies is likely going to come from the courts, if at all. The amount of amicus support at the district court level for all the exchange cases has been an impressive showing from industry advocacy organizations, businesses, and political actors. The State Attorney General briefing is especially interesting, claiming the SEC is overstepping into the realm of general consumer protection and money transmission which are typically issues reserved for the states. SEC Commissioner Uyeda Warns About Unbound Administrative Authority SEC Commissioner Mark Uyeda gave a speech to the Council of Institutional Investors titled Dangers of the Unbounded Administrative State which included a section regarding the current regulation of digital assets by the SEC. In it, he warned the Commission’s “broad reading of Howey would appear to scope in many common transactions in the non-digital world, including pre-purchase commitments, collectibles, art, and land.” Tl;dr: This is the strongest statement by an SEC Commissioner without the last name Peirce to come out in opposition to regulation by enforcement by the current SEC.  “When a regulator can, without practical limitation, promulgate, interpret, and enforce rules and guidance, including retroactively, the temptation to be arbitrary in the exercise of administrative power and enforcement can be great.” Combined with his dissent to the ShapeShift settlement, and it appears politicians are getting more emboldened to publicly object to regulatory enforcements against digital asset industry participants. Briefly Noted: SEC Settles With ShapeShift: The SEC settled with Erik Voorhees’ long-inactive exchange entity ShapeShift for a $275,000 fine and an agreement that the company would no longer violate the Securities Exchange Act. Shapeshift handed off operations to a DAO in 2021, which continues to operate unaffected. As stated by SEC Commissioners Peirce and Uyeda “[t]he Commission’s enforcement action against ShapeShift is the latest installment in the serial drama of the Commission’s poorly conceived crypto policy.” SEC Seeks to Use Default Judgment in Coinbase Case: Predictably, the SEC is trying to use a default judgment in the Wahi case against Coinbase and predictably Coinbase pushed back. “The Wahi order was procured against an empty chair and its reasoning reflects as much. Coinbase respectfully submits that the default judgment against Mr. Ramani should be afforded no weight.” Wyoming Creates New Corporate Structure for DAOs: Wyoming passed a law creating a new corporate structure: the “Decentralized Unincorporated Nonprofit Association” or “DUNA” (terrible name; unless it involves sandworms). This was a structure advocated by various industry participants as a DAO corporate wrapper, and is seemingly designed primarily to avoid triggering Corporate Transparency Act reporting requirements. Advocacy Groups Block Department of Energy Survey of Bitcoin Miners: The Texas Blockchain Council filed a lawsuit challenging the Department of Energy’s recent “emergency” survey requiring bitcoin miners to provide ongoing reporting to the agency. House Majority Whip Tom Emmer has also sent a letter to the agency challenging its actions. These efforts apparently worked, as the Department of Energy retracted it survey. Blockchain Association Advocates Against Sen. Warren Proposal: The Blockchain Association wrote a letter, signed by many members who are former or current law enforcement or military, advocating against Senator Elizabeth Warren’s proposed anti-money laundering law. Digital assets aren’t going away, so laws which are impossible to comply with based on technological limitations won’t kill it. It will just drive it overseas away from the reach of U.S. regulators. Polsinelli Blockchain+ News and Speaking: Bitblog Blockchain+ Bi-Weekly key author Jonathan Schmalfeld will be speaking on May 15th at the D.C. Blockchain Summit together with key members of Congress and senior regulators and Commissioners. He will also be speaking at NFT/NYC on April 3rd. Conclusion: The landscape of digital assets and Web3 law is currently marked by a series of legal and regulatory challenges, as well as legislative attention and increased values that underscore the ongoing tension between innovation and regulation. The lawsuit by the Crypto Freedom Alliance and LEJILEX against the SEC, alongside Kraken's defense against the SEC's lawsuit, highlights the digital asset industry's resistance to what it perceives as regulatory overreach as well as its maturation in being able to assertively self-advocate. Moreover, Wyoming's pioneering legal framework for DAOs and the backlash against regulatory actions by various advocacy groups and political figures, including SEC Commissioner Uyeda's critique, reflect a broader debate on the balance between fostering innovation in the digital asset space and ensuring regulatory compliance. These developments suggest that the resolution of these tensions will significantly shape the future of digital assets and their regulation. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

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