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.