It’s been an eventful stretch in crypto law and regulation. The Senate passed the GENIUS Act — the first major federal crypto bill to clear the chamber’s 60-vote threshold needed to overcome a filibuster — which would establish clear federal guidelines for stablecoin issuance, governance, and custody. Legislative activity continues to accelerate in Congress, with the Senate also holding its first hearing focused squarely on crypto market structure. Meanwhile, the long-running SEC v. Ripple case appears to finally be drawing to a close — albeit without the court’s blessing on the parties’ proposed settlement. The Blockchain+ team at Polsinelli is also proud to have served as lead authors of a submission to the SEC’s Crypto Task Force on behalf of The Digital Chamber. The letter addresses the status of consumer NFTs and other digital assets that should not fall under the SEC’s purview, discusses how the SEC should develop a digital assets taxonomy, and makes certain suggestions regarding SEC processes on a going-forward basis. You can read the full letter here. These developments and a few other brief notes are discussed below. SEC v. Ripple Settlement Agreement Nixed by Trial Court; Appeals Still Dropped: June 26, 2025 Background: Back in May, Judge Torres denied the parties’ joint request to approve a final proposed settlement of the SEC v. Ripple matter. The parties went back to do the legwork that Judge Torres found lacking in their initial attempt, and Judge Torres has once again denied request, ruling that “the parties do not have the authority to agree not to be bound by a court’s final judgment that a party violated an Act of Congress in such a manner that a permanent injunction and a civil penalty were necessary to prevent that party from violating the law again.” Analysis: On one hand, it’s always troubling when a court gets between two parties trying to settle a matter. On the other hand, it is hard to fault Judge Torres, who watched the SEC spend immense administrative and judicial resources over a half-decade period only for the SEC to do a complete about-face after the matter concluded. As Judge Torres ruled, the SEC briefed that “without an injunction, Ripple would continue to disregard the laws of Congress in a manner that would hurt investors,” so hard to accept the SEC effectively asking the court to ‘disregard’ its own prior statements. Ripple announced it was dropping its appeal, so this appears to be the end of the matter. Senate Digital Asset Subcommittee Holds Market Structure Hearing: June 24, 2025 Background: The Senate Banking Subcommittee on Digital Assets held a hearing titled Exploring Bipartisan Legislative Frameworks for Digital Asset Market Structure. The same day, Senate Banking Committee Chair, along with 3 other Republican colleagues, released their proposed digital asset market structure legislation principles, which appear to align with the CLARITY Act currently pending in the House. The hearing was sparsely attended, with only five of the eleven subcommittee members making an appearance and Senator Alsobrooks (sitting in for Ranking Member Gallego) being the sole Democrat to attend. Analysis: Having already passed stablecoin legislation, the Senate is turning its eye to market structure legislation. However, the sparse attendance could indicate that priorities lie elsewhere while the Senate waits to see how the House handles the CLARITY Act and GENIUS Act. That said, this was the first Senate hearing on market structure that seemed less exploratory and more focused on actual legislative text goals — a positive step. It looks like the goal is for market structure to be through both chambers of Congress by the end of September, which is ambitious to say the least, but an aggressive timeline gives market structure a chance of passing this year. Stablecoin Bill Passes in Senate on 68-30 Bipartisan Vote: June 17, 2025 Background: As expected after clearing cloture, the GENIUS Act (as amended) has passed the Senate and now moves on to the House for its consideration. The bill requires most stablecoin issuers to be approved and overseen by federal financial regulators such as the FDIC, OCC, and Federal Reserve, while allowing states to approve issuance under $10 billion, as long as the entities are regulated at the state level under similar frameworks. The bill was amended to win over pro-crypto Democrats seeking stricter rules for nonfinancial and foreign stablecoin issuers. The scope of payment stablecoins is limited to centralized tokens, meaning they are issued and managed by a single entity that maintains full control over the reserves, with real world 1:1 backing, such as stablecoins backed by treasury instruments or the U.S. dollar. This is the first crypto bill to pass the Senate’s 60-vote majority needed to overcome Senate filibuster rules, unlike the Senate’s 2024 disapproval resolution for the SEC’s Staff Accounting Bulletin, which only required a simple majority under the Congressional Review Act and was ultimately vetoed by President Biden. Analysis: There are currently enough votes in the House to get this passed and onto the President’s desk, where he has said he would sign the bill into law in its current form.  However, there are ongoing talks in the House to try to link the GENIUS Act’s passage with the CLARITY Act market structure legislation, which will face a much steeper path to passage. Hopefully, the GENIUS Act doesn’t get tripped up right before the finish line by efforts to tie it to broader legislation efforts. Effective market structure legislation could be truly transformative for the industry,  but there is a “bird in hand” argument for locking in a stablecoin win now instead of trying to do everything at once and ending nothing. Even if the GENIUS Act is signed into law, products such as Euro-pegged stablecoins, algorithmic stablecoins, and yield-bearing stablecoins have yet to be addressed. Briefly Noted: Payments Article: “How Stablecoins Could Transform Merchant Payments” by the Coinbase-led Payments Innovation Council is a great reference on how stablecoin payments can be implemented by businesses. The full protocol described in the article outlines a model compliant with existing payment processing laws (including smart-contract-enabled escrow for chargebacks) while potentially saving companies significant fees. DAO Governance Study: Practitioners in the space should read this recent study on governance centralization in decentralized autonomous organizations (DAOs) and its drivers and economic implications. “Our findings suggest that DAOs thus far fall short of delivering the promise of decentralized governance.” Fed Reputational Risk Examinations Over: The Federal Reserve has joined the OCC and FDIC in ending “reputational risk” examinations for banks it oversees. This is part of a wider effort across agencies and Congress to require firm metrics for banking examinations rather than basing examinations on industries a bank services. Bitcoin Backed Mortgages: Federal Housing Finance Agency’s Director, Bill Pulte, has directed the agency to study consumers’ use of crypto holdings for mortgage qualifications and a letter directing Fannie Mae and Freddie Mac to consider crypto for mortgage loan risk assessments. Prediction Markets/Funding Stays Hot: Kalshi, one of the leading prediction markets permitted in the U.S. after winning their dispute with the CFTC last year, is reportedly raising $185 million in a Series C at a $2 billion valuation. Polymarket also reportedly closed on a $200 million raise at a $1 billion valuation. The M&A activity is also starting to provide venture funds with liquidity for new investments. In-Kind Redemptions Coming: ETF purchasers are going to be given the option for in-kind redemptions in the near future. So people can buy in or sell ETF positions without exiting the underlying asset. There are still tax compliance issues to work through before this becomes a reality, though. FTX Creditor Distributions Begin: FTX’s bankruptcy estate started its first wave of creditor distributions on June 24, 2025, with some customers reportedly seeing higher-than-expected recoveries thanks to crypto market gains. Additional payouts are expected to continue into 2026. Supreme Court to Hear ’40 Act Matter: The U.S. Supreme Court has agreed to hear a case that would settle a split between the Circuits as to whether there is a private right of action under the Investment Company Act of 1940, or the ’40 Act.  Courts had long held that there is no such right of action until SDNY, and then the 2nd Circuit found that the ’40 Act contains "rights-creating language" that a court can't deny a rescission claim for violation of the statute.  While this doesn’t directly implicate crypto, many crypto and DAO structures potentially implicate the registration provisions of the Investment Company Act.  If there is a private right of action, there may be another fairly broad avenue for class action plaintiffs to bring new claims.  Conclusion: From stalled settlements in federal court to ambitious timelines for market structure legislation, digital asset law in the United States remains in flux. While the GENIUS Act’s bipartisan support offers a rare moment of legislative clarity, efforts to tie it to broader market reforms could still jeopardize its path forward. At the same time, regulatory agencies continue to refine how they treat crypto-related activities, from stablecoin payments to mortgage underwriting. As always, the space moves fast, and legal practitioners will need to keep pace with a landscape that is being rewritten in real time. 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 took a break from the usual Bi-Weekly updates for the Thanksgiving holiday, but the Web3 legal developments did not. There was a significant ruling out of the 5th Circuit, which has major implications on the legal treatment of immutable software code and agency actions after Loper Bright generally. There was also an action brought against the SEC by eighteen states regarding the agency’s handling of digital asset matters, a federal district court ruling overturning the SEC’s recently enacted Dealer Rule, and a host of other legal developments that are sure to have ramifications across the industry. These developments and a few other brief notes are discussed below. 18 States File Lawsuit Against SEC Over Handling of Crypto: November 15, 2024 Background: Eighteen states have filed a lawsuit against the SEC and its Commissioners, accusing them of unconstitutional overreach and unfair persecution of the digital asset industry. The lawsuit was jointly filed in Kentucky federal court by Kentucky, Nebraska, Tennessee, West Virginia, Iowa, Texas, Mississippi, Montana, Arkansas, Ohio, Kansas, Missouri, Indiana, Utah, Louisiana, South Carolina, Oklahoma, and Florida. The lawsuit alleges that the agency’s actions focusing on U.S. crypto companies “defy basic principles of federalism and separation of powers.” Analysis: The DeFi Education Fund assisted with this effort, which is clear from the pleadings. With Chair Gensler’s impending resignation, to be soon replaced with a more digital asset-friendly head of the SEC, this may just be litigation theater. On the other hand, if any case is going to make it to the Supreme Court on an expedited basis regarding the appropriateness of applying Howey to digital assets, it would be a matter brought by a large number of states against the SEC to be heard by a current group of Supreme Court Justices that have shown their predilections to limiting perceived agency overreach. Judge Rules Lido DAO Might Be a General Partnership: November 18, 2024 Background: The Court in Samuels v. Lido DAO has rejected motions to dismiss filed by various investors, holding that Lido DAO is adequately alleged to be a general partnership under California law and that the investors are adequately alleged as general partners, which would make them jointly and severally liable for the actions of the DAO. This means the named parties will need to defend themselves in court or risk being held jointly/severally liable if the challenged DAO actions are deemed illegal. Analysis: The reason for arguments for either corporate wrappers or BORGs is to avoid situations like this where participation in a DAO makes an individual or entity on the hook for everything it does. It seems like judges are easily convinced that the reason for working through DAOs is avoiding liability, as opposed to why many choose the DAO structure to mitigate other risks such as opaque governance and centralized risks. As it stands, it seems like DAOs will need to avoid the U.S. entirely or implement corporate wrappers of some kind to have a target for courts to point a finger to in lawsuits. Texas Court Strikes Down SEC Dealer Rules: November 21, 2024 Background: A Northern District of Texas district court has ruled in favor of the Blockchain Association’s challenge to the SEC’s promulgated the “Dealer Rule,” which expanded the definition of “Dealer” under the SEC’s interpretation of the Securities Exchange Act. The Court’s ruling states, “The SEC exceeded its statutory authority by enacting such a broad definition of dealer untethered from the text, history, and structure of the Exchange Act.” It also incorporated by reference its analysis in the related case, Nat’l Ass’n of Priv. Fund Managers v. SEC, No. 4:24-cv-00250 (N.D. Tex), where the Court noted, “[under the Dealer Rule], many of the world’s largest, most prominent market participants, including the Federal Reserve, may have been operating unlawfully as unregistered securities ‘dealers’ for 90 years without anyone—including the Commission—having previously noticed.” Analysis: The Court didn’t even have to reach the arguments regarding whether the rule was arbitrary and capricious or exceeded the SEC’s authority under Loper Bright to overturn the Dealer Rule. This means that SEC rules enacted under Chair Gensler and challenged in court are now 1-and-5 in surviving those legal challenges. That is more rules overturned by courts than the previous 3 SEC Chairs combined. Chair Gensler has announced his planned resignation but elected to stay on as Chair until January 20th, indicating Chair Gensler believes there are additional matters he wants to finalize that may not get done without him there to break a 2-2 tie, so still more to come. Consumer Financial Protection Bureau Issues Digital Wallet Rule: November 21, 2024 Background: The Consumer Financial Protection Bureau (“CFPB”) finalized its rules to supervise digital funds transfer and payment wallet apps. In announcing the final rule, the CFPB stated it “made several significant changes from its initial proposal. The transaction threshold determining which companies require supervision is now substantially higher, at 50 million annual transactions. Given the evolving market for digital currencies, the CFPB also limited the rule's scope to count only transactions conducted in U.S. dollars.” Analysis: While Coinbase, the DeFi Education Fund, the Blockchain Association, and others all sent staunch opposition to the proposed rule encompassing self-custody digital asset wallets, most expected the agency formed by Elizabeth Warren would still go through with the rules as written. So the CFPB expressly limiting the rule to wallets for U.S. dollars was a pleasant surprise. Either way, this saves a ton of industry time and effort in not having to file lawsuits to challenge the rule if it had been enacted as previously written. Fifth Circuit Overturns OFAC Sanctions of Tornado Cash Smart Contracts: November 26, 2024 Background: The Treasury Department’s Office of Foreign Assets Control (“OFAC”) sanctions of the open-source digital asset software protocol known as “Tornado Cash,” which forbid any dealings with the Tornado Cash smart contracts, were overturned by the 5th Circuit. This case was brought by various users of Tornado Cash, claiming the open-source, self-executing software is not sanctionable under the International Emergency Economic Powers Act (as opposed to the rogue persons and entities who abuse that software, who are sanctionable). The Court agreed, holding OFAC only had the power to sanction the “property” of a foreign national or entity, and since Tornado Cash’s immutable smart contracts are not the “property,” they are outside of OFAC's statutory powers to sanction. Analysis: The Court’s use of diagrams and plain speak to explain how Tornado Cash works was (other than some minor technical misspeaks on pg. 5) surprisingly well done. Hats off to the lawyers that had to effectively teach 76, 65, and 59-year-old judges the fairly complex technical aspects of the mixing platform enough for those judges to recite it back (mostly) accurately and reach the right result. This case may get attention outside of crypto law, as it turned primarily on Loper Bright grounds, which redefined the level of deference (previously known as Chevron deference) given to federal agencies in interpreting statutory text. Now we await the outcome of the various Tornado Cash developer cases. There is also the case pending in the 11th Circuit, which had oral arguments heard recently and is available here. Briefly Noted: SEC Chair Gensler Announces Planned Resignation: This was likely going to happen regardless of who won the Presidential election, but Gary Gensler announced he will resign from the SEC effective on inauguration day. With Commissioner Lizárraga also announcing his resignation, that will leave only Commissioners Peirce (pro-crypto), Uyeda (pro-crypto), and Crenshaw (anti-crypto, but on an expired term) left until new Commissioners are appointed by the President and approved by Congress. Kraken Request for Early Appeal Denied: The judge in SEC v. Payward Ventures (aka Kraken) has denied the exchange’s request for an interlocutory appeal of the dismissal denial ruling. So the case marches on. Frozen Staking Rewards Still Income: This was released the first week of November, but that was a busy week in crypto legal updates, so our update neglected to include this letter memo where the IRS clarified that their position is staking rewards are taxable the year earned, even if inaccessible due to being frozen on a platform or otherwise locked in a protocol. Various Articles Published on BSA and Sanction Authorities: The Blockchain Association published this deep dive into the history of the Bank Secrecy Act and argues that the Bank Secrecy Act (“BSA”) is neither fit nor constitutional when applied to digital asset transactions. There was also this recent publication worth reading on the attempted criminalization of the development of open-source cryptocurrency mixing software. Report on Dollar Dominance Through Stablecoins: Another publication worth reading is this work from the Digital Chamber on how stablecoins are supporting the continuation of U.S. Dollar dominance. Also, be sure to check out this letter from the Digital Chamber calling for the end of the policy forbidding crypto regulators from owning even a de minimis amount of crypto. Forbidding regulators from using the products/services they regulate is simply not sound policy. Southern District of New York Toning Down Crypto Cases: The co-chief of the SDNY U.S. Attorney’s Office securities and commodities task force said not to expect more crypto cases from the office any time soon with Jay Clayton expected to take over the office. Conclusion: In a dynamic and rapidly evolving legal landscape, the past few weeks have highlighted the interplay between innovation, regulation, and judicial oversight within the Web3 ecosystem. From challenges to agency overreach, such as the 18-state lawsuit against the SEC and the Fifth Circuit’s groundbreaking Tornado Cash decision, to rulings that reshape industry practices like the Lido DAO partnership liability and the Dealer Rule’s invalidation, the implications are profound. These developments emphasize the critical need for clarity and balance in how laws and regulations intersect with emerging technologies. While the legal battles are far from over, the outcomes will undoubtedly shape the future of digital assets, decentralized platforms, and blockchain innovation. As always, staying informed and engaged is key as we navigate this complex yet promising 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.

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.

As Congress is on its August recess, litigation over digital asset issues continued with major developments in the Yuga Labs trademark case and the SEC cases against Kraken and Consensys. While these matters all involve factual underpinnings specific to blockchain technology, the resulting rulings will have implications far surpassing the specific facts of those cases, including how courts rule on certain trademark and venue disputes going forward. With the matchup for the November 2024 U.S. Presidential election now set, campaign donations from blockchain and cryptocurrency companies are significant, with estimates suggesting that nearly 50% of all corporate campaign donations come from this sector. This election is shaping up to be one of the most interesting and exciting in history, with another ~70 days to go. The blockchain community is benefiting from increased support across both parties, a marked shift from just a year ago when such backing seemed unlikely. These developments and a few other brief notes are discussed below. Oral Arguments Conclude in NFT Trademark Ruling Appeal: August 15, 2024 Background: Oral arguments occurred in the Yuga Labs v. Rider Ripps appeal (starts around the 39-minute mark). Yuga was awarded $1,575,362.92 in damages at the district court level and another roughly $7 million in fees and costs following a Special Master’s assessment. A prior appeal of the same case over Rogers test issues was decided in Yuga’s favor back in October of 2023. Much of the oral arguments focused on the effects of the Jack Daniel's Properties v. VIP Products decision on the case, and buyers of NFTs which the judges questioned as having “a different understanding and are coming at this from a different place” from consumers of more ordinary goods, like sneakers. Analysis: This case highlights the need to have counsel who understands the technology at issue in litigation over these matters, as judges questioned “[w]hat are we even talking about? What is an NFT?” during oral arguments. As this is a trademark case, much of the underlying decision rests on what a “reasonable consumer” of NFTs would know. The explanation as to how an NFT can have verifiable provenance while still also being potentially confusing as to source or origin to consumers requires a level of combined practical and technical understanding of NFTs which very few attorneys possess. Consensys Continues Fight with SEC Over Venue for Securities Law Battle: August 16, 2024 Background: Back in April, Consensys Software Inc. (developer and provider of leading self-custody digital wallet MetaMask) sued the SEC for declaratory and injunctive relief in the Northern District of Texas. Complaint is available here. The SEC, in part, mooted that lawsuit through a letter stating the staff was not recommending charges be brought related to the company’s role in “Ethereum 2.0” (i.e., the protocol switch from proof of work to proof of stake). The SEC also brought a separate lawsuit against Consensys in the Eastern District of New York, alleging the digital wallet’s staking and swapping functionalities violate federal securities laws. The SEC moved to dismiss the Texas action, and Consensys responded in opposition. Analysis: Consensys argues that under applicable Fifth Circuit precedent, the district court that first receives the lawsuit over the controversy at issue should retain jurisdiction (i.e., the “first to file” rule). Generally, federal courts will often side with the government on venue issues and allow the government’s proposed venue to adjudicate matters when another valid venue is offered. But this is the same district that just struck down the Federal Trade Commission’s noncompete ban and gave nationwide application to the ruling, so it is possible due to the expedited briefing schedule in place that this Texas federal court will want to retain jurisdiction if it feels like the SEC is trying to run from the court’s authority. Motion To Dismiss Fully Briefed in Private Class Action Against Lido DAO: August 22, 2024 Background: Back in December of 2023, a putative class action was filed against Lido DAO, amongst others, regarding the sale of LDO tokens and alleging such sales were unregistered securities transactions. In response, Lido DAO’s token holders voted to create a legal entity, “Dolphin CL, LLC,” for the purpose of hiring counsel and representing Lido DAO’s interests in the litigation. That entity filed a Motion to Dismiss, which was opposed by Plaintiffs, and has been fully briefed now with the latest Reply in Support. Analysis: The arguments raised by Dolphin’s Motion to Dismiss are sound, in that the plaintiffs allege the DAO is a partnership with joint/several liability for members without meeting certain required elements (namely, the alleged partners having the ability to approve or disapprove additional parties from joining the partnership). However, the interesting part of this case is not the partnership law arguments, but rather how Lido DAO went about forming their defense. Creating a legal entity for purpose of defense rather than trying to wrap a DAO beforehand is a seemingly solid strategy in avoiding what the Dolphin Motion refers to as a “Hobson’s choice” of having a default judgment levied against them or supporting the claim that the software at issue is in fact a legal entity capable of being sued. Certainly, a case worth following. Kraken Loses Attempt at Early Dismissal of SEC Lawsuit: August 22, 2024 Background: During oral arguments in the SEC v. Payward, Inc. et al. (“Kraken”) case’s hearing on Kraken’s Motion to Dismiss, the Court forecasted its intent to deny Kraken’s motion. So it comes as no surprise that the written Order released on August 23rd did exactly that, allowing the SEC’s lawsuit against the digital asset exchange to move forward into further litigation. The Court rejected the SEC’s “misstatements” about the tokens at issue themselves being securities, stating “[t]o the extent it tries to argue that the individual tokens that form the basis of transactions on Kraken are investment contracts, or are themselves securities, its argument cannot proceed.” However, the Court distinguished the reasoning for dismissal of certain secondary sales in Binance and also refused to apply the major questions doctrine to the SEC’s actions. Analysis: This brings the win rate for the “Investment Contract Require Contracts” argument to exactly zero after that argument was rejected in Ripple, Binance, Coinbase, and now Kraken. It remains to be seen if that argument will ever win, since it makes sense as a limiting factor. Is it reasonable to expect the efforts of others based on your payment if there is no agreement or promise for those efforts? Additionally, the article from Edward Lee on The Original Public Meaning of Investment Contract also supports the view that the argument has legal merit. But eventually, if the losses keep stacking up, it will be hard for attorneys to keep advancing that argument in court. Briefly Noted: FinCEN Withdrawals Proposed Self-Hosted Wallet Rules: The 2020 FinCEN unhosted wallet proposal, which would require having KYC information for every unhosted wallet to which individuals transfer certain amounts of digital assets, has been formally repealed. As the identity of the owner(s) of any particular digital wallet is often unknowable for the individuals interacting with those digital wallets, the repeal of this rulemaking proposal is good news for the industry at large. Arrest of Telegram CEO in France: On Sunday, April 25, Pavel Durov, the CEO of Telegram, was arrested in France as he was disembarking from his private jet. The arrest stems from allegations of criminal activities involving the Telegram messaging platform. Details on the specific charges and Telegram's role are still emerging. This case could have significant implications for the accountability of digital platforms in hosting content. Additionally, the French prosecutors' actions may serve as a warning to those developing extraterritorial blockchain networks. Abra Settles With SEC: On August 26, the Securities and Exchange Commission announced a settlement with Plutus Lending LLC (operating as “Abra”) for failing to register its retail crypto asset lending product, Abra Earn. The SEC also settled charges against Abra for operating as an unregistered investment company. This settlement follows Abra's June 2024 agreement with the Conference of State Bank Supervisors on behalf of 25 state regulators for conducting digital currency transactions without proper licenses. We hope that with these settlements behind it, Abra will be well-positioned to continue as a leading company and drive innovation in the industry. Industry Advocacy Groups Submit Amicus in Various Cases: The Digital Chamber filed an amicus brief in the SCOTUS case regarding a derivative action against NVIDIA for failing to disclose in SEC filings the chip maker’s dependence on cryptocurrency mining to drive ongoing sales. Additionally, the Blockchain Association and DeFi Education Fund have joined the amicus in a case challenging the SEC’s consolidated audit trail (“CAT”) database. SEC Fights for Jurisdiction Over Creator of Pulse Chain: The SEC pushed back against Richard Heart’s jurisdictional defenses, claiming his in-person podcast appearance in Miami and virtual appearances in the United States subject him to United States securities laws and give the Court jurisdiction over him in those disputes. The case is currently pending in the Eastern District of New York. Fifth Circuit Ruling on Geofence Warrants Has Digital Asset Implications: While not directly crypto related, this recent ruling in the 5th Circuit struck down the use of “geofence” warrants, which are warrants to access location information for users who have opted into having internet providers retain location history. This could have massive implications for the use of the John Doe subpoenas against centralized exchanges and other cryptocurrency platforms like SFOX and Circle and was fairly universally upheld prior to this recent case law. Shaq NFT Lawsuit Avoids Dismissal: The Court hearing the lawsuit against Shaq related to his Astrals NFTs has allowed most the claim to advance, ruling against The Big Aristotle’s motion to dismiss and holding that his NFTs could be plausibly alleged as securities. Digital Chamber Appoints President: The Digital Chamber has announced the former Chief Policy Officer Cody Carbone has been promoted to President of the organization. Cody has led the Digital Chamber’s policy and legal efforts since 2022, and the editors of the Blitblog have worked closely with Cody in his previous role, including on preparing the Chamber’s amicus brief in the Hermès case. We congratulate Cody and look forward to continuing our collaboration with him. Conclusion: As the blockchain and digital asset landscape continues to evolve, the ongoing legal battles and regulatory developments underscore the growing importance of understanding the intersection between technology and law. The recent cases involving Yuga Labs, Kraken, Consensys, and others highlight how pivotal the outcomes of these disputes will be—not just for the parties involved, but for the broader implications they hold for the digital asset industry. As we approach the November 2024 U.S. Presidential election, the increased involvement and influence of the blockchain community signal a new era of political engagement for the sector. With the industry's support becoming increasingly bipartisan, the coming months promise to be both challenging and transformative for those navigating the complex legal and regulatory landscape of 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.

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 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.

As expected with Congress on break, the news the past two weeks was dominated by updates in major industry litigation efforts. While there was some action on the House’s stablecoin bill in the wake of the major announcement by PayPal that it released its own fully backed stablecoin, most of the focus has stayed on the Coinbase litigation against the SEC and the SEC’s decision to appeal the adverse rulings against the agency in Ripple. These developments and a few other brief notes are discussed below. PayPal Announces Launch of U.S. Dollar-Pegged Stablecoin, PYUSD: August 7, 2023 Background: As we noted in the Briefly Noted section of the last Bi-Weekly update, on August 7 PayPal announced it would be launching a fully-backed dollar-denominated stablecoin, PayPal USD (“PYUSD”). The planned token is an ERC-20 token, which means it can be transferred to self-custodial wallets, but similar to USDC and USDT, it does have freezing functionality and can be seized. Summary: Due to the follow-up news from Washington D.C. on this hotly debated issue of regulated stablecoin issuers, the Blockchain+ team wanted to provide a more in-depth background on the payment processing giant PayPal entering the stablecoin issuer field. Republicans have used the PayPal announcement to make a renewed push to pass the Clarity for Payment Stablecoins Act in the House. Democrat Maxine Waters was reportedly “deeply concerned” about PayPal’s new stablecoin. This may just be the first of many private stablecoins to come, as the issuer of the PayPal stablecoin, Paxos, is reportedly working on other white label stablecoins as well. Senator Lummis and Others File Amicus in Coinbase Litigation: August 11, 2023 Background: On August 11, there was an expected bevy of amicus filings in Coinbase’s litigation against the SEC, with filings in support of Coinbase coming from Senator Cynthia Lummis, the Blockchain Association, a16z/Paradigm, the Chamber of Digital Commerce, the DeFi Education Fund, and a group of securities law professors. The SEC has until October 3 to file its opposition. Summary: Most of the focus was on Senator Lummis’ brief which argues that the SEC is overstepping its authority by treating all crypto assets as securities, which contradicts legislative efforts in Congress and requires proper legislation. Senator Lummis is the co-sponsor of currently pending digital asset legislation titled the Responsible Financial Innovation Act. The brief's importance lies in its representation of a congressional perspective that challenges the SEC's approach and urges the court to defer to the legislative branch for creating a holistic crypto regulatory framework. While all the briefs are well-written and worth a read, the group of securities law professors’ brief also provides a cogent argument supporting the idea that and “investment contract” requires both an “investment” and “contract” to fall under the Howey test for a scheme. SEC Files Intent to File Interlocutory Appeal in Ripple and Ripple Responds: August 16, 2023 Background: On August 9, the SEC filed a letter request to file a motion for leave to file an interlocutory appeal of the Court’s July 13, 2023 Summary Judgment ruling. On August 16, Ripple responded with its own letter of intent to oppose the SEC’s request.  The SEC was given until August 18 to actually file its motion for leave to appeal with all briefing on the subject to be completed by September 8. The SEC’s arguments largely followed its letter, claiming the Court erred in its ruling regarding programmatic sales and “other distributions” to employees and charitable organizations as securities offerings. Summary: Seeking this interlocutory appeal is an aggressive move from the agency. Many thought the current leadership would be inclined to ride the issue out until trial, knowing that uncertainty would be better than a potential sped up major loss on appeal. For more background on the Ripple decision which the SEC seeks to appeal, read our breakdown on the BitBlog available here. As we noted at the time, the Court’s ruling as to “other distributions” was the most cursory of the decision, and there may be a factual record at play which was the reason for such a terse decision on a major aspect of the litigation. Court Issues Summary Judgment in Favor of Treasury Department in Tornado Cash Matter: August 17, 2023 Background: In September of 2022, Coinbase funded a lawsuit brought by six individuals challenging the U.S. Treasury Department’s sanctions of digital wallets linked to the Tornado Cash smart contracts. On August 17, the Court hearing that matter ruled in favor of the Treasury Department and issued summary judgment against the six individuals. The ruling found that Tornado Cash – a protocol comprised of a set of smart contracts with no formal organizational structure – is a “person” for purposes of the International Emergency Economic Powers Act, and that an “association” can be comprised of any group of people with a common purpose.  It further found that the smart contracts comprising the protocol are property in which that association has an interest even though nobody has ownership of the smart contracts, in part because of the fees generated by transactions on Tornado Cash.  This was one of two major lawsuits challenging the sanctions, the other brought by CoinCenter and still pending in the Northern District of Florida. Summary: Coinbase Chief Legal Officer took to Twitter in the wake of the decision saying “[w]e’ve always known that Fifth Circuit review is required to resolve these issues, and we continue to support them on appeal.” The language from the ruling is fairly expansive and does not seem to be limited to smart contracts of a type that comprise the Tornado Cash protocol. That said, smart contract can memorialize legally binding promises, facilitate the performance of legally binding promises, or may just be executable code having nothing to do with promises (legally binding or otherwise). Not all smart contracts act or should be treated the same. The Court seems to have missed this nuance when claiming all smart contracts are like vending machines (which, to be fair, is an example used by blockchain innovator Nick Szabo in explaining one of the functions of smart contracts). Briefly Noted: Celsius Network Plan and Disclosure Statement Approved for Voting by Creditors:  On August 17, the Bankruptcy Court approved the Celsius Network Plan of Reorganization for it to be voted on by eligible creditors. Please see our Bitblog post setting out the relevant timelines as well as our highlighting the terms of the Plan of Reorganization.  With this approval “Earn” creditors are significantly closer to getting repaid at least some of their claims. Eligible creditors should expect to be getting ballets to vote on the plan in the very near future. It Is important for any eligible to vote as one’s recovery may be impacted on whether a creditor voted. Federal Reserve Announced Program Directed Towards Blockchain: The Federal Reserve has announced a new program to “novel activities” for banks related to crypto-assets, distributed ledger technology, and complex, technology-driven partnerships with nonbanks. This level of advanced supervision for banking partners of the digital asset industry has been troubling to many and raises questions as to the legality of such practices. Bittrex Settles with SEC: Bittrex settled with the SEC and agreed to pay a $25 million fine. The release points out the fact that Bittrex told token issuers to scrub statements regarding promises of future returns and such prior to listing the asset. Of note was the SEC’s focus on Bittrex advising token issuers to remove statements which may induce others to rely on the efforts of others and/or expect profits in their decisions to buy tokens. Creating a “once a security always a security” issue for token issuers who made early marketing foot faults. Coinbase Gets CFTC Approval: Coinbase announced that it has received regulatory approval from the National Futures Association (the self-regulatory body governing the US commodities derivative industry) to operate a Futures Commission Merchant (FCM) to offer and sell crypto futures.  While there are a number of approved FCMs that were born from traditional commodities businesses or broker-dealers, this is the first time a retail crypto exchange operator has received a US FCM license. Prime Trust Files for Bankruptcy Protection: Nevada based cryptocurrency custodian Prime Trust filed for bankruptcy protection on August 15 in United States Bankruptcy Court for the District of Delaware. This filing comes as no surprise as Prime Trust has had a number of problems and setback over last the few months. These problems include Nevada's Financial Institutions Division attempting to take over the company in June by declaring them insolvent as well as a failed transaction where they were to be taken over by BitGo. Prime Trust stated in its filing that it has assets of between $50 and $100 million with liabilities of between $100 and $500 million with between 25,000 and 50,000 creditors. SEC Brings First Charges for Violating new Marketing Rule: The SEC’s first crackdown regarding the relatively new “Marketing Rule” under the Investment Advisers Act relates to a crypto fund manager.  Allegations include that the manager extrapolated three weeks of performance into a full year to get to 2700% hypothetical annualized return under a certain strategy, as well as inconsistent disclosure regarding custody of cryptoassets. A big part of the problem was that the manager allegedly buried disclaimers and assumptions used in calculating hypothetical performance behind embedded hyperlinks.  Just as a friendly reminder, an attorney or compliance professional should review any performance information (including hypotheticals, case studies, projections and track record) included in investment adviser marketing materials, even if it’s a tool located on a website or within an app. Conclusion: Over the past two weeks, major developments in the digital asset industry's litigation landscape dominated the headlines. PayPal's announcement of its new fully-backed U.S. dollar-pegged stablecoin, PYUSD, further ignited the ongoing discussions about regulated stablecoin issuers in Washington D.C. Additionally, Coinbase's litigation against the SEC saw support pouring in from influential entities, challenging the SEC's broader approach towards crypto assets. The SEC's decision to pursue an interlocutory appeal against Ripple and the summary judgment in favor of the Treasury Department regarding the Tornado Cash issue reflect the increasing complexity of the legal environment surrounding digital assets. With significant updates from Celsius Network, Federal Reserve, Bittrex, Coinbase, Prime Trust, and the SEC's enforcement actions, it's evident that the intersection of digital assets and regulatory frameworks is in a state of flux. These developments underscore the importance of attorneys for the digital asset industry to navigate and help shape the ever-evolving legal landscape. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

The Blockchain Bi-Weekly presented by the Polsinelli Blockchain+ team is a rundown of some of the key stories in the Web3, blockchain and crypto ecosystems curated by our attorneys navigating the intersections of code, smart contracts, and US law. As the end of the year approaches, the biggest news story was founder of the now defunct FTX cryptocurrency exchange, Sam Bankman-Fried (“SBF”), being found guilty on all counts in the criminal trial brought against him in the wake of the exchange’s collapse. The SEC stayed busy in their digital asset enforcement actions responding in opposition to cryptocurrency exchange Binance’s request for an early dismissal and bringing new actions with the DOJ against the founders and executives involved in the SafeMoon project. But while these allegations of digital asset fraud dominated the headlines, traditional financial firms have quietly begun taking steps to expand their cryptocurrency-backed ETF offerings and the Presidential Executive Order on AI mentioned cryptographic proofs as an essential tool to preserve privacy in an increasingly digital world. These developments and a few other brief notes are discussed below. SafeMoon Founders Hit with DOJ and SEC Complaints: November 1, 2023 Background: The SEC has brought a civil action against SafeMoon LLC and executives Kyle Nagy, John Karony and Thomas Smith for securities fraud and unregistered sales of securities. At the same time, the DOJ has also brought criminal securities fraud, wire fraud and money laundering charges against Nagy, Karony and Smith. Summary: SafeMoon previously faced private securities fraud actions last year, so this is not the first time these founders have faced legal challenges to their project. However, while the SEC has been active in the space, the DOJ has largely refrained from bringing criminal actions except in the most egregious situations and the allegations in the complaints here are serious, even if currently unproven. One important takeaway is the amount of marketing statements that the SEC and DOJ relied on to support their securities fraud claims, underscoring the importance of legal compliance training for social media managers involved in projects. Sam Bankman-Fried Trial Comes to an End; Guilty on All Counts: November 3, 2023 Background: SBF’s defense team closed out their defense on October 31, and the trial reached its conclusion with jury instructions set and closing arguments concluded. After these weeks of litigation, it only took the jury just a few hours to come back with a guilty verdict on all counts. These verdicts carry a maximum sentence of 110 years, with sentencing scheduled for March 28, 2024. There is also still a trial scheduled for next year on five more charges, plus potential state criminal charges to come. Summary: While there is still sentencing left and there will almost certainly be appeals and ongoing actions, it is a relief for the industry to have the SBF saga mostly in the rearview mirror. His fraud was a stain on the digital asset industry, so this seems cathartic for it to be over. As the prosecutor stated in closing “This is not about complicated issues of cryptocurrency. It’s not about hedging. It’s not about technical jargon. It’s about deception, it’s about lies, it’s about stealing, it’s about greed.” Consumer Financial Protection Bureau (“CFPB”) Proposed Digital Wallet Regulations: November 7, 2023 Background: The CFBP has proposed new federal oversight rules for non-banks which provide digital wallet or payment applications. Read the proposed rule and request for public comment here. In the release announcing the proposal, CFPB Director Rohit Chopra stated "Today's rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight." House Financial Services Committee Chair Patrick McHenry released a statement vehemently opposing the proposed rule. Summary: The CFPB estimates that this rule will affect 17 non-bank financial institutions, but of course, it doesn’t name those and the definitions are broad enough that this number seems low. Assumedly they only mean to encompass payment processors in the traditional sense without focusing on digital assets, but they expressly include bitcoin transfers as a payment so any company which allows for digital asset transfers would seemingly also fall in these rules. SEC Responds to Binance Motion to Dismiss: November 7, 2023 Background: The SEC has responded to the Motions to Dismiss filed by the various Binance entities back in September. While Binance was sued a day before Coinbase, due to some strategic lawyering from Coinbase’s attorneys, Coinbase has led the way in the briefing on the cryptocurrency exchange litigation. This latest briefing kept with that theme with the SEC largely restating the points they made against Coinbase in its case against Binance. Summary: The SEC predictably led with their arguments that securities laws are intentionally flexible, without stating any actual limiting principal on what separates a security from something that a person subjectively buys with at least some profit motivations (like a car, house, our countless other assets which value largely comes from actors other than the purchaser/owner). Interestingly, on page 47 of the briefing, the SEC seems to have finally backed off its position that ETH is a security, stating BTC and ETH are the “largest crypto assets in existence but [are] not at issue here.” Briefly Noted: Update in Digital Asset Bankruptcies: If you are having trouble keeping up with all the digital asset bankruptcy cases, you aren’t alone. Luckily, Stephen Rutenberg and Michael DiPietro break them all down in their recent publication with David Brill. Highly recommend reading to get caught up on what is happening in these cases and what to look forward to in the upcoming year. ETH Spot ETF Application on the Horizon: Financial giant BlackRock has registered a corporate entity "iShares Ethereum Trust" in Delaware, hinting at the imminent submission of a spot Ether ETF filing. Similar to the spot Bitcoin ETF filings, ETH has been approved to be trading in futures products but this would be the first offering of an ETH spot ETF. It will be interesting if the SEC resists this product, or if in the wake of the Grayscale decision, an approval is granted without needing judicial intervention. President Releases Executive Order on AI: While not directly focused on digital assets, the Presidential Executive Order on Safe, Secure, and Trustworthy Artificial Intelligence did include some focus on digital assets, including listing strengthening “privacy-preserving research and technologies, such as cryptographic tools…” as an area of emphasis. To read more on the Executive Order, check out the Polsinelli client alert on this subject. SEC Notes Difficulty in Recruiting Talent Due to Crypto Divesting Requirements: The SEC cannot find people to hire in crypto because of an Office of Inspector General rule which says an individual cannot own any crypto at all if they participate in crypto enforcement actions. As aptly stated in an article published by Paradigm Policy: you can’t regulate what you don’t understand. DeFi Education Fund Issues Tax Proposal Comment Letter: The DeFi Education Fund issued its tax proposal comment letter which lists all the ways the proposed rules would have potentially unanticipated and disastrous consequences. With over 115,000 comments so far, the IRS has some work to do on these proposed rules. SEC's Staff Accounting Bulletin No. 121 (“SAB 121”) Rejected by GAO: The Government Accountability Office (“GAO”) rejected the SEC’s attempt at rulemaking-without-rulemaking by ruling that SAB 121, which required custodied digital assets be listed as liabilities on balance sheets, failed to abide by the Congressional Review Act. Conclusion: The recent developments in the blockchain and crypto ecosystems illustrate a dynamic and evolving landscape at the intersection of technology, finance, and law. The guilty verdict in Sam Bankman-Fried's trial and the SEC's ongoing enforcement actions, including those against the founders of SafeMoon, underscore the legal complexities and regulatory challenges in the digital asset space. Meanwhile, traditional financial firms expanding their cryptocurrency-backed ETF offerings and the Presidential Executive Order on AI recognizing the role of cryptographic proofs highlight the growing mainstream integration and significance of blockchain technology. These developments, along with others discussed, reflect a pivotal moment in the digital asset industry, balancing regulatory scrutiny with innovative expansion. 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.

Stephen Rutenberg and Michael DiPietro, real estate finance attorneys in the firm's Miami and Wilmington offices, discuss the collapse of major crypto companies like Voyager, Celsius, 3AC, BlockFi, and FTX in 2022, revealing their involvement in crypto asset investments and loans. Read more about the recent crypto insolvencies.

The Blockchain Bi-Weekly presented by the Polsinelli Blockchain+ team is a rundown of some of the key stories in the Web3, blockchain and crypto ecosystems curated by our attorneys navigating the intersections of code, smart contracts, and US law. For the past two weeks, all eyes have been on the trial of Sam Bankman-Fried, the disgraced founder of the defunct digital asset exchange FTX. Of course, it’s only natural for peoples’ attention to be drawn to the biggest alleged financial fraud trial since Bernie Madoff; but the SBF story is more of a story of unchecked power than anything specific to digital assets. While many were focused on that front-page criminal trial, the SEC has been busy the past two weeks as well—to far less media fanfare.  The agency’s request for an interlocutory appeal in Ripple was denied, and it also did not file an appeal in the Grayscale matter signaling potential digital asset financial product approvals in the future. The agency also filed its response to Coinbase’s motion for judgement on the pleadings and had a range of amicus come out in support of its motion. These developments and a few other brief notes are discussed below. Criminal Trial of FTX Founder Sam Bankman-Fried Begins: October 3, 2023 Background: The Sam Bankman-Fried (“SBF”) trial started on October 3, 2023, and is the biggest financial fraud trial since Bernie Madoff. SBF was the founder of the now-defunct digital asset exchange FTX. He is accused of seven counts of fraud, conspiracy and money laundering centering on his alleged use of customer deposits on the crypto trading platform FTX to cover losses at his hedge fund, Alameda Research, and on personal expenses. The trial is expected to last six weeks. Summary: The first two weeks of trial resulted in some headline-grabbing moments, as did the Michael Lewis book “Going Infinite” which follows SBF and was published the weekend before SBF’s trial began. It will be impossible to tell the story of Web3 law in 2023 without mentioning the SBF trial, but this is less a story about cryptocurrency and more a story about standard financial fraud, albeit on a larger scale than most. While we will continue to cover the trial in these updates, we will likely keep the ongoing updates in the Briefly Noted section to not distract from the real developments in blockchain law. SEC’s Request for Interlocutory Appeal in Ripple Denied: October 3, 2023 Background: The SEC was denied its request for an interlocutory appeal at the trial court level, meaning the agency will need to take up its arguments on appeal after the trial on remaining merits issues scheduled for April 23, 2024. This means there is no chance of appellate review prior to 2024 as the SEC hoped for, and there is virtually no chance any decision could reach the Supreme Court before 2026 Summary: The judge in Ripple clarified her Order that a Howey analysis is a facts and circumstances analysis, and her ruling was based on the facts and circumstances specific to this case and not the laws of digital assets generally. Any loss for the SEC is good for the industry at this point. However, there is no way to know if the 2026 or beyond SCOTUS will be made up of justices who are as hostile to agency overreaches as the current SCOTUS is. This leaves lower courts to continue to decide one-off issues until there is Congressional movement, the SEC changes its enforcement strategies or SCOTUS decides the issue in 2026 or beyond. SEC’s Files Response in Opposition to Coinbase Motion for Judgment: October 3, 2023 Background: The SEC has filed their opposition to the Coinbase Motion for Judgment under Rule 12(c). The agency came out swinging, calling the Coinbase argument flawed and attempting to distance itself from prior statements by the agency which seem to contradict its current litigation posture. There were also three amicus filed in support of the SEC—the first from a group of administrative law scholars; the second from the New Finance Institute (which appears to be a blog); and the third from the North American Securities Administrators Association. Summary: The SEC claims in their briefing that both (1) the rights conferred by digital assets are inherent in the code itself (fn. 5); and (2) the SEC is merely there to assure investors receive adequate disclosures (pg. 23). Which is contradictory on its face but does not take digital assets necessarily outside the jurisdiction of the SEC. The agency also claims its briefing in Edward where it said: “‘investment contract’ makes clear that instruments of that name include those in which a return—whether labeled income or profit—is promised in a contract” (emphasis in their briefing) does not mean they were stating a contractual promise is required (fn. 7). That said, despite logical inconsistencies, the briefing is overall strong as could be expected from the top litigators in the agency, so it remains an uphill battle for Coinbase to get a dismissal this early in the case. Amicus Come Out in Support of SEC: October 10, 2023 There were three amicus filed in support of the SEC this week —the  first from a group of administrative law scholars; the second from the New Finance Institute (which appears to be a blog); and the third from the North American Securities Administrators Association. The securities administrators focused on the regulation of digital assets at large, the administrative law scholars focused on major question doctrine issues and the bloggers focused on seemingly just disliking cryptocurrencies generally. Tl;dr: The blogger’s brief is…interesting. It claims that viewing gold as an investment vehicle is incorrect and that the reason there are no cases of an “investment contract” without some contractual arrangement for future work or profits is due to the “base rate fallacy” and not because the SEC is moving the goalpost. It also cites the academic literature of “Wikipedia” and a total of five cases in the briefing.  The administrative law scholars focus on the major question doctrine claiming the doctrine does not apply to agency enforcement actions, even though the Administrative Procedures Act does apply to such situations. The securities regulators of course argue that securities regulations are clear and the SEC’s enforcements have been consistent. In sum, it appears that (as could be expected) the Coinbase amicus with interested industry filers were seemingly stronger than the SEC amicus, as it is rare to see administrate agencies gain support at the trial level for enforcement actions over any industry actors. SEC Lets Appeal Deadline Pass in Grayscale Matter: October 13, 2023 Background: We previously covered the D.C. Circuit’s decision in Grayscale, which found the agency acted arbitrarily and capriciously in denying the Grayscale spot Bitcoin ETF. The Court ruled that there was no basis for the SEC to claim that a Bitcoin Spot ETF would be any more subject to potential manipulation than the Bitcoin futures ETF which had already been granted by the agency. The SEC’s deadline to appeal that decision was October 13, 2023, and the agency apparently decided against filing an appeal in the Grayscale matter, which signals a likely approval for one of the various spot Bitcoin ETFs in the near future. Summary: While the SEC’s failure to appeal the Grayscale matter is an important indicator of the likelihood of future approvals, it does not mean approvals are imminent. It certainly does not help that a recent and since retracted leak of an early approval caused Bitcoin price to quickly rise, only to fall when it was revealed to be false reporting. It is possible the SEC will point to that as evidence of spot market manipulation ability. It is important to note that, at minimum, any decision for approvals or denials on products like a spot Bitcoin ETF would come from a closed meeting of the Commission and is not something that the SEC would delegate this for random approval. Briefly Noted: U.S. Registered ETH Futures Trading Begins: The ETH futures ETF has started trading in the U.S., making it clear that even the SEC does not consider ETH a security, otherwise it would never be allowed to trade in securities markets. The playbook for a spot ETF is clear, with Grayscale again leading the way. SEC Updated Third Circuit on Rulemaking: The SEC sent their Court-mandated update on the status of digital asset rulemaking, and it technically meets the Court’s order but just barely. I can’t imagine this is the expected level of transparency the Third Circuit was expecting when they kept this case on their docket to babysit the agency. Coinbase filed their own reply in response, accusing the SEC of more delays and gamesmanship. California Passes Comprehensive Digital Asset Registration Law: California Governor Newsom has signed the state’s “Bitlicense” bill into law which will go into effect on July 1, 2025. California joins New York as a state with fairly comprehensive regulatory regimes for digital assets. Any companies in the space operating in California should begin working towards compliance now. SEC Includes Crypto Assets on Examination Priorities Report: The SEC released its Division of Examinations Priorities Report outlining the Division's examination priorities for the coming year. Crypto is once again an exam priority for registered investment advisers and broker-dealers. The Division said it will keep monitoring firms and conduct exams "when appropriate," in light of "the continued volatility of, and activity around, the crypto asset markets." Conclusion: In the midst of the high-profile trial of Sam Bankman-Fried and the buzz surrounding the cryptocurrency world, it becomes evident that this legal landscape is evolving rapidly. The SBF trial serves as a stark reminder of the perils of unchecked power, transcending the digital asset realm to illuminate broader issues of financial fraud. Meanwhile, the SEC's recent developments, from the denial of its interlocutory appeal in Ripple to its response in the Coinbase case, hint at the complex and ever-changing regulatory environment for cryptocurrencies. As the legal saga continues to unfold, it is clear that the future of blockchain law will be shaped by these pivotal moments, and we'll be here to keep you updated on these critical developments. 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.

Polsinelli is partnering with the Wall Street Blockchain Alliance for an engaging series of panels and discussions exploring the ever-evolving realm of cryptoassets and their profound influence on the global financial landscape. The Crypto Investors Summit will take place in person on October 23, 2023, at the Players Club in New York. Polsinelli Fintech and Blockchain co-heads, Stephen Rutenberg and Daniel McAvoy will each be speaking on panels related to the regulatory crackdown on crypto and recent crypto bankruptcy. This event is free for Wall Street Blockchain Alliance members and Polsinelli will also be providing CLE for two panels for all qualified attendees. Date: Monday, October 23rd, 2023 Time: 1:00 PM – 6:00 PM Eastern Time Agenda: 1:00 pm - Panel 1 – Exploring the Cryptoasset Market: Current and Future Prospects In this panel, seasoned industry experts will delve into the developments of the past year, the evolving landscape of the crypto market, emerging challenges and opportunities, the tokenized future and the transformative impact on the traditional financial sector in the wake of these events. 2:00 pm - Panel 2 – Navigating the Regulatory Crackdown on Crypto In this session, seasoned industry experts will scrutinize regulatory stances on ongoing activities within the crypto space, industry reactions to these measures, impacts on global banking and the potential evolution of the market to maintain compliance while fostering innovation and expansion. 3:15 pm - Panel 3 - Crypto Insolvencies: Unraveling the Impact of Industry Failures and the Evolving Role of the Bankruptcy Courts Our panelists, representing various stakeholders in these cases, will offer valuable insights and lessons gleaned from these distinctive restructurings within the cryptocurrency realm. 4:15 pm - Panel 4 - The Empire Strikes Back – Legal Updates and Analysis of the SEC’s Cases Against Ripple and Coinbase In this session, a panel of experts will comprehensively examine these cases, scrutinizing the strategies employed by both parties and highlighting the pivotal significance of these cases for the future of cryptoassets in America. 5:10 pm – Networking & Cocktails Panelists: Phil Berg — Chair of Corporate Practice, Otterbourg P.C. David Brill — Former Deputy General Counsel at Voyager; Chair of the WSBA Cryptoasset Working Group Francesca Don Angelo — Deputy General Counsel - Galaxy Digital Samson Enzer — Partner, Cahill Gordon & Reindel LLP Jason Gottlieb — Partner & Chair, White Collar and Regulatory Enforcement, Morrison Cohen LLP Richard Johnson — Chief Executive Officer, Texture Capital Joshua Ashley Klayman Kuzar — U.S. Head of Fintech and Head of Blockchain and Digital Assets, Linklaters LLP; WSBA Board Member Pat LaVecchia — Chief Executive Officer, Oasis Pro Daniel McAvoy — Shareholder, Polsinelli Ron Quaranta — Chairman, Wall Street Blockchain Alliance Stephen Rutenberg — Shareholder, Polsinelli Kayvan Sadeghi — Partner, Jenner & Block LLP Jamie Solano — Partner, Ford O'Brien Landy LLP Robert Stark — Partner, Brown Rudnick LLP

Polsinelli is pleased to announce that in conjunction with the publication of the Multilaw FinTech Guide, Stephen A. Rutenberg, Co-Chair of Polsinelli's FinTech and Blockchain practice, will be speaking at an upcoming Multilaw Webinar on November 10th. Cryptocurrency & Blockchain: When do the benefits outweigh the risks? Featuring Polsinelli’s Shareholder Stephen Rutenberg The panel discussion gathers experts from across the network to discuss the development of cryptocurrency and blockchain usage in their jurisdictions, how the technology adoption is being received by regulators, its impact on wider initiatives (e.g. ESG), the current status in the tokenization of assets (e.g., financial streams, real estate, music rights, etc.) in the respective countries and what trends are likely to be important in the future. This webinar is open and relevant to all those who are interested in this growing area and will take place on Thursday 10 November at 3.00pm - 4.00pm (GMT) / 10.00am - 11.00am (EST). To register, or to learn more, click here. Panelists: Jill Wong, Howse Williams, Hong Kong Andreas Walter, Schalast, Germany Stephen Rutenberg, Polsinelli, USA Oded Ofek, M.Firon & Co., Israel Moderator: Jacob Kirkham, Growth Manager, Multilaw Multilaw is a global network of law firms bound together by enduring relationships. Across industries and practices, Multilaw shares client advice and active referrals, combining the highest legal standards and local expertise. Multilaw recently released its Global FinTech Guide. Put together by industry experts from member firms across the network, it presents a multi-jurisdictional analysis of the relevant legal framework and economic conditions under which FinTech services can be provided. A great resource for individuals and organizations involved in the FinTech sector from founders, companies, investors and advisors to other stakeholders across the industry. "We're proud to have partnered with Multilaw to draft the U.S. portion of the FinTech Guide and to collaborate with other highly-valued members of our global network," said Daniel L. McAvoy, Co-Chair of Polsinelli's FinTech and Blockchain practice. Multilaw also hosts a program of in-person and virtual events, both member-only meetings and webinars open to clients, covering some of the latest topics and sharing knowledge from across our global network.

On September 15, 2022, the Senate Committee on Agriculture, Nutrition, and Forestry (the “Ag. Committee”) held a hearing to discuss Senate Bill 4760, titled the Digital Commodities Consumer Protection Act of 2022 (the “Bill”) which was introduced by Senators Debbie Stabenow (D-MI) and John Boozman (R-AR). Senate Minority Whip John Thune (R-SD) and Senator Cory Booker (D-NJ) joined as original co-sponsors. The Bill lays out a framework for potential oversight by the Commodity Futures Trading Commission (“CFTC”) over certain parts the cryptocurrency market. The Ag. Committee has been charged with overseeing the CFTC ever since the CFTC’s creation roughly one hundred years ago following the enactment of the Grain Futures Act of 1922. The CFTC was created in large part to oversee what was, at the time, a new and developing commodities futures market. The Bill is one of a number of bills currently before Congress regarding the regulation or reform of the digital asset industry, including Senate Bill 4356 titled the Responsible Financial Innovation Act, sponsored by Senator Cynthia Lummis (R-WY) and Senator Kristen Gillibrand (D-NY) which also attempts to create a more comprehensive regulatory framework for digital assets Current CFTC Chairman Rostin Behnam commented in his opening remarks the appropriateness of discussing the CFTC’s potential role in overseeing another developing market, the digital asset commodities market, on this hundred-year anniversary. Chairman Behnam’s complete opening remarks are available here. The Ag. Committee meeting was split into two sections: the first of which Chairman Behnam served as the sole witness for, and during the second session committee members asked questions of various industry experts who were invited to speak. Through both sessions, digital assets were classified in three separate groupings: (1) digital asset commodities (which Ag. Committee Chairwoman Deborah Stabenow specifically said Bitcoin (“BTC”) and Ethereum (“ETH”) fall under); (2) digital asset securities; and (3) stablecoins. The bill’s proponents made clear that this bill only sought to regulate the first grouping (digital asset commodities) and merely be a “piece of the puzzle” on digital asset regulation which necessarily would require other regulations covering digital asset securities and stablecoins. Topics of Discussion During Hearing Throughout both sessions of the hearing, there was an emphasis on the need for regulation which provides regulatory clarity and keeps innovation and market development in the United States, while also providing much needed consumer protection. Some potentially interesting discussions from the hearing include: As stated above, Chairwoman Stabenow and many others on the committee treated it as a forgone conclusion that BTC and ETH are in fact commodities and should be regulated as such. This somewhat follows the position of the now controversial  “Hinman Speech” in which then acting SEC Director of Corporation Finance Bill Hinman took the position that ETH along with BTC had become “sufficiently decentralized” to no longer be considered securities. The SEC has since distanced itself from that position with respect to ETH. There was significant focus about the access digital assets can provide to individuals and communities who are underserved by the traditional banking industry, while also noting the lack of regulation has made these already vulnerable communities even more vulnerable to fraud and mismanagement. There seems to be strong interest by the Ag. Committee to get at least some regulation related to digital assets through Congress in the next 6-12 months, even if political realties make that unlikely. Chairman Behnam stated his office estimates it will need an additional $112 million in the next three years to fund the necessary resources to oversee the digital asset commodities industry, including rulemaking, hiring, training, and outreach. This increased budget is anticipated to be paid for by user fees on digital asset commodities trading platforms under the Bill. This request does open the Chairman to the cynical view that at least part of his motivation is to expand his judication and budget. Multiple Senators emphasized that they do not believe blockchain technology and the overarching Web3 ecosystem is a phase, and the pressing need for regulatory clarity in the United States on many issues facing this industry to prevent the country from falling behind economic rivals (primarily, China). Senator Gillibrand and many of the industry expert witnesses applauded the Bill as a great first step, but they noted that the Bill’s current form, including definitions of decentralized finance (“DeFi”), what constitutes a “digital asset commodity” vs. a “digital asset security”, and what actions make an entity a broker/dealer, will need revisions before the Bill can move forward. While there appeared to be almost universal acknowledgement of the committee members and witnesses that this Bill is not a complete solution to the lack of regulatory clarity in the digital asset industry, committee members generally indicated support on a bipartisan basis. There is hope that due to the bipartisan nature of the Bill, its seemingly large support amongst Ag. Committee members, and the almost unquestioned need to have some regulatory clarity in this space, that the Bill’s next round of edits and comments can be expected on an expedited basis. However even if the Ag, Committee were to vote in support of the Bill, its passage by the full Senate and of a comparable bill in the House remains fraught with challenges. Other Digital Asset Related Hearing on September 15, 2022 The Ag. Committee hearing on the Bill took place at the same time as the Senate committee on Banking, Housing, and Urban Affairs conducted a hearing to question Gary Gensler, Chair of the U.S. Securities and Exchange Commission (“SEC”) regarding the SEC’s regulation of the digital assets industry. It is unclear if these overlapping hearings were coincidental. During the Ag. Committee hearing on the Bill, multiple committee members questioned the CFTC’s ability to work together with the SEC to avoid creating a bureaucratic quagmire of competing federal agency oversights which would be harmful to the industry and, ultimately, the consumers. While Chairman Behnam was confident the agencies could work together on this, similar to how they work together in the swaps markets and oversight of other duel registered entities, Chair Gensler indicated that the two agencies often have overlapping jurisdiction and suggested that the SEC should implement a security-based swap execution facility regime similar to that implemented by the CFTC when Gensler was the head of that agency. It remains to be seen, however, if the SEC will endorse or support the Bill’s attempt to place a level of regulatory oversight over the digital asset industry into the hands of the CFTC instead of being under the sole purview of the SEC.

On August 9, 2022, the U.S. Securities and Exchange Commission (“SEC”) issued a Cease and Desist Order against Bloom Protocol, LLC (“Bloom”) and agreed to a related Offer of Settlement in respect of Bloom’s unregistered initial coin offering (“ICO”). While the SEC entered into many similar settlements with ICO issuers late in the tenure of former Chair Jay Clayton, this appears to be the first such settlement under the stewardship of current Chair Gary Gensler with an ICO issuer where there were no allegations of misconduct other than conducting an unregistered offering of securities. The alleged facts of the Bloom ICO are similar to those of many other SEC settlements with ICO issuers such as Airfox, Paragon Coin, and Enigma. Bloom offered and sold its tokens to the public, raising nearly $31 million from the sale of tokens to over 7,000 investors. While the tokens were sold by a non-US subsidiary of Bloom, the SEC alleged that the funds were actually controlled by the US entity. Tokens were then allegedly sold to a number of US investors in a “pre-sale” that appears to have been conducted under Rule 506(c) – private placements using general advertising or general solicitation to all verified accredited investors – followed almost immediately by a public sale that included US purchasers and made no attempt to verify accredited investor status. The release then goes to great lengths to establish that the tokens were securities under the Howey test, particularly focusing on investors’ expectations of profits. The other prongs of that test – an investment of money, into a common enterprise, and efforts of others – are largely assumed. The terms of the settlement also largely match the terms of prior settlements. Bloom is to issue a press release notifying the public of the order, permit investors to make claims, file a Form 10 registration statement under the Securities Exchange Act of 1934 to register the “BLT” tokens, and then offer rescission of the token once the registration statement is effective. In addition, Bloom was charged a civil penalty of a little more than the total amount it raised in the pre-sale and public sale. The Order contains an interesting new paragraph, not present in any of the prior ICO settlements, that could hint to the SEC’s view on making future determinations of whether a digital asset is a security: “If Respondent plans to file a Form 15 to terminate its registration pursuant to Rule 12g-4 under the Securities Exchange Act of 1934 on the grounds that the BLT no longer constitutes a “class of securities” under Rule 12g-4 because the BLT is no longer a “security” under Section 3(a)(10) of the 1934 Act, Respondent will notify the Commission staff at least thirty (30) days prior to such filing. Upon such notification, the Commission staff may make reasonable requests for further information, and Respondent agrees to provide such information, as applicable.” This appears to be an admission by the SEC of a belief held by many practitioners in the digital asset industry - that a token that was once a security could, under the right circumstances, cease to be a security at some point in the future. It is unclear from the Order what basis the SEC might assent to a digital asset’s treatment as a non-security. While in the past, the SEC released guidance on when a digital asset might be an investment contract under Howey with a heavy focus on operationality and decentralization of the underlying protocol, the Division of Enforcement has tried to walk this back in its prosecution of the XRP case against Ripple. This language could hint that the SEC may at some point become willing to make determinations that digital assets are not securities beyond the extremely limited three examples where the SEC has granted no-action relief in Turnkey Jet, Pocketful of Quarters, and VCOIN. Similarly, it appears that there may be a glut of forthcoming enforcement actions against issuers of ICOs that happened shortly after the publication of the “DAO Report,” particularly as applicable statutes of limitations come close to expiring. For example, on August 16, the SEC filed a complaint against Dragonchain with similar allegations. Additional lawsuits are likely to be filed in the near future.

On July 21, 2022, the Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) each alleged insider trading violations against a former Coinbase employee, his brother, and another alleged acquaintance of his. Coinbase is one of the leading exchanges in the United States for the trading of cryptocurrencies. The DOJ brought charges of wire fraud against the three defendants in the Southern District of New York without any allegations of securities law violations, while the SEC brought a civil claim for insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder in the Western District of Washington against the same three defendants. The SEC action raises questions about the state of digital asset regulation in the United States and could hamper digital asset development in the United States if there are not changes to this “regulation by enforcement” strategy by the SEC. The Case as Presented by the SEC/DOJ and the DOJ Indictment: The factual allegations by both the SEC and DOJ cases are largely the same. According to the DOJ Indictment and SEC Complaint (available here and here), Ishan Wahi (“Ishan”), is a former Coinbase product manager assigned in the asset listing team. In that role, Ishan “was involved in the highly confidential process of listing crypto assets on Coinbase’s exchange” DOJ Indictment, ¶2. Coinbase has numerous requirements before it will allow a digital asset to be listed for trading, including that it does not list tokens which it considers to be securities under US federal securities laws. Due to the rigorous criteria for listing a digital token on Coinbase, typically the market price of the token increases once there has been a public announcement that the token will be listed. As such, advance knowledge that Coinbase will approve a token for listing could be used to purchase the token at a potentially unfair discount. Id. Ishan allegedly took his advance knowledge of Coinbase’s asset listings and informed his brother Nikhil Wahi (“Nikhil”) and former college roommate Sameer Ramani (“Sameer”) of those upcoming listings. This allowed Nikhil and Sameer to buy those assets ahead of the listings and realize at least $1.5 million in combined gains after those assets had predictable bumps in value after being announced for listing on one of the largest cryptocurrency exchanges in the world. DOJ Indictment, ¶3. The scheme appears to have been detected by Coinbase. On May 11, 2022, Coinbase’s director of security operations reached out to Ishan to schedule a meeting regarding a suspected breach in confidentiality which resulted in assets being heavily traded ahead of Coinbase’s listing announcements. This increase in trading was also deduced in the market and discussed on Twitter, in large part due to Twitter influencer @Cobie tweeting about suspicious trading activity. The Cobie tweet is cited in the DOJ’s indictment. DOJ Indictment, ¶15. Possibly to avoid appearing for the interview with Coinbase’s director of security, Ishan purchased a one-way plane ticket to India and sent emails to his friends and colleagues explaining he had to go home for a family issue. DOJ Indictment, ¶18. However, this attempt to flee was thwarted when Ishan was apprehended by authorities and prevented from leaving the United States. According to the indictment, when apprehended Ishan had in his possession “an extensive array of belongings, including, among other items, three large suitcases, seven electronic devices, two passports, multiple other forms of identification, hundreds of dollars in U.S. currency, financial documents, and other personal effects and items.” DOJ Indictment, ¶20. While Ishan and Nikhil were arrested and will face charges with a possible penalty of 20 years of incarceration, Sameer is still at large and believed to be in India, having departed the US shortly after being informed by Ishan of the internal Coinbase investigation. SEC Complaint, ¶16. The DOJ charges alone are certainly newsworthy with similarities to the DOJ allegations against former OpenSea executive Nate Chastain (which we covered on the BitBlog here). Viewed in a bubble, the DOJ action appears to demonstrate effective compliance, enforcement, and collaboration among government, industry leaders, and social media activists as the combined investigative efforts of all three parties led to the perpetrators being brought to justice. Indeed, it was the public nature of the blockchain which allowed individuals on social media to bring these suspicious transactions to light.  Coinbase also cooperated with the DOJ’s investigation. The DOJ action shows how fraudsters can be apprehended under existing laws without an expansion of the securities laws. While the DOJ uses “insider trading” language in its press release, the charges are brought under the federal wire fraud act (18 U.S.C. § 1343) for Ishan’s alleged breach of his confidentiality agreement with Coinbase and Nikhil/Sameer’s use of that confidential information. Charges in the SEC Civil Action: When the DOJ indicts defendants on criminal charges of insider trading, it is not uncommon for the SEC to also bring a parallel civil action which typically gets stayed during the pendency of the criminal action.  This matter is unusual, however, because the DOJ alleged insider trading under traditional wire fraud laws rather than under securities laws.  Still, the SEC decided to file a civil complaint for securities insider trading against the same parties.  Because the charges being brought by the SEC are not identical, and there are major questions of law (such as whether the tokens are securities) that are unlikely to be addressed in the DOJ matter, it is unclear whether these proceedings will stay during the DOJ prosecution. Coinbase has repeatedly taken the position that none of the coins it lists are securities. For example, in Coinbase’s written testimony for the Congressional Subcommittee on Capital Markets, Securities, and Investment, they stated: “To help potential market participants, we published our Digital Asset Framework to provide transparency about how we consider listing new assets. A key factor in our framework analysis is a determination that the potential new asset is not a security under U.S. law. The absence of regulatory clarity has slowed our willingness and ability to list new assets.” (Full written testimony available here). However, the SEC has affirmatively alleged that at least nine of the 25 tokens traded by the defendants ahead of their Coinbase listings are “crypto asset securities,” the trading of which on non-public information constitutes a violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder. The nine assets alleged to be crypto asset securities by the SEC are $AMP, $RLY, $DDX, $XYO, $RGT, $LCX, $POWR, $DFX, and $KROM. SEC Complaint, ¶¶ 39, 45, 50, 57, 71, 78, and 82.  While neither the SEC nor DOJ has released the full list of assets traded by Ishan, Nikhil, and Sameer, we do know by comparing the DOJ’s indictment to the SEC’s Complaint that $TRIBE, $ALCX, $GALA, and $ENS are all coins traded by the indicted individuals but not alleged to be securities in the SEC Complaint. Following the filing of the SEC Complaint, Coinbase continued to state that these tokens are not securities by issuing a statement from their Chief Legal Officer (and former Magistrate Judge for the Northern District of California) Paul Grewal titled “Coinbase does not list securities. End of story.” (available here). The SEC did not charge Coinbase with trading in securities which Coinbase would not be allowed to do without becoming an SEC registered exchange. The SEC failed to charge any of the 9 token issuers that it alleges are securities with violations of the securities laws. Implications and Ramifications: Bringing this action was an interesting strategic decision by the SEC.  Rather than bringing an action against Coinbase, a large public company with nearly unlimited resources to defend a regulatory action, or even against the token issuers, the SEC is bringing this claim against three individuals who are facing criminal charges, one of whom likely won’t defend himself at all because he is still on the lam.  Because these defendants have limited resources and probably are more interested in staying out of prison than being punished by the SEC, it is unlikely that they would challenge the SEC’s characterization of the tokens as securities.  While Coinbase could try to join the case by interpleader, it is unlikely that they could have much influence on the civil action. Many, including Coinbase, feel that the SEC would be fulfilling its duty of protecting consumers by setting up a framework for what is and is not considered a security in the digital asset space. On July 21, Coinbase issued an additional statement which “calls on the SEC to develop a workable regulatory framework for digital asset securities guided by formal procedures and a public notice-and-comment process, rather than through arbitrary enforcement or guidance developed behind closed doors.” (Full statement available here).  Coinbase has stated that the timing of this statement was incidental and that they had planned on making this statement even when they had no knowledge that the SEC would bring a civil claim in the case. The SEC action here has even raised a rare public rebuke from another government regulatory body.  CFTC Commissioner Caroline Pham issued a statement on the SEC case, describing it as “a striking example of regulation by enforcement.” (Full statement available here).  Separately, according to Bloomberg, it has been leaked that Coinbase is also the subject of an SEC investigation on whether it has been improperly listing unregistered securities.  In the wake of the XRP action that has dragged on since late 2020 in which the SEC has lost a number of prominent motions, this action could be used to create a “precedent” where there is no meaningful voice opposing the SEC’s theories. The crypto industry needs meaningful regulatory guidance. As these cases indicate, fraud is a real problem, but this particular action does not appear to have any meaningful deterrent effect, given the DOJ’s case which does not involve allegations regarding securities.  The stated mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.  This can only be accomplished in the crypto space once the market understands what is or is not a security and there is a workable path to compliance.

In what may be the first of its kind, a New York state court has authorized service via token airdrop in a case regarding allegedly stolen cryptocurrency assets. This form of alternative service is novel but could become a more routine practice in an industry where the identities of potential parties to litigation may be difficult to ascertain using blockchain data alone. Background on the Dispute According to the Complaint in the case, the plaintiff LCX AG (“LCX”) is a Liechtenstein based virtual currency exchange. As alleged in the Complaint, on or about January 8, 2022, the unknown defendants (named in the Complaint as John Does 1-25) illegitimately gained access to LCX’s cryptocurrency wallet and transferred $7.94 million worth of digital assets out of LCX’s control. Cryptocurrency wallets are similar in many ways to bank accounts, in that they can be used to hold and transfer assets. In the same way a thief can transfer funds from a bank account if they gain access to that account, thieves can also transfer cryptocurrency assets if they gain access to the keys to the wallet holding digital assets. Following the alleged theft, LCX and its third-party consulting firm determined that the suspected thieves used “Tornado Cash,” which is a “mixing” service designed to hide transactions on an otherwise publicly available blockchain ledger by using complicated transfers between unrelated wallets. While Tornado Cash and other mixing services have legal purposes such as preserving the anonymity of parties to legitimate transactions, they are also utilized by criminals to launder digital funds in an illicit manner. Even the use of these mixing services, however, can often also be unwound. This is especially true in transactions of large amounts of cryptocurrency, similar to how transactions utilizing complex money laundering schemes in the international banking system can be unwound. According to the blockchain data platform Chainalysis, although Illicit crypto transactions reached an all-time high of $14 billion in 2021, these suspected nefarious transactions accounted for 0.15% of crypto volume last year, down from 0.62% in 2020. While the Complaint alleges the suspected thieves used Tornado Cash, LCX believes its hired consultants were able to unwind those mixing services to identify a wallet which is alleged to still hold $1.274 million of the allegedly stolen assets. Unlike bank accounts which have associated identifying information, there are often no registered addresses or other identifying information connected to digital wallets. This makes it difficult to provide the actual proof of service required to institute an action or obtain a judgement against an individual where the only known information is their digital wallet addresses. Service via token airdrop into those wallet addresses solves that issue. Service Via Airdrop Service of lawsuits is traditionally made on the defendant personally at a home or business address via special process servers. In cases where service on the individual is not possible for some reason, many states authorize alternative means of service if the plaintiff can show that the alternative means of service likely to provide actual notice of the litigation to the defendant. For example, courts have historically allowed notice via newspaper publication as an alternative means of service where the defendant cannot be serviced personally. Here, the Court permitted service via “airdrop” in which a digital token is placed in a specific cryptocurrency wallet, similar to how a direct deposit can place funds in a traditional bank account. This particular token contained a hyperlink to the associated court filings in the case, and a mechanism which allowed the data of any individual who clicked on the hyperlink to be tracked. While this is a novel way to serve notice of a lawsuit, similar airdrops have been used to communicate with the owners of otherwise anonymous cryptocurrency wallet owners. Such was the case recently when actor Seth Green had his Bored Ape non-fungible token (“NFT”) stolen and the unknowing buyer of the stolen NFT was otherwise difficult to locate. While this type of digital service is new, it could be implemented in many disputes in the future regarding digital assets. Similar to the authorization of service that was seen recently in the Facebook Biometric Information Privacy Act litigation (where notice was served on potential class members via email and directly on the Facebook platform), service via airdrop may be the most efficient way to inform potential lawsuit participants of the pending dispute and how they can protect their rights in that dispute. This type of airdropped service is not without issues, though. First, transactions on the blockchain are largely publicly available, meaning any individual with the wallet address would also be able to see service of the lawsuit notice. Additionally, many users are hesitant to click on unknown links (such as the one in the airdropped LCX) due to legitimate cybersecurity concerns. While service via airdropped token is unlikely to replace traditional methods of service, it may be a useful means of serving process on unknown persons where there is a digital wallet linked to the acts which the applicable lawsuit relates.

A former employee of OpenSea, the largest marketplace for the purchase and sale of non-fungible tokens (NFTs), has been indicted and charged with wire fraud and money laundering allegedly in connection with actions he took while employed by OpenSea. NTFs bought and sold on the OpenSea platform mostly consist of digital assets that represent the ownership interest in a piece of digitally generated and displayed works of art.  The full ten-page indictment is available here. While not charged with actual insider trading under Securities Exchange Act Rule 10b-5 or other applicable securities laws, in a press release the Department of Justice (DOJ) has framed this to be the first ever “digital asset insider trading scheme” to be prosecuted in the United States. Nathaniel Chastain (“Chastain”) was arrested on June 1, 2022 and released on $100,000 bond after entering a plea of “not guilty” in federal court. According to the indictment, in September of 2021, Chastain resigned from his position as product manager at OpenSea after it was revealed he was purchasing NFTs based on confidential information about the identities of artists and collections that would be placed on OpenSea’s front page.  The placement of art on OpenSea’s front page is alleged to be relevant to its price since highlighted projects and artists often enjoy a price bump while featured more prominently on OpeaSea’s website. The DOJ indictment is based on Chastain’s alleged breaches of the fiduciary duties he owed to his employer at the time (OpenSea), along with Chastain’s use of “burner” (anonymous) cryptocurrency wallets in an alleged attempt to hide his actions. The NFTs Chastain purchased were largely art projects with no utility outside of ownership of the artwork, which may in part explain why Chastain is being charged with wire fraud and not securities fraud. Works of art have not, in-and-of-themselves, traditionally been treated as securities by the U.S. Securities and Exchange Commission (SEC) or other government entities. A few other interesting facts of the case not otherwise mentioned in the pleading documents themselves but found reported elsewhere by others include: At the time of Chastain’s actions, OpenSea did not have a policy explicitly prohibiting using confidential information to purchase or sell any NFTs, whether available on the OpenSea platform or not. That was only implemented after Chastain’ actions were revealed. Chastain’s purchases largely occurred after the items were available on display on the front page of the OpenSea platform (albeit, only by mere seconds in some cases). This means, at the time of purchase, there arguably was public knowledge that the items were being promoted on the front page of OpenSea and that Chastain was not necessarily “front running” trades of the NFTs in the traditional sense.  That said, under the allegations he may have been able to use advance knowledge of the proposed listing locations to make trades before the market had time to digest the information. These alleged front running actions were initially uncovered by individuals on Twitter in September of 2021, who were able to connect Chastain’s actions to various otherwise anonymous cryptocurrency wallets by tracking transactions through a public blockchain. The total amount Chastain made from these purchases and sales is currently believed to be less than $150,000. While Chastain was not formally charged with securities fraud, the DOJ’s use of “insider trading” verbiage throughout the indictment and in their press-release seems to indicate a clear signal of future enforcement actions to come. These statements by the DOJ along with the recently released DOJ report on detection and prevention of crimes involving digital assets likely portend for securities law actions in respect of NFTs that have other characteristics that could cause them to be deemed “investment contracts” under the Howey test, such as a right to redistribution of profits. It also shows that the DOJ likely has been paying much closer attention to this space closer and for a longer period of time than is conventionally thought, as not many outside of the NFT community knew about or paid attention to this relatively minor scheme when it was uncovered in 2021, and that even relatively minor players risk becoming the subject of law enforcement.

Thoughts on Recent SEC statements and Action on Enforcement Related to Decentralized Autonomous Organizations (DAO) On November 10, 2021  the US Securities and Exchange Commission (the SEC) announced that it had halted the first ever attempt to register digital tokens issued by a decentralized autonomous organization (DAO) under the US federal securities laws. American CryptoFed – also the first DAO to take advantage of Wyoming’s new “DAO Law” that attempts to give DAOs legal status – filed Form 10 and subsequently filed a Form S-1 in an effort to register its digitals assets in the form of two coins designed to operate in tandem issued under the names Locke and Ducat. A DAO is an organization encoded as a transparent computer program, controlled by the organization members and not by a central corporate entity, often through a governance token utilized on a blockchain. In the SEC’s announcement, they alleged that the registration statement filed by American CryptoFed contained a number of deficiencies, including purportedly misleading statements such as claims that the tokens were not intended to be securities and may be distributed on the form of registration statement used for registration of securities under an employee benefit plan.  Perhaps just as importantly, the registration statement failed to provide substantive information about the issuer as is required to be disclosed in the form, such as information regarding its business, management, and financial condition. One telling example of the deficient information concerns the issuer’s ownership structure, which a pure DAO would be unable to produce by its very nature of being a DAO. This highlights several issues with being able to register DAO-issued tokens under the current regulatory framework.  The SEC disclosure forms rightly require financial statements and business information regarding the issuer.  That said, a DAO is not really an entity.  There often is a supporting entity in place alongside a DAO, and in some instances an organization that isn’t really decentralized may be mislabeled as a DAO, but the DAO itself in almost all circumstances would not be able to produce financial statements prepared in accordance with generally accepted accounting principles.  If the DAO does not have a definable business and truly is decentralized, then there may not be a management structure for which information can be provided.  Further, depending on the circumstances, the financial condition of a DAO may be of limited relevance to holders of the tokens, particularly if there truly is a level of decentralization that would allow the project to move forward even if the ‘entity’ sponsoring the token were to collapse (or the financial statements of the issuer could be looking at the wrong thing if the treasury of the DAO is not housed in that entity).   Simply put, this action implies that it will be difficult if not impossible for true a DAO to register its tokens under the current regulatory framework, even if it sets itself up in a way to attempt robust compliance. Avoiding the Line and Counsel? Any spurt of innovation, particularly the one we are experiencing now with decentralized finance and DAOs, will test the boundaries of existing regulation and hopefully lead to regulatory flexibility and updated regulations. For this reason, a recent statement by SEC Chair Gensler could use additional clarification.  On November 4, 2021, a few days before the American CryptoFed halt, at the first SEC Enforcement Forum since he became Chair, Gensler laid out a number of enforcement directives of the SEC, putting an emphasis on a the economic reality of a transaction regardless of what form it is in. In particular, he emphasized that terms such as “decentralized finance” (DeFi), “currency,” or “peer-to-peer lending” should not be taken at face value without looking at what the transaction is really doing. While it is important to understand the spirit of the law and never act fraudulently regardless of the law, the role of legal counsel is to help clients work within the law, even if it is near the boundary of the law. Gensler’s statement - “if you’re asking a lawyer, accountant, or adviser if something is over the line, maybe it’s time to step back from the line” – has the potential to deter entrepreneurs from seeking counsel and encourage haphazard action. While a measure of caution is not undue, it does have the potential to stifle innovation. This is after all a new frontier of finance where advances are made in the margins often by those who get there first. Consulting with responsible counsel is something that any innovator should be encouraged to do. Seemingly discouraging innovators from seeking counsel, and asking those who are trying to be responsible and comply with the law to not even attempt to do so, would only increase the prevalence of bad actors, exposing all parties - including investors - to the very risks that regulators are trying to avoid. Rulemaking Under Any Other Name… A few days after Chair Gensler’s statement, Gurbir Gruwal, the new Director of the Division of Enforcement gave prepared remarks discussing the role of that Division.  The remarks were largely a defense against the assertion that, with respect to the crypto industry, the SEC has been “regulating by enforcement” rather than creating new regulation.  Mr. Gruwal gave three examples to show how the Division’s Cyber Unit’s enforcement of digital assets actions are enforcing existing laws and not creating new law.  The first example he gave was the Kik ICO, followed by a recent Ponzi scheme that claimed to use DeFi but did not actually support a DeFi network and, last, the BitConnect project that also was long thought to be a Ponzi scheme.  While there was not complete consensus within the digital asset legal community about how Kik’s KIN token would be treated for federal securities law purposes, the latter two were blatant frauds of what would have obviously been securities, had they existed at all. Selecting those straightforward examples out of hundreds does not mean that there haven’t been other enforcement actions in areas where the law was quite unsettled. While the Division of Enforcement is doing a lot of great work, the speech shows that there is a fundamental misunderstanding of the industry’s frustration over “rulemaking by enforcement.” Rather than coming out with new regulations that provide somewhat bright lines, one must wade through a gallimaufry of enforcement actions, press releases, risk alerts, and speeches to determine the current state of the law. Even then, there is a wide gulf between what the SEC has endorsed and publicly warned against with any level of specificity.  In the nearly 10 months since the current administration took office, there have only been a small handful of new proposed rules and only in the last week have any new substantive regulations been approved.  “Rulemaking by enforcement” is really shorthand for the lack of clear, concise guidance needed for those who want to comply with the law to actually comply with the law.  This particularly rings true for aspects of many blockchain technologies that are fundamentally incompatible with existing regulations, even if they are compatible with the spirit of the law.  The SEC Staff has announced that it will try to tackle this problem with respect to the Advisers Act “Custody Rule” by modernizing it, but it does not appear that any other meaningful regulation relating to digital assets or decentralized finance is on the horizon. Maybe the SEC should also consider a framework under which a DAO or a supporting organization of a DAO can register securities, particularly as the discussion regarding regulation of stablecoins and DeFi starts to heat up. The prepared remarks close out as follows: “This is not “regulation by enforcement.” This is not “regulation by enforcement.” This is not “regulation by enforcement.” There. I have said it thrice and what I tell you three times is true.” This is (not) regulation by speechmaking at its finest.

On October 28, 2021, The Financial Action Task Force (FATF), an inter-governmental body that sets international standards with an aim to prevent global money laundering and terrorist financing, released updated guidance related to Virtual Assets and Virtual Asset Service Providers (VASPs).  This updates guidance previously released by the FATF in 2015, October 2018, and June 2019. One of the most important hurdles for the virtual assets and cryptocurrency to overcome is to convince regulators, legislators, and the public that this growing industry does not foster money laundering and other financial crimes. Key to this challenge is dealing with the fact that many anti-money laundering regulations focus on “know your customer” rules.  On the other hand, a defining feature of much of the virtual asset industry is the anonymity of the “customer” and that “service providers” may be a decentralized code running on a series of nodes without the ability to track or know anything about a customer’s identity or background. In general, the report does a good job focusing on where its authors perceive actual risk to be, particularly systematic risk, and trying to not hamper technological innovation. Among the important changes between this guidance and the guidance issued by the FATF from June 2019 which it replaces is a focus on stablecoins, virtual assets whose values are pegged one or more other currencies. The potential for stablecoins to be adopted for widespread commerce has led to increased scrutiny of them by global regulators, as these digital assets pose a systemic risk to the economy if a stablecoin were to be criminally exploited or to just flat out fail. For the growing NFT (non-fungible token) market, this guidance is likely to be of some relief since it indicates that it does not consider most assets that are bought for purely speculative purposes to be a virtual asset subject to legal scrutiny. Finally, with regard to DeFi, or decentralized finance, the guidance indicates that a truly decentralized software protocol would not be considered a VASP under the FATF standards, as the Standards do not apply to underlying software or technology. However, care must be taken that even if those arrangements seem decentralized it may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services.”  There are also other important updates related to peer to peer platforms and the “travel rules,” among other matters. Learn more

As the United States Senate considered H.R. 3684, the “Investing in a New Vision for the Environment and Surface Transportation In America Act (INVEST in America Act)”, an attempt to modify legislative language concerning cryptocurrency failed on a procedural basis. The Invest In America Act is an historic $1 trillion bipartisan bill that, if passed, will fund physical infrastructure in the United States, including spending for roads, bridges and public transportation as well as providing funding for high speed internet, electric vehicles and modernizing the power grid. Much of this bill is to be funded though increasing the national deficit, in other words, debt, as well as some spending cuts. A portion of the bill is to be funded by new sources of revenue, including tighter enforcement of cryptocurrency transaction reporting, which has been estimated to amount to $28 billion over 10 years, accounting for approximately 25% of all new revenue sources under the bill. This would mandate reporting of cryptocurrency transactions by certain intermediaries and other affiliated parties. In some ways the crypto tax provisions of the Act shows how the cryptocurrency industry has been legitimized by government regulators, being viewed as stable and secure enough to serve as a primary revenue source for public works projects over the next 10 years. That said, there is real concern that these provisions of the Act will effect the growth of a fledgling digital asset industry since it has the potential to drive a lot of activity outside of the United States, which in turn could decrease the amount of revenue actually raised. Under the Act, a cryptocurrency broker will be obligated to report digital asset transactions to the IRS. As introduced, Section 80603 of H.R. 3684 contained a broad definition of a “cryptocurrency broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” For taxing purposes, this definition means a sale on behalf of someone else. Many in the cryptocurrency industry are concerned that parties who are not acting as true brokers, such as cryptocurrency miners, developers, network validators and stakers, could be caught in this definition. The U.S. Department of the Treasury, the Congressional Joint Committee on Taxation and others believe the language in H.R. 3684 is sufficiently clear that reporting requirements only cover actual brokers who have custody over assets. In a sign of growing lobbying strength of the blockchain industry, Sens. Patrick Toomey (R-PA), Mark Warner (D-VA), Cynthia Lummis (R-WY), Kyrsten Sinema (D-AZ) and Rob Portman (R-OH) reached a compromise on an amendment to the Act that would have alleviated some of the concerns of the crypto community. The authors intended for their amendment to clarify that the definition of “broker” applies only to persons who regularly effectuate transfers of digital assets on exchanges where people buy, sell and trade cryptocurrency.  Persons who solely engaged in validating distributed ledger transactions would not be covered for those activities, whether they utilize proof-of-work, proof-of-stake or other new consensus mechanisms. Further, the definition clearly would not have applied to individuals solely engaged in selling hardware or software with the sole function of permitting someone to control private keys used to access digital assets. Cloture in the Senate and Why the Cryptocurrency Amendment Failed Even with Widespread Support Cloture in the Senate is the procedure by which a vote can end debate without also rejecting the bill, amendment, conference report, motion or other matter it has been debating. Under Senate Rule XXII, the process usually begins when the Majority Leader files a cloture petition containing the signatures of 16 Senators who express a desire to close debate on a matter. The petition then lies over in the Senate for 48 hours plus one hour after the Senate convenes. Cloture can be invoked with the vote of 60 Senators. Senators who desire to offer revisions to a bill or amendment on which cloture has been invoked must submit their amendments in writing before the cloture vote takes place. First-degree amendments, which propose to change the text of a bill or a committee amendment in the nature of a substitute, must be submitted in writing when the Senate is in session no later than 1:00 p.m. on the day after the cloture motion is filed. The Senate voted to invoke cloture on the Invest in America Act on August 8, 2021, by a vote of 68-29 (3 not voting). Sens. Portman, Toomey, Warner, Lummis, Sinema and Portman reached a compromise on their revised amendment only the next day. Under Senate rules, amendments offered after cloture is invoked require the unanimous consent of all 100 members of the Senate.  On August 9th, Senator Toomey requested unanimous consent that the compromise cryptocurrency amendment be adopted.  Senator Richard Shelby [R-AL] “reserved the right to object”. The Senator had an amendment to increase defense spending by $50 billion and asked Senator Toomey if he would agree to a unanimous consent request to add his (Shelby’s amendment). Toomey agreed, but Senator Bernie Sanders [I-VT], Budget Committee Chair, objected to the Shelby amendment, which was viewed as a poison pill for Democrats (and Sen. Shelby ultimately did vote against final passage of H.R. 3684). Therefore, Senator Shelby objected to the Toomey amendment, killing amendment in the Senate. Next Steps and Cryptocurrency in the House Although the blockchain industry came up short with this amendment, the fight is far from over. Cryptocurrency advocates are lobbying to change the bill in the House by adding the failed Senate bipartisan amendment. In addition, the House Congressional Blockchain Caucus sent a letter to the entire House expressing concerns about the Senate provision in H.R. 3684. Advocates state that they are asking the House to tax cryptocurrencies fairly with minimum administrative burden. Shortly after the Senate completed action on H.R. 3684, Rep. Anna Eshoo [D-CA], Chairwoman of the Health Subcommittee of the House Energy and Commerce Committee, sent a letter to Speaker Nancy Pelosi [D-CA] requesting that the Speaker amend the bill with regard to the broker definition in Section 80603. She noted the bipartisan amendment which failed on a procedural objection had the support of Treasury Secretary Janet Yellen. Additionally, there are numerous impediments to passing the Act in the House, which puts its fate in doubt. House Speaker Nancy Pelosi has vowed not to take up the Senate bipartisan infrastructure bill until that body passes a separate huge $3.5 trillion budget through a process called reconciliation under which a bill can be passed with only a majority.  Meanwhile, nine House Members sent the Speaker a letter saying they would vote against the House budget reconciliation bill unless she brings up the Senate infrastructure bill first. Speaker Pelosi has said she will not do that. The House is scheduled to return early from its recess on August 23rd. Stay tuned. Finally, even if the Act passes in its current form, the IRS would need to approve implementing regulations. These regulations could ultimately include much of the clarity that cryptocurrency advocates are seeking.

On Tuesday, April 20, 2021, the House of Representatives passed the Eliminate Barriers to Innovation Act of 2021 (the “Act”). The Act was initially introduced in March with an overarching aim to clarify the roles of the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) in the policing of cryptocurrencies in the U.S., and create collaboration between the two agencies. If passed in the Senate, the Act would require the CFTC and the SEC to jointly establish a digital asset working group (the “Working Group”) within 90 days of enactment.  This is landmark legislation as it is the first time either branch of Congress has passed a blockchain-related bill.  If passed, the Act could help provide some much-needed clarity in determining which regulators have jurisdiction over different digital asset issuers. The Working Group’s directive would be to submit, within one year, a report that contains an analysis of the current CFTC and SEC legal and regulatory framework for digital assets, the impact a lack of clarity has had on primary and secondary markets in the U.S., and the country’s competitive standing in comparison to developments in other countries. The report would also be required to include recommendations addressing the following: Creation, maintenance, and improvement of primary and secondary markets in digital assets; Legal treatment of custody, private key management, cybersecurity, and business continuity relating to digital asset intermediaries; and Future best practices to reduce fraud and manipulation of digital assets, improve protection of investors, and assist in compliance with banking and anti-money laundering laws and regulations. The Working Group’s composition would be comprised of an equal number of employees and non-governmental representatives appointed by the SEC and CFTC. The non-governmental representatives in the Working Group would be required to include at least one representative from each of the following sectors: FinTech companies providing digital assets products or services; Financial firms under the jurisdiction of the SEC or the CFTC; Institutions or organizations engaged in academic research or advocacy relating to digital asset use; Small businesses engaged in FinTech; and Investor protection organizations - Institutions and organizations that support investment in historically-underserved businesses (women-owned, minority-owned, and rural businesses). The full text of the Act can be found here.