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

As expected, September started with what has been dubbed a “crypto sprint,” as various branches of government look to quickly put into place digital asset regulations and legislation before the end of the year. In the Senate, the Senate Banking Committee has released its updated market structure legislative draft — maintaining key differences from the House’s market structure bill — the CLARITY Act, which passed by an overwhelming bipartisan vote earlier this year. At the SEC, the agency is hard at work coordinating with the CFTC on multiple crypto-related issues, and it released its rulemaking agenda for the upcoming year. Detailed breakdowns of these developments, their implications for businesses going forward, and a few other updates on crypto-law topics are discussed below. Senate Releases Market Structure Draft Bill: September 5, 2025 Background: Before the August recess, the Senate Banking Committee released a discussion draft market structure bill with an accompanying request for comments. Polsinelli assisted with the Digital Chamber’s response to those comment requests. Back from break, the Senate has now taken in those comments and released an updated draft titled the Responsible Financial Innovation Act. Senate Banking Chair Tim Scott will try to advance this draft through committee this month to stay on the fast-paced schedule that congressional and executive branch leadership is aiming for. While still waiting for the Senate Agriculture Committee’s companion draft to address many CFTC-related issues, Senate Banking will need to schedule a hearing in the near future on this revised draft for any chance of passing in 2025. Analysis: The big question was whether the Senate’s bill would revert to the CLARITY Act’s control-based/decentralization test (which passed the House in an overwhelming vote of 294-134) to determine if sales of certain digital assets would be considered securities transactions, versus the Senate’s bill, which created an “ancillary asset” concept to determine when a transaction involving digital assets constitutes a securities transaction. That question was answered, as the current draft maintains the ancillary asset framework with some fairly important changes. The biggest industry win in the revised draft has to be the increased protection for developers of noncustodial software tech, which was advocated for by more than 100 industry participants and spearheaded by the DeFi Education Fund. From an initial review, it appears that the draft implemented many of the modifications requested by industry comments — but at 182 pages, it is expected to have areas that still need improvement. SEC and CFTC Release Joint Statements on Crypto Issues: September 2-5, 2025 Background: The SEC and CFTC released a joint statement clarifying the views of both agencies’ staff that “SEC- and CFTC- registered exchanges are not prohibited from facilitating the trading of certain spot commodity products.” One large hold-up in facilitating the sale of tokenized securities through existing digital asset exchanges (or facilitating the sale of non-securities crypto assets through alternative trading systems and securities exchanges) is how the exchanges would be permitted to sell, or accept as payments, non-securities like $USDC or $BTC alongside tokenized securities. This appears to be the first step in overcoming that hurdle. A few days later, CFTC Acting Chair Pham and SEC Chair Atkins released a joint statement with the subtitle, “Next Steps – Bringing Novel and Innovative Products Back to America,” which relates to planned convergences of securities and commodities laws that might facilitate the development of “everything exchanges.” Analysis: While the statements don’t create any new actionable law, they do signal the direction in which the agencies will be heading. The follow-up statements on bringing novel financial products back onshore were also important. All the listed areas of focus — 24/7 markets, perps, event contracts, DeFi and portfolio composition requirements — directly implicate crypto or benefit from blockchain ledger technology rails, so it seems like good things are on the horizon. It also means the policy work done in the next 12-18 months could shape U.S. financial markets for decades to come. SEC Releases Regulatory Agenda: September 4, 2025 Background: The SEC’s Office of Information and Regulatory Affairs released the Spring 2025 Unified Agenda of Regulatory and Deregulatory Actions, which Chair Atkins described as covering “rule proposals related to the offer and sale of crypto assets to help clarify the regulatory framework for crypto assets and provide greater certainty to the market,” as well as “withdrawal of a host of items from the last Administration that do not align with the goal that regulation should be smart, effective and appropriately tailored within the confines of our statutory authority.” Analysis: While the market structure legislation efforts are ongoing in the Senate, the SEC has clearly signaled that it intends to move forward with crypto-related rulemaking efforts without waiting on the outcomes of those legislative efforts. The proposed rule changes include many areas that can be expected to impact crypto (such as revised definition of “Dealer” and Rule 144 Safe Harbor changes) and five agenda items that directly mention crypto: (1) Crypto Assets; (2) Amendments to the Custody Rules; (3) Transfer Agents; (4) Amendments to Broker-Dealer Financial Responsibility and Recordkeeping and Reporting Rules; and (5) Crypto Market Structure Amendments. There is very little detail at this point, but it is a step in the right direction and a forecast of what is to come in the next 6-12 months. It is also interesting that, for the first time, this is being framed as a deregulatory agenda — not just a regulatory one. Briefly Noted: NASDAQ Submits Crypto Rule Change Proposal: The NASDAQ Exchange has submitted a proposed rule to the SEC regarding the tokenization of stock for trading on-chain. While the current proposal doesn’t include T+0 settlement, trading stocks through blockchain ledger technology could allow for faster settlement and easier books and records-keeping compliance, alleviating the need for burdensome consolidated audit trail rules. Fed Conference on Payments Innovation: The Federal Reserve is hosting a conference on “payments innovation.” Less than a year ago, we were in the throes of Operation ChokePoint 2.0, and now the Fed is actively bringing together crypto leaders to figure out how to integrate blockchain into the financial system.   Polymarket No-Action: Polymarket will be available to U.S. consumers after the CFTC issued a no-action letter that allows Polymarket to offer event contracts without reporting the data required under U.S. financial regulations (which wouldn’t have added much, given the level of transparency). This comes as prediction markets start to influence sports wagering markets with their rise in popularity. Crypto Funding Stays Hot: Crypto companies have raised over $16 billion this year from venture, which is on pace to beat the funding record from 2021, when companies in the space raised over $29 billion. This comes as Figure and Gemini both are looking to go public in the near term and M&A in the space is hotter than ever. 100+ Industry Participants Push for Developer Protections: DeFi Education Fund organized a huge coalition of industry advocacy groups and participants to sign a letter advocating for protecting the software developers and non-custodial service providers. The Digital Chamber’s Consumer Innovation working group came up with draft legislative text for self-custodial wallet developers and consumers — which is a good start — and which was highlighted on pg. 30 of the Digital Chamber’s letter to the Senate Banking Committee on market structure legislation. As noted above, these efforts were seemingly successful in getting developer protections added to the Senate market structure bill efforts. Why Stablecoins: Similar to the effort spearheaded by Polygon a few years ago of compiling real world uses cases for blockchain technologies, this recent effort to compile what makes stablecoins so useful is a nice addition to the zeitgeist. Economic Data on the Blockchain: Commerce Secretary Lutnick went semi-viral recently when he said his department will start issuing economic data on blockchain (official release here). This will allow pricing oracles to rely on blockchain data versus publicized data, which can lag and have errors in reporting. This could have a large effect on how economic indicators get priced into the market. White Hat Safe Harbors: In addition to the crypto privateer law proposals, more and more DeFi protocols are providing safe harbors to white-hat hackers in event of a breach or exploit. By the time authorities get involved, it is often too late, so giving private actors — who have the ability to stop these exploits while they are occurring — the power to do so is a good idea. Conclusion: The pace of developments underscores that the “crypto sprint” is more than just a slogan; lawmakers, regulators and industry participants are all moving quickly to shape the rules that will govern digital assets for years to come. With the Senate Banking Committee pressing forward on its market structure bill, the SEC and CFTC aligning on joint statements and rulemaking agendas and agencies across the government opening the door to blockchain-based innovation, the next several months will be decisive. Whether the result is greater clarity, better protections for developers and consumers or a framework that helps keep innovation onshore, what happens in 2025 will set the trajectory for the U.S. digital asset ecosystem well into the next decade. 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.

Congress may be in its August recess, but the crypto legal developments have not slowed. The SEC’s Division of Corporation Finance released long-awaited guidance on Proof-of-Stake liquid staking tokens, clarifying when such activities may fall outside the scope of securities laws. The very next day, a jury returned a split verdict in the Department of Justice’s criminal case against Tornado Cash developer Roman Storm, a case that leaves unanswered fundamental questions about individual liability in creating neutral privacy-preserving software. This all comes while Wall Street and public/soon-to-be-public companies have been looking for legally compliant ways to integrate crypto into their business strategies. Together, these updates capture the evolving legal landscape for crypto, as regulators and courts wrestle with how to apply traditional frameworks while embracing developing technologies. Detailed breakdowns of these developments, their implications for businesses going forward and a few other updates on crypto-law topics are discussed below. SEC Issues Guidance on Proof of Stake Liquid Staking Tokens: Aug. 5, 2025 Background: For the less crypto savvy, liquid staking tokens (LSTs) are tradable tokens received in exchange for staking cryptocurrency with a Proof-of-Stake (PoS) protocol. These tokens serve as receipts — representing staked assets plus accrued rewards — while allowing the holder of the tokens to use them in decentralized finance activities. This enables investors to earn staking rewards without fully locking up liquidity since the LST can be sold, lent or otherwise used while the original underlying staked asset remains locked in the network. The SEC’s Division of Corporation Finance has now released guidance on when it views “Liquid Staking Activities” as not involving the offer or sale of securities. Importantly, this guidance is limited and does not mean that all configurations of LST issuance and redemptions fall outside of the activities regulated by the SEC and state securities regulators. Analysis: This statement follows prior guidance on Covered Stablecoins, Memecoins and Staking, and it continues the current SEC’s approach of issuing targeted regulatory guidance for digital asset activities, where previously Commissioners advocated for (and some continue to advocate for) ambiguity. Polsinelli specifically called for the Commission to address liquid staking tokens in our written submission to the SEC on behalf of the Digital Chamber (see, pg. 20), making this exactly the type of guidance that leading industry advocacy groups are actively seeking. One big takeaway is that the guidance only addresses “the staking of crypto assets that are intrinsically linked to the programmatic functioning of a public, permissionless network and are used to participate in and/or earned for participating in such network’s consensus mechanism or otherwise used to maintain and/or earned for maintaining the technological operation and security of such network.” Further, while the latest guidance specifically referenced the SEC’s prior staking guidance, this statement appears to have been carefully crafted to avoid explicitly limiting the guidance to only apply to PoS protocols. Given the already substantial LST market, this guidance is particularly important as crypto treasury companies expand and look for ways to earn yield on their token holdings. DOJ v. Storm Privacy Preserving Technology Criminal Trial Ends: Aug. 6, 2025 Background: The trial in the DOJ’s criminal prosecution of Roman Storm, a developer of privacy preserving technology, lasted about three weeks. The DOJ’s case alleged Storm’s knowledge of criminals using the privacy tool he created (alongside noncriminal use) placed put him in a conspiracy with the criminals who used the technology. The case concluded with a verdict of guilty on the charge of conspiracy to operate an unlicensed money-transmitting business, but the jury deadlocked on the charges of conspiracy to commit money laundering and conspiracy to violate sanctions. The verdict came a week after closing statements — as jurors needed additional time to deliberate — but they were still ultimately  unable to reach a unanimous verdict in two of the three charges. This means the DOJ must now decide whether or not to request a new trial on those counts. The case echoes Bernstein v. United States, which was critical in articulating that the right to free speech includes the right to create and publish cryptographic technology, the backbone of online privacy today. Storm’s case could prove equally significant in defining individual rights to create “neutral” privacy-preserving software. Analysis: The government’s case featured questionable evidence and witness complications. The first witness testified that a “recovery firm” told her that crypto that was stolen from her was sent through the Tornado Cash protocol. It was reported, however, that the “recovery firm” was actually under investigation by the FBI for fraud, and her stolen crypto likely never actually touched the protocol. There were also issues around witness availability: after it was reported that prosecutors were still considering charges against certain defense witnesses, those witnesses to pled the Fifth instead of testifying for the defense. The fact that the only charge for which Roman Storm was convicted — regarding failing to obtain a license — was for something FinCEN, which issues such licenses, directly told the DOJ a person doesn’t require a license for makes the issue seem ripe for appeal. This is far from over, as the sole conviction was also the most centered on legal vs. factual issues, and post-trial motions are expected, but the verdict itself was a mixed result with uncertain implications for the creation of non-custodial software generally. This also comes as the Department of Treasury is looking for comments on how to address illicit finance issues in digital assets. Briefly Noted: Public Markets Booming: While it may be ambivalent about the adoption of stablecoins and other cryptocurrencies, Wall Street seems to be clamoring for more public company activity in the space. In addition to the dozens of crypto treasury companies that have launched or are rumored to be launching and the successful IPO of stablecoin issuer Circle, Gemini publicly filed Form S-1 in advance of an IPO, and Bullish — the owner of an exchange that doesn’t even permit U.S. investors, along with other related businesses, including CoinDesk — significantly upsized its IPO, ultimately raising about $1.1 billion dollars. There has been great flexibility in the transaction structures of these vehicles, from traditional IPO to moving existing listings to the U.S., to de-SPAC transactions, to mergers into existing listed companies, to simply shifting the business strategy of an existing public company. Polsinelli has been advising investors and other stakeholders in all flavors of these transactions.  Digital Chamber Releases Comments to Senate Working Draft: The Digital Chamber has submitted its response to the Senate Banking Committee’s digital asset market structure working draft questions. The Senate will have much to consider when they return from the August Congressional Recess. Crypto Executive Orders: The President issued two Executive Orders related to crypto recently. The first mandates that the Secretary of Labor issue guidance for 401ks  that includes “alternative assets,” including crypto. The other is related: preventing a recurrence of Operation ChokePoint 2.0, which under the prior administration severely limited the banking opportunities of crypto industry participants by requiring federal banking regulators to create policies preventing de-banking based on political or industry affiliations. White House Crypto Head Steps Down: Bo Hines is stepping down as the executive director of the White House crypto council to return to  the private sector. With the President’s Working Group on Digital Asset Markets having completed its report, this was likely a good time to hand off the reigns to others to continue these efforts. Crypto Privacy Updates: In light of the Tornado Cash verdict, this article from Coinbase on privacy preserving technologies like zero-knowledge proofs, and this speech from SEC Commissioner Peirce on the importance of financial privacy preservation, provide compelling reasoning for the importance of preserving financial privacy in an increasingly digital world, as well as the struggles of doing so. Uniswap DUNA Proposal: Uniswap proposed adopting a DUNA corporate wrapper for its existing token governance structure. The DUNA structure was introduced by Wyoming and created last year to attract crypto businesses. Seeing an extremely sophisticated team like Uniswap make this proposal and become one of the first major DAOs to contemplate a DUNA corporate structure is certainly something worth monitoring. That said, the structure is just one of many in the decentralization toolbox and still may not be appropriate for many DAOs and other protocols looking to decentralize, particularly in light of potential tax consequences and significant ambiguity within the DUNA law itself. Do Kwon Pleads Guilty: Three years after the Terra/Luna collapse that contributed to the downfall a crash of 3AC and FTX, founder Do Kwon plead guilty to two counts of federal fraud. He faces up to 25 years in U.S. prison, after which he still may face extradition to South Korea — which engaged in a tug-of-war with U.S. authorities regarding his release from prison in Montenegro. Conclusion: Both the SEC’s liquid staking guidance and the mixed verdict in Storm’s trial reflect an inflection point for U.S. crypto regulation. Industry stakeholders now have greater clarity on certain staking activities, yet the line between permissible software development and unlawful facilitation of financial crime remains contested. With additional executive action from the White House, new market structure proposals from Congress and industry-led governance experiments such as Uniswap’s DUNA initiative, the legal and policy environment for digital assets is changing at an unprecedented pace. How regulators, courts and industry participants navigate these developments in the coming months will shape not just compliance obligations, but also the broader trajectory of innovation in blockchain-based finance. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

With the GENIUS Act (stablecoins) now signed into law, and the CLARITY Act (market structure) having passed the House and entering active discussion in the Senate, the U.S. federal government’s embrace of digital asset policy appears to have embarked on what may, in time, be remembered as its most significant step forward. In the past few weeks, SEC Chair Paul Atkins unveiled “Project Crypto,” a sweeping Commission-wide initiative to re-engineer the federal securities framework and enable a blockchain-embracing financial system. The announcement came the same week as the President’s digital asset working group released its own 166-page legislative and regulatory roadmap. While both efforts remain in their formative stages, they signal a potentially historic shift: a coordinated move away from legacy intermediated finance toward a more open, programmable, blockchain-embracing financial structure. Detailed breakdowns on these major policy proposals, what they mean for businesses going forward and a few other updates on crypto-law topics are discussed below. Also, the Polsinelli Blockchain+ team is proud to be a sponsor, speaker and participant at the Heartland Digital Asset Exchange in Kansas City on September 9, 2025. We’re excited to help bring digital innovation and the blockchain revolution to the American heartland. Please join us—and let your Kansas City friends and colleagues know. SEC Chair Announces “Project Crypto” in Speech: July 31, 2025 Background: In a recent speech SEC Chair Paul Atkins, announced that the SEC would be launching an effort titled “Project Crypto” which he described as “a Commission-wide initiative to modernize securities rules and regulations to enable America’s financial markets to move on-chain.” The major Project Crypto initiatives include: Efforts to onshore crypto through a regulatory framework for the distribution of crypto assets in the U.S.; Creation of a framework for tokenized stocks, bonds, partnership interests and other securities; Modernization of custody rules for SEC registered intermediaries; Allowing broker-dealers with alternative trading systems to offer trading of non-security assets alongside securities, and to provide additional services like staking and lending (potentially dubbed “Reg Super-App”); Integration of decentralized finance (DeFi) and other onchain software systems into U.S. securities markets; and Creation of an “innovation exemption” regime to allow projects to go to market without being required to comply with “incompatible or burdensome prescriptive regulatory requirements,” so long as they adhere to certain principles-based conditions “designed to achieve the core policy aims of the federal securities laws.” Analysis: It would be hard to overstate how groundbreaking this development could be. Not since the 1960s “paperwork crisis” and the clearing and settlement reforms that followed has the SEC proposed such sweeping structural changes. It’s notable that the statement begins by stating the “SEC must holistically consider the potential benefits and risks of moving our markets from an off-chain environment to an on-chain one” (emphasis added), which suggests that none of the six goals are set in stone. Still, even partial modernization of the financial system using blockchain technology would represent a monumental shift—one that could reduce reliance on traditional intermediaries and reshape longstanding market structures. That said, while most financial institutions are exploring or piloting blockchain systems internally, widespread adoption in core market infrastructure has yet to materialize and will take time. Regulatory clarity will undoubtedly help accelerate progress, but it is likely just one piece of a broader puzzle that includes operational, technological and cultural hurdles. OpenSea “Insider Trading” Conviction Overturned on Appeal: July 31, 2025 Background: The former employee (Nate Chastain) of NFT marketplace OpenSea had his conviction overturned on appeal in what was dubbed at the time the “first ever ‘Digital Asset Insider Trading’ Scheme.” The Second Circuit ruled that the district court improperly instructed the jury that Mr. Chastain could be convicted if his actions were unethical alone, even if his employer did not treat the information he traded on as confidential and it did not represent a property interest of his employer. “[W]e cannot say that the jury would have reached the same verdict if it had been properly instructed that fraud requires appropriation of a property interest rather than unprofessional business conduct.” Analysis: This early conviction was seemingly more about “sending a message” in what was seen as a lawless area of NFT platforms than about actual harm to others, so it is not surprising to see it overturned. What Mr. Chastain did was widely seen as unethical at the time and he lost his job (and likely millions of dollars in equity as an early employee in the unicorn that OpenSea would become) because of those actions. But at the end of the day, this was a guy in his 20’s buying NFTs, featuring them on an NFT marketplace and then selling them at a higher price based on increased demand that his featuring decisions created. This behavior is not something many would view worthy of jail time, particularly compared to far worse actors who caused real harm. Hopefully this will be the end of the matter, though the DOJ could choose to retry the case. The President’s Working Group on Digital Assets Releases Initial Report: July 30, 2025 Background: When President Trump took office, one of his initial actions was releasing an Executive Order titled Strengthening American Leadership in Digital Financial Technology. That Executive Order established the President’s Working Group on Digital Asset Markets (“Working Group”) which was directed to submit a report recommending regulatory and legislative proposals that advance the policies set forth in the Order within 180 days. The Working Group’s 166 page report was released last week, and is available here along with a fact sheet summary here. Analysis: All areas of the Executive branch appear to be marching in unison to position the U.S. as the crypto capital of the world. The Polsinelli Blockchain+ team intends to publish a more detailed breakdown of the Working Group report based on areas of expertise, but some initial highlights are as follows: A preference for building on the CLARITY Act rather than the Senate Banking Committee’s discussion draft; A substantive discussion (pages 104–112) on the challenges and policy options for applying BSA-style reporting obligations to DeFi protocols; and Recognition of ongoing tax reporting issues, with a directive for the IRS to develop clearer, more tailored guidance to help taxpayers understand and track digital asset tax obligations. The report is comprehensive and appears to be written by individuals with a strong understanding of the underlying technology. It includes a helpful chart mapping out which policy items are being directed to federal agencies and which will require Congressional action.   The Senate Banking Committee Releases Market Structure Discussion Draft: July 22, 2025 Background: The Senate Banking Committee has now released a discussion draft of its proposed market structure legislation, following the overwhelming 294-134  House vote passing the House’s digital asset market structure bill, the CLARITY Act. At just 35 pages, the Senate’s Discussion Draft is far shorter than the 536 page CLARITY Act, but it also only addresses SEC-related topics while the Senate Agriculture Committee is expected to release a separate discussion focused on CFTC-related topics soon. The Banking Committee also released a set of 35 questions for industry input as they continue to evaluate how to regulate digital assets. Analysis: Prior to the CLARITY Act vote and the President’s Working Group report, most believed the Senate would use that bill as a starting point and then  prepare their own legislation on market structure issues. It is unclear whether the unexpectedly wide bipartisan support for the CLARITY ACT changed that plan. It now appears that the Senate will have two separate bills, one through Senate Banking and one through Senate Agriculture, which will be combined on the Senate floor for a final vote. The expectation is that the Senate Agriculture bill addressing the CFTC elements of market structure will be far longer and closer aligned with the CLARITY Act, while the discussion draft from Senate Banking indicates potentially major changes from CLARITY on SEC-related provisions. Notably it replaces the control test in the CLARITY Act with an “ancillary asset” framework under which as long as certain disclosures are made certain types of assets may be sold as part of an investment contract without the asset itself being considered a security. Even with an expedited timeline, there is still a lot to work to be done for critical market structure legislation to work its way through the system. Briefly Noted: Digital Chamber Submits Final SEC Crypto Task Force Comment Letters: The Digital Chamber recently completed its project responding to the SEC’s Crypto Task Force’s public request for information. The Chamber coordinated and submitted a series of industry comment letters addressing key regulatory issues raised by the SEC. The Polsinelli Blockchain+ group was actively involved in several of these responses, including serving as lead drafters on one of the submissions. We recognize Annemarie Tierney of the Digital Chamber, along with the Chamber’s staff and the many industry-leading outside counsel and in-house practitioners, for their leadership on this extraordinary project and the impressive results it produced. Viewed together, the letters offer a detailed overview of the legal and structural challenges facing the digital asset space—along with a range of practical solutions. The Chamber is expected to package these responses into a broader public policy push aimed at shaping forthcoming SEC guidance and rulemaking. Traditional Finance Integration of Crypto: This piece in American Banker from some of the Franklin Templeton team warns that “legacy institutions that fail to embrace [blockchain-driven innovation] risk losing out on immense opportunities for their customers” feels particularly apt in light of the recent statements from the SEC Chair. While it’s still early, this is a good time for professionals in traditional finance to learn how crypto functions even if only to stay ahead of where the trend is heading. SEC Greenlights In-Kind Redemptions: The SEC has approved in-kind redemptions for crypto ETFs, meaning authorized participants can redeem ETF shares by receiving the underlying crypto assets rather than cash. This is standard practice in many traditional ETFs (such as those for bonds or equities) and is considered tax- and cost-efficient. For crypto ETFs, it reduces the need to liquidate assets on secondary markets and helps institutions retain direct custody of the underlying tokens. Samurai Wallet Developers Plead Guilty: Samurai Wallet developers Keonne Rodriguez and William Hill pled guilty to unlicensed money transmission conspiracy charges, in exchange for dismissing  the money laundering conspiracy charges. They entered their plea just a day before the jury deliberations began in the Tornado Cash case, with both sides seemingly recognizing the outcome of that case would impact this related but separate case. Bored Ape Trademark Appeal Finalized: Yuga Labs won on a vast majority of the appeals in its case against Ryder Ripps and others for trademark law and related violations, but the case is heading back to the District Court for determination on likelihood of confusion. Crypto Policy Resource: The Crypto Policy Under Trump: H1 2025 Report put out by Galaxy Research is a great resource for its  collection of legislative and administrative primary sources, organized by topic and agency Tornado Trial Witness Under Scrutiny: This research from blockchain analysts has revealed that the government’s first witness in the Tornado Cash case—presented as a scam victim—never actually had their stolen funds mixed through the Tornado protocol. Instead, the witness appears to have relied on claims from a so-called “recovery firm,” which is itself reportedly under investigation, to link Tornado Cash to the theft. Despite this, the court permitted the witness to testify, raising serious questions about evidentiary standards and the role of hearsay in a high-profile crypto trial. This issue is likely to receive continued scrutiny in the weeks ahead, and we intend to cover it in more depth in our next update where we cover the verdict in this case (issued prior to publication but subsequent to finalization of this update). SEC Statement on Liquid Staking: As this Bi-Weekly was being finalized, the SEC released a statement, providing guidance that in the Commissions view, the creation and redemption of certain forms of liquid staking tokens falls outside the scope of U.S. securities laws. We will provide a full update on the guidance and its implications in our next Bi-Weekly update. Conclusion: Together, Project Crypto, the Senate’s legislative proposals, the Second Circuit’s reversal of the OpenSea “insider trading” conviction and the release of the President’s Working Group report signal a synchronized push across all three branches of government to move past ad hoc enforcement and toward coherent policy for digital assets. While regulatory change will not happen overnight, the tone and coordination suggest that U.S. regulators increasingly see blockchain technology not as a threat, but as a foundation for future market infrastructure. As these developments continue to unfold, we expect both rapid innovation and complex legal debates over how best to balance market integrity, investor protection and technological progress. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

In a historic week for digital assets, the United States has officially enacted its first federal crypto legislation with the GENIUS Act signed into law on July 18, 2025. Passed after the longest House vote in history, this bipartisan milestone establishes a comprehensive framework for the issuance, sale and redemption of fiat-backed digital assets and bringing long-awaited regulatory clarity to stablecoins, and opening the door for their use in faster, cheaper and more secure payment systems. This update breaks down what the GENIUS Act means for businesses and financial institutions, tracks the parallel developments of the CLARITY Act in the House and Senate market structure efforts, and recaps other major legal and regulatory developments from what lawmakers dubbed “Crypto Week” on Capitol Hill. We paused our usual biweekly schedule so we could deliver the legislative updates while they were fresh, and in hindsight, that was the right call. There’s a lot to cover. Read on for analysis, updates and a few additional developments briefly noted below. GENIUS Act Passes House, Signed Into Law: July 17, 2025 Background: It took the longest vote in House history, nearly 10 hours just to clear the procedural threshold for a floor vote, but the GENIUS Act ultimately passed on a striking 307–122 bipartisan vote. This rare show of consensus in today’s deeply divided Congress is an important signal of national momentum behind digital asset legislation. The President signed it into law  the following day, making it the first federal crypto legislation ever enacted in the U.S. making America one of the first countries to develop a formal legal framework for issuance, sale and redemption of digital assets pegged to a sovereign currency. The law’s regulatory framework gives businesses and financial institutions long-sought-after legal certainty around stablecoin use in payments and financial infrastructure. Analysis: It wouldn’t be a Crypto Week without some last-minute drama. The GENIUS Act almost fell apart when a group of House Republicans demanded the addition of the Anti-CBDC Surveillance State Act language to the bill. That move would have forced the bill back to the Senate, where it likely would have died. Fortunately, cooler heads prevailed—and likely some pressure from President Trump, who publicly urged Republicans to get behind crypto legislation—and the GENIUS Act made it through cleanly. Now law, it marks a historic turning point in U.S. crypto legislation and provides opportunity for stablecoins to be integrated into faster, more secure and cost-effective payment systems. CLARITY Act Passes House, Heads to the Senate: July 17, 2025 Background: The House also passed the CLARITY Act, its long-anticipated digital asset market structure bill with broad bipartisan support on a vote of 294-134. All House Republicans voted in favor of the legislation or abstained and 78 Democrats joined them—an improvement over FIT21, the prior House market structure bill, which drew 71 Democratic votes before dying in the Senate. The CLARITY Act now heads to the Senate, where it will meet competing frameworks already in development by the Agriculture and Banking Committees. This sets up the next phase of negotiations over what a final market structure bill might look like. Analysis: As with the GENIUS Act, the CLARITY vote nearly went sideways, due to last minute efforts of the House Freedom Caucus to attach the Anti-CBDC Surveillance State Act language to the bill. That move would have undermined the wide bipartisan support it eventually obtained. Instead a deal was struck to attach the CBDC provision to a separate defense spending authorization package, allowing for broad bipartisan support for the passage CLARITY. It remains to be seen whether the Senate will advance the CLARITY Act itself or use it as a base for new legislation. Either way, the level of bipartisan backing in the House is a promising signal. With parallel efforts already underway in Senate committees, the prospect of comprehensive digital asset market structure legislation becoming law is more real than at any time before. Senate Moves Forward on Market Structure: July 9, 2025 Background: The Senate Banking Committee held a hearing of the full committee titled From Wall Street to Web3: Building Tomorrow’s Digital Asset Markets. Witnesses included Summer Mersinger from the Blockchain Association, Ripple CEO Brad Garlinghouse, Chainalysis CEO Jonathan Levin and others. The Senate Agriculture Committee has also scheduled its own hearing this week. The Senate Banking Committee has since then released a discussion draft of legislation along with a formal request for industry input. Analysis: The hearing marked another step in the Senate’s increasingly engaged posture on crypto regulation. Last month, the Senate Banking Committee leadership released its Principles for Market Structure Legislation. The hearing felt productive, reflected growing consensus that digital assets can no longer be ignored or simply litigated out of existence. Even skeptical voices are now focused on how to regulate crypto; not whether to do so (though many still appear unsure how to get their handle on something they tried to ignore away for years). That said the Senate remains well behind the House, which has already passed the CLARITY Act. And unlike the GENIUS Act’s fairly clean path to enactment, market legislation is expected to undergo extended negotiations between the chambers. Lawmakers, like  Senator Warren and Congresswoman Waters  are expected to oppose most market structure efforts, which could complicate the path to bipartisan consensus. Time is also running out: Congress is fast approaching its pre-election recess, and the window to finalize legislation this year is narrowing. And with the current state of dysfunction in Washington, anything is possible—including, as recent reports suggest, Congress going into early recess over political drama and rising fears of a government shutdown later this fall. The mere fact that crypto legislation is receiving this level of sustained attention in Congress is remarkable—and a sign of how far the industry has come in just a few years. Important Amicus Filed in Right-to-Code Case: July 7, 2025 Background: Back in January, a plaintiff backed by Coin Center filed a lawsuit  seeking a declaratory judgment that developing and publishing non‑custodial digital asset software does not require a money-transmitter license (the case is Lewellen v. Bondi in the Northern District of Texas). The Department of Justice (DOJ) moved to dismiss arguing that the plaintiff failed to show a credible threat of enforcement, failed to state a plausible constitutional claim and was seeking an improper advisory opinion. Now, a coalition of prominent digital asset stakeholders have filed an amicus brief opposing the DOJ’s motion and urging the court to allow the case to proceed. The amici include the venture firm Paradigm, the DeFi Education Fund, the Digital Chamber, the Solana Foundation and others—forming  a who’s-whoof crypto litigation advocates. Analysis: The DOJ argues there’s no credible risk of prosecution, but that position is hard to square with its ongoing criminal cases against crypto software developers. As the amicus brief states, “[t]he developers are analogous to the manufacturers of USB drives and frying pans. Since they merely make the tools that other people use to make transfers, they are not involved in the transfers themselves.” Despite signals from the current administration that it is taking a more constructive approach to crypto, this case highlights the persistent legal uncertainty facing developers. If the DOJ prevails, open-source software creators across the crypto ecosystem could remain exposed to prosecution simply for publishing code. Whether or not this court grants relief, the issue is unlikely to go away without either a legislative fix or clear, binding precedent. This is a fight that still needs to be fought at won or software developers in this and other spaces will remain at risk of criminal prosecution for public Briefly Noted: Paradigm Crypto User Research: Paradigm is a leader in crypto market research, and its latest mapping of crypto users is no exception. One of the more striking findings: 59% of respondents said the crypto assets someone owns—or previously owned—can reveal a lot about them. This suggests a growing belief that wallet history signals personal values, risk appetite or even political alignment. As crypto use becomes more mainstream, these behavioral cues may shape how users are profiled, marketed to or even evaluated for platform access. Research like this is especially valuable as more traditional businesses begin to explore the space under a more welcoming regulatory regime. Anti-CBDC Surveillance State Act Update: Also during Crypto Week, in line with expectations Representative Emmer’s Anti-CBDC bill passed the House on a largely partly-line 219-210 vote with only 2 Democrats voting in favor. While the bill is unlikely to gain traction in the Senate, it shows concerns over digital asset financial surveillance which are worth considering. DeFi Broker Rule Is Done: The IRS rule regarding digital asset “broker” reporting requirements issued just before the last administration ended is now officially dead, after being directed to be retracted by Congress. A quite but meaningful  win for the industry and another loss for the dwindling anti-crypto holdouts in Washington who not too long ago openly talked of building an anti-crypto army.   Important Message from Commissioner Hester Peirce on Tokenization: In response to various tokenized securities announcements, Commissioner Peirce has released a well-timed statement “Enchanting, but Not Magical: A Statement on the Tokenization of Securities.” Her key message: tokenized or not, securities need to follow securities laws. “While blockchain-based tokenization is new, the process of issuing an instrument representing a security is not. The same legal requirements apply to on- and off-chain versions of these instruments.” This message is what Polsinelli advocated for on behalf of the Digital Chamber in a recently submitted letter to the SEC which we covered in our last update and was submitted a week before Commissioner Peirce’s statement. DOJ v. Storm Trial Updates: A few pre-trial developments surfaced in the DOJ’s criminal case against Roman Storm (this is a good background on the case available here). Among them: the DOJ reportedly misrepresented a text from a reporter as coming from another Tornado Cash developer during the Grand Jury proceedings, and there were some other spicy pre-trial exchanges. The trial is underway and expected to last for a few more weeks, so we will keep covering those developments as they occur. Banking Regulators Give Guidance on Crypto Custody: The FDIC, the Office of Comptroller of Currency and the Federal Reserve issued joint guidance stating that banks can custody crypto assets for customers but need to be aware of risks and take appropriate steps to manage risk.  A long overdue and welcomed step toward normalizing digital asset custody in the traditional banking system Crypto Tax Changes: Though announced a while ago, it made the news again that the President supports  a de minimis tax exemption on appreciation related to crypto used to purchase everyday goods and services. Any such changes are likely need to come from Congress as it considers appropriate ways to tax crypto. Crypto-specific tax change proposals were not included in the recently passed “big beautiful bill” despite a last minute push. John Doe Summons Live On: SCOTUS will not be hearing a case challenging the broad use of warrantless summons, called “John Doe” summons, against third parties including digital asset exchanges. Combined with the anti-CBDC legislative efforts and the prosecution of Roman Storm discussed above, the financial surveillance of digital assets and legality of privacy preserving technologies will continue to be hot topics to follow. Conclusion: The passage of the GENIUS Act marks a turning point in U.S. digital asset regulation, signaling that stablecoins are no longer operating in a legal gray space but within a defined and enforceable framework. Combined with bipartisan momentum behind the CLARITY Act and ongoing Senate efforts on broader market structure legislation, the U.S. is finally laying the groundwork for a cohesive digital asset regulatory regime. While challenges remain, including constitutional litigation over software development to unresolved questions around CBDCs and financial surveillance, the last few weeks which included “Crypto Week” have demonstrated that meaningful, bipartisan progress is not only possible but actively underway. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

It’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.

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

The most important development of the last two weeks is likely the release of a revised bipartisan digital asset market structure bill in Congress, which now gives real momentum to the possibility of comprehensive legislation. At the same time, the SEC is continuing to reposition its posture, pulling back from aggressive litigation, acknowledging areas outside its jurisdiction such as staking, and signaling a more measured approach as we await the first report from its new Crypto Task Force. Meanwhile, the courts continue to shape the legal boundaries of decentralized finance, as seen in the closely watched ruling overturning fraud charges in the Mango Markets case. These developments and a few other brief notes are discussed below. Bipartisan Market Structure (“CLARITY Act”) Bill Text Released: May 29, 2025 Background: After releasing draft language of an unnamed market structure bill a few weeks ago, a revised and now titled version, the CLARITY Act, dropped last week. Sponsored by House Financial Services Committee Chair French Hill, the bill has five Republican and three Democratic co-sponsors, all members of either the House Financial Services or House Agriculture Committees. It is expected to be fast-tracked for markup in the Financial Services Committee, as early as June 10th, so this could move quickly through committees. Broader House timing remains unclear, however, as Congressional attention is divided among numerous competing priorities beyond digital asset regulation. Analysis: The sponsors appear to have seriously considered industry feedback, and several technology-specific issues flagged in the prior version were meaningfully addressed. For example, many pointed to the definition of “Decentralized Finance Trading Protocol,” previously criticized as overly broad, has been revised and now more closely tracks the drafters’ likely intent. There was a hearing earlier this week in the House Financial Services Committee (which we will cover in the next Bi-Weekly update), which was designed to discuss digital asset regulation more broadly but focused heavily on this bill as well.  SEC Releases Guidance That Certain Proof of Stake Staking Activities Do Not Implicate Securities Laws: May 29, 2025 Background: The SEC Division of Corporate Finance put out a “Statement on Certain Protocol Staking Activities” clarifying its view that certain proof-of-stake blockchain protocol “staking” activities are not securities transactions within the scope of the federal securities laws. This follows related guidance on Proof-of-Work mining which was put out in March. “Accordingly, it is the Division’s view that participants in Protocol Staking Activities do not need to register with the Commission transactions under the Securities Act or fall within one of the Securities Act’s exemptions from registration in connection with these Protocol Staking Activities.” Analysis: This likely clears the way for staking in ETH ETFs or other ETFs linked to proof-of-stake blockchain assets, which may be approved in the near future (although there are still tax and other securities law issues that could make this complicated). It is unclear how this might affect the prior Kraken consent order, as many of the staking services offered by Kraken now appear to be “Ancillary Services” under this guidance. It is great to see all this guidance coming out, but until the guidance is formalized into rulemaking or until there is action from Congress in this area, then the industry is left with few, if any, assurances those viewpoints will continue under different leadership. SEC Moves to Dismiss Binance Case with Prejudice: May 29, 2025 Background: The SEC has asked the Court to dismiss the agency’s case against the various Binance entities and its founder, Changpeng Zhao (“CZ”), with prejudice, which would bring an end to the cases brought under the prior administration against the biggest U.S. digital asset exchanges, which we have been covering on the BiBlog. This follows previously dismissing cases against Coinbase and Kraken and closing investigations into OpenSea, Circle, and others shortly after the change in administration and resignation of prior SEC Chair Gary Gensler. Analysis: As we noted in our 2024 year-end digital asset rundown, the cases against various exchanges were bet-the-company litigation for all the exchanges sued. If it was ruled that sales on the platforms of exceedingly common tokens like SOL were securities transactions, that would have made it difficult for most individuals to transact in digital assets in the United States, particularly those lacking experience interacting with decentralized finance. With these lawsuits behind the exchanges, all eyes turn to formal guidance and rulemaking from the SEC/CFTC and whether there will be comprehensive digital asset legislation out of Congress, which is currently being considered by both chambers. Conviction Overturned in Mango Markets Exploit: May 23, 2025 Background: District Court Judge Arun Subramanian has overturned the fraud convictions against Mango Markets exploiter Avraham (“Avi”) Eisenberg, ruling that venue was improper since there was no evidence that the routing engine for Avi’s trades were in New York. The more interesting ruling, though, was finding there was insufficient evidence of falsity to support a wire-fraud charge (see ruling starting at pg. 26). The Court ruled that because the user terms and conditions didn’t make intent to repay a condition upon borrowing, and because Avi didn’t make any false representations about the value of his assets (he just exploited an oracle into making those false representations for him), the government could not support a fraud conviction, ruling “[o]n a platform with no rules, instructions, or prohibitions about borrowing, the government needed more to show that Eisenberg made an implicit misrepresentation by allowing the algorithm to measure the actual value of his collateral.” Analysis: This case raises broader questions about what level of human interaction is needed for “wire fraud,” where the alleged fraud is primarily being perpetrated against an algorithm and not a person. There remains the issue that Avi sued Numeris, Ltd. before the Mango Markets trading activities, claiming it was fraud for others to artificially increase the price of tokens to borrow against knowingly inflated values, similar to what Avi did in his exploit. It seems disingenuous to claim “code is law” for his actions while he previously asked the government to save his funds when a protocol that he was using had a similar exploit. Avi is still going to jail on other charges to which he pled guilty. It will be interesting to see how the case law regarding the extent “code-is-law” holds up in the use of permissionless protocols. Briefly Noted: 401K and Bitcoin Reserve Updates: The Department of Labor has retracted guidance discouraging retirement managers from considering cryptocurrency as an investment option in 401(k) plans. This came as Whitehouse Crypto Czar David Sacks was at a major Bitcoin conference in Vegas where he talked about how the announced Bitcoin strategic reserve is progressing. Reputational Risk Ban Passes House Committee: The House Financial Services Committee advanced on a 33-19 bipartisan vote a bill that would prohibit federal banking agencies from considering “reputational risk” when supervising, examining, or regulating depository institutions. SEC Crypto Task Force Updates: The SEC is set to release its first Crypto Task Force Report in the upcoming months; meanwhile Commissioner Peirce delivered a great speech about the importance of the SEC setting clear rules of the road for the space (including noting where the SEC doesn’t have jurisdiction). Emmer and Torres Reintroduce Right to Code Law: Tom Emmer (R-MN) and Ritchie Torres (D-NY) have reintroduced legislation that would protect the developers of non-custodial blockchain software developers and providers from being classified as money transmitters. This would be huge in convincing developers to stay in the United States when developing blockchain-enabled technologies. CFTC U.S. Persons Guidance: The CFTC put out some helpful guidance on what they consider to be U.S. persons subject to CFTC jurisdiction in an internet age. This guidance provides that where the company’s high-level officers primarily direct, control, and coordinate the company’s activities is most important for determining whether the company is considered a domestic entity for CFTC jurisdictional purposes. SafeMoon CEO Found Guilty of Fraud: Braden Karony, the former CEO of SafeMoon, was convicted on three counts of fraud after he was ruled to have diverted millions of tokens, which he said were “locked,” and sold those tokens for personal gain. Investment Company Act Status of ETFs Questioned: The SEC Division of Investment Management, in a letter to a crypto ETF operator, stated that, in light of recent developments, it is unsure that the ETFs are investment companies that can register under the Investment Company Act of 1940. Generally, a company wouldn’t be an investment company if, among other things, less than 40% of its assets constituted investment securities. Registration statements, application requirements, and ongoing reporting requirements are different for investment companies and other issuers, and certain crypto ETFs (including Bitcoin ETFs) already register as non-investment companies. This calls into question whether the SEC might be exploring rule changes more tailored towards this type of entity.    Conclusion: These developments mark a potential turning point in the digital asset regulatory landscape. With Congress moving forward on bipartisan legislation like the CLARITY Act and federal agencies such as the SEC and CFTC issuing meaningful (if still preliminary) guidance, the pieces of a more coherent framework are starting to take shape. However, the regulatory environment remains fragmented and uncertain, especially absent formal rulemaking or statutory clarity. As agencies shift direction and courts weigh in on key enforcement matters, market participants should remain vigilant, engage with regulators, and prepare for a fast-evolving legal landscape where the line between code and law continues to be tested. The Polsinelli Blockchain+ team will continue monitoring these rapid developments and provide updates as the situation unfolds. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

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

The last two weeks have seen federal agencies continue refining their approach to the digital asset industry, while state regulators are beginning to play a more prominent role—even as the overall pace of development appears to be slowed. With the SEC stepping back from non-fraud enforcement, Oregon’s lawsuit against Coinbase highlights a potential shift toward increased state-level activity. At the federal level, the SEC issued new guidance on registering crypto-related securities, the House held hearings on digital asset market structure, and the DOJ released a memo calling on prosecutors to “end regulation by prosecution”—underscoring a growing federal priority to focus enforcement on fraud and consumer protection rather than taking a broad adversarial stance toward the industry. Other notable developments include Illinois advancing a BitLicense 2.0 proposal, OpenSea seeking SEC guidance on NFT regulations, and Ripple moving to acquire global credit network Hidden Road. These developments and a few other brief notes are discussed below. Oregon Sues Coinbase Over Alleged State Securities Laws Violations: April 17, 2025 Background: Oregon’s state attorney general has brought a lawsuit against Coinbase, alleging the exchange has violated Oregon state securities laws through listings of certain assets alleged to be securities under Oregon law. Coinbase has released a statement claiming, “Oregon’s holdout campaign is obstruction for the sake of obstruction. It is a desperate scheme that does nothing to move the crypto conversation forward, and in fact takes us a giant leap backwards from hard-won progress.” Analysis: As anticipated, states and private litigants are beginning to fill the securities litigation gap left by the SEC’s decision to drop its pending and threatened cases against digital asset participants in favor of pursuing a statutory and rulemaking-based framework. Oregon’s lawsuit, which names 31 assets as “unregistered securities,” is notable—especially as other states withdrew similar actions following the SEC’s retreat in the Coinbase matter. This latest development underscores that, despite federal de-escalation, litigation against exchanges remains an ongoing issue for the industry. SEC Issues Guidance on How to Register Securities that Involve Crypto: April 10, 2025 Background: Much of the focus at the SEC post-Gensler has been on releasing guidance on what crypto offerings are not securities (memecoins, stablecoins, etc.). The SEC Division of Corporation Finance has now put out guidance for issuers whose securities involve crypto assets on how federal securities law disclosure requirements apply. It recognizes that issuers may offer equity or debt securities as part of operations related to networks, applications, and crypto assets, and highlights the need for tailored, clear, and consistent disclosure aligned with existing rules (e.g., Regulation S-K, Forms S-1, 10, 20-F, and 1-A). Key disclosure elements include a focused description of the issuer’s business and developmental milestones, potential risks (such as technological, regulatory, and liquidity risks), a complete description of the securities (including any unique features and technical specs), and information on directors, executive officers, and significant employees (or third parties) performing policy-making functions. Analysis: Tokenized securities are coming to traditional finance. Major actors in the traditional financial world are already preparing for that eventuality. Most digital assets are not securities, but many securities could be better handled through addendum only ledger technology rather than a seemingly endless number of middlemen all getting their cut to make sure none of the other middlemen are cheating the consumer. So, while the SEC and Congress work through determining which digital assets are securities and which are something else, this is a good step to allow innovative companies to start registering tokenized products. Market Structure Hearings Held in House of Representatives: April 9, 2025 Background: The House Financial Services Committee’s Digital Asset Subcommittee and the House Agriculture Committee’s Digital Asset Subcommittee both held hearings on how to approach an overarching market structure for digital assets now that stablecoins seem to be on the fast track to regulatory standards. There is a broad consensus that digital assets that are securities need to be provided a way to register with the SEC and abide by SEC rules that aren’t so onerous that the registration process kills any value of the product. Analysis: You can probably read the statements from witnesses Bill Hughes, Chris Brummer, and Rodrigo Seira to get the gist of where the focus should be for digital asset regulation. Both hearings had a noticeable focus on use cases for digital assets. We are still waiting for what the market structure bill will look like. It will be close to FIT21, previously passed through the House Financial Services Committee, but we don’t know how close it will be yet, as there were noticeable weaknesses in the bill. Draft language is expected to be public soon, though, and all expectations are for the determining factor between securities offerings and non-securities offerings to focus on “control” as opposed to “decentralization,” which was the focus of last year’s bill. DOJ Releases Memo “Ending Regulation by Prosecution”: April 7, 2025 Background: Deputy Attorney General Todd Blanche has issued a memorandum to Department of Justice employees with the subject reading “Ending Regulation by Prosecution,” where he states, “Consistent with President Trump’s directives and the Justice Department’s priorities, the Department’s investigations and prosecutions involving digital assets shall focus on prosecuting individuals who victimize digital asset investors or those who use digital assets in furtherance of criminal offenses…” The memo clarifies that the DOJ is not going to focus efforts on exchanges or wallets for the actions of third-parties, and is not the regulator of alleged unregistered money transmission laws. It also disbands the National Cryptocurrency Enforcement Team, which was responsible for most current investigations and prosecutions in the space over the last few years. Analysis: Note that this memorandum does not include guidance not to prosecute alleged violations of 18 U.S.C. 1960(b)(1)(C), which involves allegations of transmitting funds that are “knowingly” the product of criminal offenses and is the heart of the Roman Storm and Samuri Wallet developer cases. Interestingly, the memo calls out the issue of how digital asset losses are calculated when trying to compensate victims (a not-so-subtle reference to FTX depositors getting ~$20,000 per Bitcoin lost when Bitcoin was worth quadruple that by the time repayments happened). Not sure if there is a solution to this other than making people choose early in the process if they want in-kind or value of asset at time of theft. Unfortunately for Do Kwon, even with this DOJ pivot, his suit will remain ongoing. Briefly Noted: Paul Atkins Sworn in as SEC Chair: Paul Atkins has finally been sworn in as SEC Chair, marking the formal start of a new era for the Commission. The agency remained active in redefining its priorities throughout his confirmation process, and Atkins was widely understood to be in alignment with the key decisions made during that period. With his swearing-in now complete, he is positioned to implement a full regulatory agenda and set the tone for the post-Gensler SEC—potentially accelerating shifts in enforcement priorities, rulemaking, and digital asset policy. Illinois Looking to Pass BitLicense 2.0: An Illinois bill is gaining traction and is expected to pass, which would enact similar onerous reporting and registration requirements as the New York BitLicense. With the combination of the Oregon lawsuit discussed above, this further emphasizes the need for comprehensive regulations at a federal level to prevent fractionalized and contradictory rules. OpenSea Open Letter: OpenSea has submitted a public letter to the SEC advocating for NFT marketplaces to be carved out of broker/dealer registration requirements with the SEC. It is clear that even with NFTs decline, they are still a crucial part of the ecosystems that need regulatory guidance.  Nova Labs Lawsuit Dismissed: Nova Labs (the developer behind Helium Network) was sued in the last days before Gensler resigned, and that lawsuit has now been dismissed with prejudice. So this ordeal actually ended up good for them since the lawsuit being brought and then dismissed in this way prevents any future lawsuit over the same allegations from the agency. Hinman Cleared by Office of Inspector General: Former Corporation Finance Director Bill Hinman has been cleared of allegations that his infamous speech was the result of insider dealings. $1.2 Billion M&A Deal: Ripple is reportedly acquiring global credit network Hidden Road for $1.25 billion. This is reportedly an effort to give functionality to Ripple’s stablecoin, RLUSD, in traditional finance for cross-border settlements. MEV Submission: Really great work from the team at Paradigm explaining how MEV works and what the SEC should consider in regulation in light of those technical realities. Good stuff. DOJ Memo Confirmed Not Applicable for Fraud: As stated above, the DOJ memo regarding cutting down on criminal actions for crypto actors is not a get out of jail free card for past (alleged) frauds. SEC Roundtable on Crypto Custody: The SEC has announced the time and speakers in its next crypto roundtable on custody. It remains great to see as many of these conversations as possible happen in public. Phantom Wallet Lawsuit: It looks like an attorney is suing the wallet developer where he held certain memecoins he created, but which were stolen through his computer being compromised. This will be something worth following, especially if wallet developers are regulated under a market structure bill or similar legislation. Conclusion: The last two weeks have been relatively quiet in terms of crypto legal development. With the SEC pivoting away from prosecuting non-fraud crypto cases, state regulators have begun stepping into that role, most notably with Oregon suing Coinbase over alleged violations of state securities laws. At the federal level, the SEC provided guidance on registering securities that include crypto assets, the House of Representatives held market structure hearings, while the DOJ aimed to “end regulation by prosecution.” As always, we’ll continue monitoring these developments and provide updates as the evolving regulatory landscape for digital assets continues to take shape across federal and state levels. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

The past two weeks have been relatively quiet, with stablecoins being the most prominent focus on the regulatory front. Stablecoin legislation now appears likely this year, with a bill to regulate stablecoins advancing out of the key House Financial Services Committee — a step toward what would be the first crypto-specific federal legislation enacted in the United States. The SEC also issued guidance clarifying that certain “covered stablecoins” are not securities under existing law. Unresolved are several key questions — including whether regulatory authority over stablecoins will lie solely with the federal government or continue to be shared with the states and whether interest-bearing stablecoins should be treated as stablecoins at all. These developments and a few other brief notes are discussed below. SEC Clarifies That Certain Stablecoins Are Not Securities: April 4, 2025 Background: While Congress moves toward a legislative framework for stablecoins (discussed below), the SEC has issued limited guidance addressing how existing securities laws apply to certain types of stablecoins. The SEC’s Division of Corporation Finance’s Statement on Stablecoins provides that the offer and sale of certain “covered stablecoins” do not consist of the offer and sale of securities and issuers of the same “do not need to register . . . with the Commission under the Securities Act or fall within one of the Securities Act’s exemptions from registration.” Analysis: Under the guidance, “covered stablecoins” are defined as stablecoins that are marketed for the purposes of making payments, are exchangeable for the reference currency on a one-for-one basis and are backed by a reserve of low-risk, liquid assets. There are at least two big takeaways from this guidance. First, interest-bearing stablecoins could turn a consumer product into an investment product under the Howey and Reves tests. Second, while not explicitly addressed, the statement implies that stablecoin issuers might not need to register as investment companies under the Investment Company Act of 1940 as long as the assets backing the stablecoin are USD and other assets that are “considered low risk and readily liquid.” This view is consistent with pending legislation that would prohibit interest payments on stablecoins to distinguish them from investment products. Notably, the guidance does not address stablecoins pegged to anything other than the U.S. dollar. Stablecoin Bill Passes House Financial Services Committee: April 2, 2025 Background: The House Financial Services Committee included H.R. 2392, the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act of 2025, in a recent markup session. Committee Chair French Hill stated he expected “our discussion today will be passionate,” and his expectations were met during a marathon 10-hour debate, particularly regarding various proposed amendments to prohibit federal officials from "sponsoring, issuing, promoting or licensing" stablecoins in response to World Liberty Financial stating its intent to issue a stablecoin for its platform. The bill ultimately ended up passing through committee on a 32-17 vote, demonstrating a fairly strong bipartisan vote, though further changes can be expected before the bill reaches the House floor. Analysis: Stablecoin legislation in 2025 now appears likely, but the two major questions remain: whether authority will be split between state and federal authorities, and whether stablecoins should be permitted to bear interest. Some argue that allowing interest bearing stablecoins will enhance utility, while others argue that it could undermine the existing banking system. An anti-central bank digital currency (CBDC) bill also advanced through the Committee, along party lines, though that bill is of limited practical importance, as any CBDC would likely require express Congressional approval. SEC v. Ripple Settlement Progresses: March 25, 2025 Background: In our last Bi-Weekly update, we noted the then-available details regarding developments in the SEC v. Ripple case. Since then, further news was released that Ripple will also not be appealing the decision in its case against the SEC. The SEC will also ask the district court to lift the standard SEC injunction, but there is no guarantee that it will be approved. Analysis: The settlement was finalized as both parties agreed to drop their respective appeals in the case, which dates back to 2020. Ripple agreed to pay a fine of $50 million, reduced from the original $125 million, in exchange for the SEC requesting the lifting of injunction requiring Ripple to register any future securities. The settlement signals the conclusion of one of the most anticipated crypto litigations. As discussed in the previous update, the settlement aligns with the general outlook of the SEC dropping non-fraud related crypto cases. On the other hand, Ripple remaining liable for a $50 million fine related to its institutional token sales leaves a door open for the SEC to argue that sales of tokens for the purpose of raising capital purposes might still be treated as securities offerings. While the settlement is a welcome resolution, the absence of a final judicial opinion leaves no precedent or legal guidance for future token offerings. With this litigation soon behind us, the industry can now focus on securing clearer regulatory guidance on digital assets. Briefly Noted: Digital Chamber Conference: Remarks by Commissioner Peirce: The Digital Chamber of Commerce held its annual Blockchain Summit on March 26th, with the Polsinelli BitBlog team actively participating. We were encouraged by the strong demonstration of bipartisan support for the industry — even in these highly partisan times — due in no small part to the efforts of the Chamber under Perianne Boring and now under the energetic new leadership of Coby Carbone, whom we had the pleasure of congratulating in person. Of particular note at the conference was SEC Commissioner Hester Peirce’s important address on the path ahead for building common-sense digital asset regulations. SEC Chair Confirmation Hearing: Paul Atkins had his Senate confirmation hearing last week, but there wasn’t anything unexpected discussed. He has a lot of work ahead of him and will get plenty of help from the industry in the various upcoming roundtables. That said, it appears he may have already gotten a head start, with two of the three remaining SEC commissioners (Uyeda and Peirce) being former staffers of his.  Securities Clarity Act Reintroduced: House Majority Whip Tom Emmer has reintroduced his Securities Clarity Act, which specifies that any asset sold as the object of an investment contract is distinct from the securities offering it was originally a part of. This definition is technology-neutral and applies to all assets sold or offered that would only be considered a “security” because of their inclusion in an investment contract. With the unclear status of the market structure bill, this would be a solid alternative along with SEC rulemaking and no-action letters. FDIC Removes Crypto Limits: The FDIC has released a statement that it will no longer require supervised institutions that “engage in permissible crypto-related activities” to receive prior agency approval. Another big win for getting digital asset companies access to traditional banking. Kentucky Self-Custody Law: Kentucky recently enacted a law that passed unanimously on a bipartisan vote and guarantees individuals the right to hold and manage their crypto in self-hosted wallets. Hopefully, we see similar protections at the federal level soon. State Staking-as-a-Service Lawsuits Dropped: Fresh off the SEC clarifying its view that pooled PoW mining operations are not generally securities offerings, South Carolina, Kentucky and Vermont have all dropped their lawsuits against Coinbase alleging that its staking services qualified as securities.  Circle Files to Go Public: USDC stablecoin issuer Circle has filed their S-1 to go public, aiming for a $5 billion valuation. Considering they had $1.68 billion in revenue and reserve income in 2024, that seems reasonable, even in less than optimal market conditions. Interestingly, the IPO filings also revealed Coinbase’s acquisition of a stake in Circle. This is just the first of the crypto companies going public in the upcoming months/years, if tariffs don’t derail those plans. Defending the Fourth Amendment: It is worth reading this amicus brief from the DeFi Education Fund in a case regarding the Constitution’s Fourth Amendment protection against illegal search and seizure, specifically challenging the government’s subpoena powers over digital asset transaction records held by centralized exchanges. Acting SEC Chair Asks for Guidance Assessment: Acting SEC Chair Uyeda has asked the staff to reassess certain guidance, which includes the Framework for “Investment Contract” Analysis of Digital Assets. This document was based on a 2018 speech by former SEC Bill Hinman. It appears the goal would be to clean the slate of past guidance muddying the waters in areas the current administration wants to change, including the prior approach to regulating digital assets. Conclusion: With the SEC announcing that certain “covered stablecoins” are not securities and a stablecoin bill advancing through the House Financial Services Committee, stablecoins were the most active area of regulatory development over the past two weeks. Ripple’s settlement with the SEC marks the close of one of the most closely watched crypto litigations to date — though it leaves much work ahead in the pursuit of clearer legal frameworks for digital assets. Other notable updates include the SEC Chair’s confirmation hearing, the reintroduction of the Securities Clarity Act, the FDIC’s removal of prior approval requirements for crypto-related activities, Kentucky’s new self-custody law, and Circle going public. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

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

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

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

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.

The last two weeks have seen a flurry of Congressional hearings addressing key digital asset issues, alongside several noteworthy consent judgments against industry participants from the SEC. These fast-paced developments are expected to continue through the end of September, when both the CFTC and SEC conclude their fiscal years, as they strive to optimize their results for 2024. While there almost certainly won’t be crypto legislation passed this year, Congress looks to set the stage for potential digital asset legislation in the upcoming lame duck session after the November elections and beyond. These developments and a few other brief notes are discussed below. Congress Holds Hearing on Decentralized Finance (“DeFi”): September 10, 2024 Background: The House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing entitled Decoding DeFi: Breaking Down the Future of Decentralized Finance. It featured testimony from Rebecca Rettig (Chief Legal and Policy Officer at Polygon Labs), Peter Van Valkenburgh (Coin Center’s Director of Research), and others. The Committee Memorandum is available here. The Digital Chamber provided a nice summary of the hearing, available here. Analysis: The fact that DeFi has even reached the level of importance to warrant a Congressional hearing is a big step for this burgeoning subset of the digital asset industry. This does not mean that the hearing was totally supportive of DeFi, with Representative Sherman and others using the hearing as a platform to make unsubstantiated claims that DeFi’s primary use is for tax evasion. These assertions were effectively countered by Van Valkenburgh stating that “Tax evasion is a crime. It should be aggressively policed…I do not, however, think that tax evasion and its existence warrant a 100% surveilled and controlled financial system.” The fact that subsets of digital assets remain a partisan issue is somewhat disheartening, but not entirely unexpected. eToro Settles with SEC and Delists Virtually All Crypto Assets: September 12, 2024 Background: Trading platform eToro USA LLC has agreed to pay $1.5 million to settle charges that it operated an unregistered broker and unregistered clearing agency in connection with its trading platform that facilitated buying and selling certain crypto assets as “securities.” While the platform will continue to permit trading of BTC, ETH, and BCH (Bitcoin Cash), all other digital assets such as LTC (Litecoin), DOGE, and others will be removed. The Order curiously mandates that eToro immediately stop selling those assets while simultaneously requiring the company to sell those assets or otherwise refund customers within 180 days. Analysis: It is unclear why BCH will be permitted to continue being traded on the platform despite not being meaningfully different from Litecoin. Could it have something to do with BCH having “Bitcoin” in its name? The requirements of the settlement do not appear to give eToro a feasible path forward to operate its U.S. business. This is disappointing considering that prior to the settlement, eToro seemingly tried to follow SEC guidance in that it de-listed assets that the SEC named in other lawsuits as securities, obtained a BitLicense and other state regulatory licenses, and otherwise acted cautiously in an attempt to remain in compliance. It looks like the only way for eToro to comply with the forced sell aspect of Order will be to sell overseas (likely at deep discounts), which will then be passed on to customers. As mentioned above, we expect more of these settlements/actions to flow in leading up to SEC’s September 30 fiscal year end.  Flyfish Club Settles with SEC over NFT Restaurant Membership Sales: September 16, 2024 Background: The SEC issued an Order against Flyfish Club, the creators of restaurant club passes in the form of NFTs. Flyfish Club NFTs represented membership in the private dining club, for which holders of the NFT could digitally verify such membership and make reservations at the restaurant, but the Staff took the position that the NFTs were marketed as securities because they could be resold for a profit. As usual, Commissioners Peirce and Uyeda dissented. As a part of the agreement, Flyfish Club agreed to destroy any NFTs in the company’s possession that it hasn’t sold, not take royalties on any ongoing secondary sales, and pay a $750,000 fine, among other things. This order was issued only a few days before the opening of the restaurant and did not prevent its opening or help the token holders obtain their membership benefits. Analysis: The fact pattern in FlyClub closely resembles that of Silver Hills Country Club v. Sobieski, a California state court case from 1960. That court found that the country club memberships at issue were being sold as securities and did so through the creation of the “risk capital” test. That test almost exclusively looks at whether a seller is seeking risk capital to develop a business venture. The fact that the memberships were transferable led that court to determine that they represented “risk capital.” In the FlyClub order, while the SEC tries to connect the violations to the Howey test, this could be seen as a move towards the SEC adopting the risk capital test. It’s important to note that the risk capital test has never been recognized by any federal court in the United States. It is also interesting that the SEC has now entered two settlements with two consumptive NFTs and did not require the project to cease and desist, nor did it require a repurchase offer. This contrasts with most SEC settlements with and lawsuits against issuers of utility tokens, in which the SEC demanded that the project shut down. At least the people who want to eat can be fed. House Financial Services Committee Holds Hearing on SEC Approach to Digital Assets: September 18, 2024 Background: Following up on the DeFi hearing the week before, the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing entitled Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets. It featured testimony from Dan Gallagher (former SEC Commissioner), Michael Liftik (former Deputy Chief of Staff to SEC Chair White), and others. The Committee Memorandum started with the following Introduction: “The Securities and Exchange Commission (SEC) has long struggled with the application of the United States’ securities laws to the digital asset ecosystem. Under Chair Gensler, the SEC has prioritized and pursued an enforcement and regulatory agenda to the detriment of the digital asset ecosystem.” Analysis: The battle lines of crypto supporters (led by Ritchie Torres (D-NY) and French Hill (R-AR)) vs. detractors (led by Stephen Lynch (D-MA) and Brad Sherman (D-CA)) stayed consistent in this hearing. The detractors echoed SEC Chair Gensler’s position that 1940's-era court cases on securities laws are fit for purpose in regulating the digital asset industry. On the other side, industry participants and Congressional supporters argued that updated rules would ultimately better protect consumers while keeping innovation in America. Even Maxine Waters (D-CA) responded, “That’s odd,” when learning established FinTech Robinhood attempted to follow SEC registration procedures but was denied registration without further explanation. SEC Charges DeFi Platform with Securities Law Violations: September 18, 2024 Background: The SEC has charged the creators of the Rari DeFi platform with acting as unregistered brokers. MATIC, LINK, FTM, UST, and RGT were listed as “crypto assets offered and sold as securities” in the Complaint. The Complaint and Order are vague as to whether the Agency is alleging that only the Rari-operated liquidity pools (which the Rari team would algorithmically rebalance) are what caused the violations, or if any pool (including user-created pools that Rari had no contact with other than providing a front end to access those pools) were also violations of securities laws. Analysis: Rari was literally created by high schoolers. So it shouldn’t be shocking that it suffered a protocol hack and lost $80 million. This also very likely led to upset individuals reporting them to the SEC, which started the investigation leading to these charges. The hack exposed that the protocol was DeFi in name only, as it exhibited significant centralized control beyond just the interface. DAO votes were either ignored or delayed, along with other questionable practices. Interestingly, unlike nearly all previous settlements, this one went to great lengths to avoid labeling the tokens as “digital asset securities.” This is significant, as the SEC has consistently struggled to win this argument in courts across the country. That said, this isn’t great precedent, particularly with the looming Uniswap Wells notice still outstanding. Briefly Noted: Members of Congress Ask for SEC Stance on Airdrops: Representatives Emmer and McHenry have sent a letter to SEC Chair Gensler regarding the agency’s official stance on airdropped tokens. The letter stated, “The ethos of crypto and blockchain technology is premised on decentralization. The SEC’s regulatory approach seems to make the goal of decentralization impossible to obtain. Details Emerge Regarding Collapse of Silvergate Bank: The recently filed Declaration of the then Chief Administrative Officer of Silvergate Bank (Elaine Hetric) reveals that the bank was solvent at the time of its closure, and it was only closed due to actions from financial regulators (the Federal Reserve, FDIC, and OCC), which hampered its ability to be an ongoing business. This raises troubling questions about due process and other related issues. Details Emerge Regarding Former President Trump’s Proposed DeFi Platform: It appears the proposed DeFi platform backed by former President Trump will include a Reg D/S token sale with locked tokens and no venture or presale allotment. The platform appears to primarily just be providing an attractive interface on top of existing technology with an intention to provide easy access to DeFi. The platform may find it challenging to comply with the transfer restrictions imposed under the securities law exemptions from registration that they are relying on. NFT Bill Gets Attention in House: In light of the Flyfish settlement, the Digital Chamber-backed NFT bill becomes even more critical. The bill seeks to provide clarity that digital versions of real-world assets that are not typically deemed securities do not become securities merely through tokenization. SEC Files Proposed Amended Complaint in Binance: The SEC v. Binance Amended Complaint dropped, and looking at the redline, it appears that the SEC is prepared to go forward with claims against many tokens despite early statements that its proposed amended compliant would alleviate the Court’s need to reach a determination on those issues. Also of note, the SEC complaint included a footnote about how the SEC didn’t mean that a crypto asset is necessarily a security when they previously used the phrase “crypto asset security.” Kraken Files Answer in SEC Lawsuit: The Kraken Answer in SEC v. Kraken also dropped, in which Kraken denies everything, like most answers do. The affirmative defenses are worth a close reading, especially the free speech affirmative defense claiming that the SEC is retaliating against Kraken for being critical of the SEC in certain Congressional testimony. Conclusion: As the flurry of regulatory and legislative activity surrounding digital assets continues, the upcoming weeks could be critical in shaping the future of the industry. The Congressional hearings and SEC actions discussed here illustrate the growing importance of decentralized finance, the increasing scrutiny on platforms dealing with digital assets, and the persistent friction between regulators and industry participants. With the CFTC and SEC looking to finalize their fiscal year and Congress preparing for potential action in the lame duck session, the digital asset space is poised for further developments. As always, the industry remains in a state of flux, with major legal, regulatory, and technological shifts on the horizon. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

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

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.

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

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

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

The last week of June saw a flurry of legal developments in quick succession. The SEC sued Consensys, the developers of the largest self-custodial digital wallet (MetaMask). The IRS released its digital asset tax rules. The Court in SEC v. Binance ruled on Binance’s Motion to Dismiss. And that was just on June 28. While the first week of July had a welcome slowdown in legal news, we expect a busy summer with the anticipated incremental developments in ongoing digital asset cases and new cases being filed frequently. These developments and a few other brief notes are discussed below. Coinbase Sues SEC and FDIC over FOIA Requests: June 27, 2024 Background: Coinbase has filed lawsuits against the SEC and the FDIC regarding those agencies’ alleged failure to comply with Coinbase’s Freedom of Information Act (“FOIA”) requests. In a Twitter thread, Coinbase’s head of legal said, “@SECGov has claimed sweeping authority but refuses to provide any rules, let alone consistent or coherent ones. While @FDICgov pressured financial institutions to cut off the industry from the banking system, today we filed lawsuits under the Freedom of Information Act for requests we made over a year ago seeking important information to which we, and the public, are entitled.” Analysis: Due to the various carveouts and end-arounds, it is very hard to get anything of substance through a FOIA request unless the requesting party is willing to file a lawsuit to enforce it. Even then, it takes a sophisticated legal team and a war chest to successfully pursue these matters. Even if documents are ultimately produced, it will probably be a while before those documents see the light of day. This is likely a part of Coinbase’s litigation strategy to have multiple bites at the apple in seeking documents from the SEC through both this action and Coinbase’s litigation against the agency. Court Rules on Binance Motion to Dismiss in Suit Against the SEC: June 28, 2024 Background: The Court in SEC v. Binance ruled on the Binance Motion to Dismiss, allowing a majority of the SEC’s claims to advance to discovery but dismissing some major portions of the lawsuit, most notably those related to secondary trading. The nearly 90-page Order gave a strong rebuke of the “investment contracts require contracts” argument but an equally strong rebuke of the SEC’s “embodiment” theory that digital assets can “embody” an investment contract scheme. Judge Jackson dismissed the SEC’s allegations regarding the secondary sales of BNB being plausibly alleged to be securities transactions, as well as the SEC’s claims surrounding the Binance “Simple Earn” program and the Binance dollar-pegged stablecoin BUSD. Analysis: Polsinelli will be publishing a separate article shortly breaking down the various developments in the SEC’s cases against digital asset exchanges Coinbase, Binance, and Kraken. In the Binance ruling, Judge Jackson did not mince her words, stating “the SEC seemed to speak out of both sides of its mouth” at the hearing on the Motions to Dismiss and “the agency’s decision to oversee this billion-dollar industry through litigation—case by case, coin by coin, court after court—is probably not an efficient way to proceed, and it risks inconsistent results that may leave the relevant parties and their potential customers without clear guidance.” But just as in Coinbase, any major questions doctrine or “investment contracts require contracts” defenses will need to wait for appellate courts to have any chance of success. Coinbase has alerted Judge Failla of the Binance ruling, claiming it “further supports Coinbase’s motion for certification” for appeal. SEC Sues MetaMask Wallet Developers, Consensys: June 28, 2024 Background: The SEC has filed a lawsuit against the creators of the MetaMask digital wallet, Consensys Software Inc., alleging the digital wallet’s staking and swapping functionalities violate federal securities laws. The SEC’s lawsuit was brought in the Eastern District of New York, while developers’ declaratory judgment action is pending in the Northern District of Texas over those wallet functionalities, so there is a jurisdictional fight underway to start the matter off. That separate matter was recently scheduled for expedited briefing, so it appears on track to go forward despite the SEC’s new lawsuit in a separate court. Analysis: This comes shortly after the SEC declined to pursue an action against Consensys with respect to ETH possibly being a security, so this isn’t all bad news. Judge Fallia ruled against the SEC on its similar wallet-swapping claims brought against Coinbase, so the SEC’s choice of jurisdiction (bringing the lawsuit to New York court instead of Texas, the venue of the currently pending Consensys action) could be controversial. This Complaint contains some troubling arguments regarding the “efforts of others,” while the SEC is seemingly discouraging developers from having their smart contracts audited (paragraph 279 of the Complaint). The SEC’s mission statement is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This seems like an example of mission drift, which the SEC has been more than happy to charge investment advisers with in the past. The SEC also named the staking services offered by Lido and Rocket Pool as securities offerings without naming the corporate entities behind those projects themselves. Briefly Noted: SCOTUS Opens Floodgates for Regulatory Challenges: The Supreme Court gave the SEC and other regulatory agencies a triple whammy in the past couple of weeks. While not directly crypto-related, these developments weaken the SEC’s ability to enforce questionable positions, may affect some of the ongoing lawsuits the SEC has brought into the space, and give plaintiffs greater ability to challenge regulations and interpretations. First, they ruled that the SEC can’t bring certain civil claims in administrative courts because it violates the right to trial by jury. The next day, they formally overturned Chevron, which generally required that courts give deference to regulators’ interpretations of the laws they were created to administer. And the next week, they basically eliminated the statute of limitations to bring claims under the Administrative Procedures Act. SAB 121. IRS Releases Digital Asset Broker Reporting Rules: The IRS dropped its final digital asset broker reporting rules. While the agency punted on how to deal with DeFi or self-custodial wallet applications, the rules appear to require operational compliance starting in 2025. You can read a more detailed breakdown of the rules here. VanEck Files for SOL Spot ETF: VanEck is the first to take the plunge, filing an S-1 with the SEC to offer spot SOL ETF. It is unlikely this application will move forward or be formally denied until after the upcoming Presidential election. SEC Battles Exchange Hopeful in Texas Court: LEJILEX has filed a Motion for Summary Judgment in its case against the SEC, requesting a declaration that its planned exchange operations do not violate federal securities laws. The same day, the SEC filed their Second Motion to Dismiss, which is an odd procedural posture for a case to have summary judgment motions (typically brought at the end of a case) overlapping with motions to dismiss (typically brought at the beginning of a case). MiCA Stablecoin Rules Go into Effect: After the European Union’s MiCA stablecoin rules went into effect, it appears that Circle is the only qualified stablecoin issuer, with all other stablecoins blocked from EU exchanges. EU platforms are also offering alternatives to stablecoins like gold NFT as they wait for more EU-qualified stablecoin issuers to emerge. Amicus Filed in Support of Custodia Bank: Various amicus briefings were filed in support of Custodia Bank’s appeal of its master account rejection, including briefs filed by the Wyoming Secretary of State and Attorney General, members of the House and Senate Banking Committees, the Digital Chamber, former Senator Toomy, and the Blockchain Association. Conclusion: The recent flurry of legal actions in late June, including the SEC's lawsuit against Consensys and the court ruling on Binance's Motion to Dismiss, highlights the rapidly evolving regulatory landscape for digital assets. With Coinbase suing the SEC and FDIC over FOIA requests, and the IRS releasing new digital asset tax rules, it is evident that this summer will be pivotal for the industry. As stakeholders navigate these complexities, staying informed and seeking expert legal advice will be crucial to effectively manage the ongoing and forthcoming legal challenges. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

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

Our last update included a whirlwind of activities, with the surprisingly bipartisan House of Representatives vote on FIT 21 and the SEC’s approval of certain Ether spot ETF rule change proposals coming in quick succession. This update is back to business as usual: pending industry litigation continues to move toward a final resolution, and the President made good on his promise to veto a bill that would have reopened the door for most banks to be able to take custody of digital assets. These developments and a few other brief notes are discussed below. President Biden Vetoes Bill to Overturn Staff Accounting Bulletin 121 (“SAB 121”): May 31, 2024 Background: President Biden went through with his threat and vetoed the bipartisan bill that passed the House and Senate to overturn Staff Accounting Bulletin 121. The bill would have repealed the SEC’s accounting guidance requiring SEC-registered companies to treat digital assets held on behalf of customers as liabilities, effectively making it infeasible for most banks to meet other regulatory requirements if they custody digital assets. This veto came after a bipartisan group of lawmakers urged President Biden not to go through with his threat to veto the measure. Analysis: President Biden’s statement that “[m]y Administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets” seemingly rings hollow in a statement where he is vetoing a bill that had bipartisan sponsorship and passed with 60 votes (including Chuck Schumer) in a Democrat-controlled Senate. SAB 121 is internal SEC guidance that the Government Accountability Office has already determined failed to abide by the Administrative Procedures Act. It is also unclear how taking away trusted custodial options protects consumers. After a few weeks where it looked like the Administration may have started to reverse course on crypto policies, which are increasingly becoming a wedge issue for the upcoming election, it was disappointing to see the veto of a bill that had the backing of traditional banks and digital asset industry participants alike. Coinbase Finalizing Briefing in Rulemaking Appeal: May 31, 2024 Background: Coinbase has now completed its briefing in its appeal of the SEC’s denial of rulemaking, filing the Reply in Support of its Petition. The head of legal at Coinbase summarized their filing on Twitter, claiming “[t]he SEC is bent on choking the digital asset industry and is refusing to provide the necessary rules the industry has requested in order to tighten the squeeze.” Analysis: Coinbase faces an uphill battle on this, as Congress has not mandated that the SEC pass any such rulemaking. Best case scenario for the industry would be the Court forcing the agency’s hand, but it would still be a massive win if this results in dicta regarding the inability of digital asset participants to abide by existing rules. For those who missed it, it is worth reading the Paradigm three-part series on why “come in and register” is not possible, with citations to specific rules and reasoning. Dapper Labs Settled NBA Top Shot Securities Class Action Background: Dapper has agreed to a tentative settlement of $4 million in the class action alleging the sale of NBA Top Shot NFTs were securities transactions. While the settlement still needs to be approved by the Court, if this stands, it seems like a good result for the company after losing its Motion to Dismiss largely due to the Court finding the centralized flow blockchain makes certain securities arguments issues of fact for trial. Dapper would have likely spent more than $4 million in litigation and discovery if taken to trial, so this is an easy out for them. Analysis: Dapper gets liability protection for all sales from when it was the only market in town to buy and sell their NFTs and can now use the existence of additional marketplaces as a defense for lawsuits going forward. It seems like a win for Dapper, as $4 million should barely make a dent in the company’s bottom line. Dapper CEO Roham released a tweet claiming the settlement affirms that it was agreed that Flow blockchain was a decentralized public network and Top Shot NFTs are not securities. Briefly Noted: SEC Private Funds Rule Overturned by 5th Circuit: The Fifth Circuit vacated the private fund adviser rules that would have greatly increased compliance burdens and overhead for many fund managers. These would have applied to registered investment advisers to private funds and may have disproportionately affected crypto venture managers, most of whom cannot rely on the venture capital fund adviser exemption from registration. Our detailed alert is available here. Industry Players Back Super PAC: Coinbase has also now donated $25 million to crypto super PAC Fairshake, bringing its funding up to $75 million from Coinbase, Ripple, and a16z alone. Fairshake is a PAC that supports crypto-friendly candidates through funding, research, and advertisements. In the latest Harris poll, 33% of respondents said they take into consideration a candidate’s stance on crypto, and 77% believe a U.S. presidential candidate should have an informed perspective on crypto. House Subcommittee Hold Hearing on Tokenization of Assets: The House Financial Services Subcommittee on Digital Assets held a hearing regarding the tokenization of real-world assets. While the hearing had notable detractors, most of the focus was on the various benefits for cheaper and faster settlements and improved transparency that the integration of blockchain technologies into transactions can offer. SEC Faces Lawsuit on Document Request Responses: The American Securities Association has filed a lawsuit against the SEC in the Middle District of Florida alleging the agency has failed to comply with certain Freedom of Information Act requests regarding the agency’s enforcement actions of off-channel broker/dealer communications during COVID when those individuals were unexpectedly shifted to work from home. This is added to the list of declaratory judgment actions taken against the agency. Robinhood Purchases Crypto Exchange Bitstamp: Robinhood is buying crypto exchange Bitstamp to expand crypto operations outside of the United States. It appears companies are shifting focus and funding outside of the United States, with American industry regulation still in flux, unlike in other countries. DOJ Bring Charges Against Alleged NFT Rug Pull Founders: The DOJ is prosecuting the guys behind the alleged 2021 NFT rug pull “Evolved Apes.” While there were plenty of similar projects around that time, these guys likely got a target on their backs after Vice covered the alleged scam. Treasury Releases Findings on Study of NFTs and Illicit Finance: Treasury released their study on the use of NFTs in illicit finance, and the findings are essentially that criminals launder money with anything of value, including NFTs, but that NFTs are not a primary means of illicit financing. Members of Congress Call for Action in Matter of Jailed Binance Executive: Fifteen members of Congress have signed a letter urging executive action to bring home detained U.S. citizen/Binance executive Tigran Gambaryan. This came the same week as former Binance CEO Changpeng Zhao (“CZ”) began serving his sentence in the United States for certain anti-money laundering violations. Conclusion: As the whirlwind of recent legislative and regulatory activity settles, the cryptocurrency industry braces for continued challenges and opportunities. President Biden's veto of the bill to overturn Staff Accounting Bulletin 121 underscores the complexities facing digital asset regulation, while Coinbase's ongoing battle with the SEC and Dapper Labs' settlement in the NBA Top Shot securities class action highlight the legal landscape's evolving nature. Meanwhile, industry players rally behind initiatives like the Fairshake super PAC, signaling a growing influence in political spheres. As Congressional hearings delve into the tokenization of assets and lawsuits challenge regulatory actions, the path forward remains uncertain yet ripe with potential for innovation and growth. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

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

The focus in Web3 law the past few weeks has been on jurisdictional issues when litigating matters involving borderless digital asset transactions. This is expected to be an ongoing issue, as courts work through these challenges in both civil and criminal claims. Digital asset developers and users often have very little control over limiting transactions to certain jurisdictions without requiring the counterparty to perform identity verification (which raises a whole host of other issues), so these are not going to be easy determinations to make. There were also developments in pending stablecoin legislation, and the IRS is looking to finalize its digital asset reporting form for upcoming tax years. These developments and a few other brief notes are discussed below. Richard Heart Moves to Dismiss SEC Lawsuit Related to HEX/PulseChain: April 8, 2024 Background: Richard Heart has filed a Motion to Dismiss in the SEC’s case against him related to the $HEX cryptocurrency and PulseChain blockchain. Heart, the founder of PulseChain, is known for flashy displays of wealth which even industry participants have criticized. However, as a U.S. citizen who is a resident of Helsinki, Finland, the case raises interesting issues as to the extraterritorial reach of the SEC in borderless digital asset cases. Summary: While Richard Heart is a controversial figure on social media, the legal arguments around Heart’s jurisdictional defenses are something to watch. In this case, the SEC is trying to use the fact that PulseX is a Uniswap fork (i.e., took the same Uniswap opensource code with slight changes) as an E.D.N.Y. forum hook. It is a case worth following on that aspect alone, as it will have massive implications on what is required to create jurisdiction over international digital asset transactions. SEC Investigating Decentralized Finance Platform Uniswap: April 10, 2024 Background: The SEC issued a Wells notice to the Uniswap Foundation, signaling the agency’s intent to bring a suit against the DeFi giant. While the contents of the notice have not been made public, Uniswap’s Founder and Chief Legal Officer both had strong words against the agency. Taking the dispute public before any charges have been filed has been criticized by some and applauded by others. Summary: When FTX/3AC/Terra/Celsius failed, platforms like Uniswap, Coinbase, Kraken, and others were designed and run well enough to honor billions in user withdrawals at a rate that would bankrupt any bank with fractional reserves. If anything, the ability of Uniswap to handle such dramatic outflows showed the resiliency that DeFi is capable of. Also, interesting points from Gabe Shapiro and the Uniswap civil case on how the market maker smart contracts potentially at issue are not run by Uniswap. But since this is just a threat of a lawsuit at this point, the legal community will need to wait to see what the lawsuit itself looks like, and if it has anything to do with the recent fee switch proposal by Uniswap. Lummis-Gillibrand Payment Stablecoin Act Proposed in Senate: April 17, 2024 Background: Senators Lummis and Gillibrand have released proposed legislation titled the Lummis-Gillibrand Payment Stablecoin Act which incorporates some elements of their previously proposed omnibus crypto legislation but is focused exclusively on stablecoins. This is also distinct and has many important differences from the stablecoin legislation which has passed the House Financial Services Committee but has yet to be put up for vote for the full House. Cap Hill Crypto does a great job as always breaking down the bill. Summary: Apparently, Congresswoman Maxine Waters thinks the stablecoin bill in the House is “very, very close — very close” after previously trying to kill it in committee, and noted crypto-critic Sherrod Brown has reportedly said he is open to advancing a stablecoin bill under certain conditions, so it is looking increasingly likely that some version of stablecoin legislation has a (slim) chance of passing this year. It seems reasonable for depository institutions like banks or certain merchants to only be permitted to custody stablecoins that are provably backed 1-to-1 by the issuing entity (like Circle for USDC) so long as consumers have the choice to own and use other stablecoins. Avoiding another Terra/Luna and making dollar substitutes actually be back by dollars is something that should be generally supported. But this new bill faces criticism from various industry groups. Mango Markets Exploiter Convicted in Criminal Trial: April 18, 2024 Background: Avraham “Avi” Eisenberg was convicted on one count of commodities manipulation, one count of commodities fraud, and one count of wire fraud related to his role in the $110 million exploit of the digital asset platform Mango Markets. Avi previously admitted to his actions online, referring to his actions as a “profitable trading strategy” and asking “What are you gonna do, arrest me?” There will likely be an appeal on issues such as the choice of the New York forum for this trial, and the exclusion of Avi’s proposed expert testimony from being considered by the jury. Summary: Avi did not testify in the trial related to his Mango Markets exploit in 2022, but he was still convicted. While this was (likely) the correct result on the commodities manipulation count, it does bring to light flaws in a system where three different agencies (DOJ, CFTC, and SEC) all brought cases against Avi and all define the token at issue (MNGO) as different things. It also creates potentially problematic implications going forward if the use of a smart contract governed protocol in certain ways can be “fraud” despite no deceiving statements being made and those actions not meeting the required elements under the Computer Fraud and Abuse Act. You can read more about the conviction including quotes from Jonathan Schmalfeld in the Bloomberg Law article Crypto Trader’s Fraud Conviction Undercuts Exchange Code Defense. Briefly Noted: IRS Releases Draft Crypto Reporting Form: The IRS released a draft crypto reporting form which includes reporting by un-hosted wallet providers. Not sure if the IRS realizes that all that is required for an un-hosted wallet is something that can record the required amount of seed phrase words, i.e., a piece of paper. Coinbase Requested Interlocutory Appeal on Investment Contract Issues: Coinbase is seeking an interlocutory appeal of its Motion for Judgment loss regarding investment contract issues. Seemingly with a smart strategic move of not seeking review of the staking determination and limiting it to an issue which the SEC itself has stated is important enough for interlocutory appeal in its Ripple litigation. Generally, interlocutory appeal requests are denied, but with a case of this importance, it is possible that Judge Failla does want input from the Court of Appeals for these issues of law. Senate Republicans Release Counter to Senator Warren Bill: Senate Republicans have released a counter to the Senator Warren bill, which they titled the "Ensuring Necessary Financial Oversight and Reporting of Cryptocurrency Ecosystems Act" ("ENFORCE Act"). This has very little chance of passing but is instead a counter proposal to potentially make Senate Democrats back off certain aspects of their currently pending legislation. Conclusion: In recent weeks, the complex web of jurisdictional issues surrounding digital asset transactions has brought new challenges and developments to the forefront of Web3 law. From Richard Heart's jurisdictional defense against the SEC to the resilience of DeFi platforms like Uniswap, these cases highlight the evolving legal landscape in which digital assets operate—transcending traditional boundaries and questioning established regulatory frameworks. The proposed Lummis-Gillibrand Payment Stablecoin Act and the SEC's scrutiny suggest a shift towards greater regulation and oversight, while the conviction of Mango Markets' exploiter underscores the judicial system's effort to adapt to new forms of financial manipulation. As these developments unfold, they not only shape the immediate legal strategies of involved parties but also set precedents that will influence the future of digital asset regulation. The ongoing legal and legislative efforts signal a critical phase in defining the balance between innovation and regulation in the ever-evolving domain of cryptocurrencies. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

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

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

The week leading up to Thanksgiving was a busy one in blockchain law, with the SEC instituting another lawsuit against a major U.S.-based cryptocurrency exchange, the DOJ and CFTC reaching a settlement in their cases against international exchange Binance and Tether cooperating with the DOJ to freeze almost a quart of a billion dollars in its stablecoin linked to illicit finance. This all came a week after the House of Representatives held a subcommittee hearing to discuss the links between digital assets and criminal operations. These developments and a few other brief notes are discussed below. House Financial Services Subcommittee on Digital Assets Debates Issues Surrounding Illicit Use of Cryptocurrencies: November 15, 2023 Background: The House Financial Services Subcommittee on Digital Assets met on November 15 to ask questions from industry experts on the scale and use of digital assets in terror and other illegal financing. This was largely due to a wave of false or misleading reporting which is described well in this Forbes article, How Misinformation On Hamas And Crypto Fooled Nearly 20% Of Congress. As stated by Senator Lummis, “Crypto is not the problem, bad actors that exist in every industry are.” This hearing followed a letter that was sent from a bipartisan group of lawmakers asking for an executive study on the use of digital assets in Hamas financing. Summary: The testimony of Gregory Lisa and Jane Khodarkovsky are both worth reading, and by all accounts, this hearing was a fair and honest look at digital assets which didn’t overplay its use in terror financing or underplay the serious security threat it represents. At the end of the day, anything of value, be it art, land, fiat currency, gold, crypto or anything similar, is going to be used by people we do not support for purposes that we do not endorse. However, of all the forms of illicit finance, only the movement of digital assets on a public blockchain can be traced in real-time by anyone with access to the internet. There is no means of exchange that is more anonymous than cash, which truly leaves no footprint, and there is no blockchain for cash. We certainly need to do what we can to limit the use of any asset in terror financing, but we also need to do it in a way that doesn’t abridge the rights of Americans to privacy and financial inclusion. SEC Files Lawsuit Against Cryptocurrency Exchange Kraken: November 20, 2023 Background: The SEC has filed a lawsuit accusing the second-largest cryptocurrency exchange in the US of violating federal securities laws. Payward Inc. and Payward Ventures Inc., which operate the cryptocurrency exchange known as Kraken, are the latest to be accused of “unlawfully facilitating the buying and selling of crypto asset securities.” Summary: It was odd this wasn’t filed when the Coinbase/Binance lawsuits were filed. Many assumed that Kraken’s prior $30 million settlement got the exchange some level of approval from the SEC for its remaining operations. That was wrong. While the SEC alleges that Kraken co-mingled customer funds, this is something Kraken self-reported years ago as an accounting issue which happened when Kraken switched accounting systems and they resolved thereafter. Kraken’s founder has pointed out that its cooperation and settlement with the SEC did not help the exchange avoid further litigation, and encouraged others in the space to avoid the U.S. under its current regulatory regime. Many of the tokens named in the lawsuit are used daily as utility tokens and are up big on the year, creating the question of exactly who the SEC is protecting in these actions? Also, the timing of this is certainly suspicious with SEC Chair Gary Gensler potentially front-running the major Binance settlement news his agency wasn’t a part of. Tether Freezes $225 Million in Cryptocurrency Linked to Pig Butchering Scams and Human Trafficking: November 20, 2023 Background: Tether, working in concert with the DOJ and Chainalysis, has frozen $225 million worth of its own stablecoin linked to an international human trafficking syndicate in Southeast Asia. The freeze occurred across 37 self-custodial wallets. The funds were primarily linked to pig butchering scams, where users are tricked into thinking they are sending funds to a cryptocurrency trading platform only to be robbed and refused the ability to cash out. Summary: It appears that Tether is working closely  with the DOJ based on this and other recent cooperative asset freezes. This coincides with the recent push, at the request of Senator Lummis and Representative French Hill, to crack down on major offshore players in the digital asset space. With the Binance settlement discussed below and the DOJ working with a cooperative Tether, that request for attention was seemingly abided by. This is good for the space and shows when there are lawful reasons and court orders to freeze funds, that an asset freeze can still be done without over-intrusive financial surveillance. Head of Binance Pleads Guilty to Bank Secrecy Act Charge and Steps Down: November 21, 2023 Background: On November 21, Binance and its CEO Changpeng Zhao (“CZ”) admitted to violations of anti-money laundering laws along with sanctions violations and operating as an unlicensed money transmitter. You can read the indictment here and the plea document here. As a part of the deal, CZ agreed to step down as CEO, have no involvement with Binance for 3 years, and Binance is required to appoint an independent compliance monitor for three years. Total fines and sanctions were just under $4 billion. CZ will plead guilty to a single count of failure to maintain an effective Anti-Money Laundering program under the Bank Secrecy Act, which carries a maximum sentence of five years. But due to various sentencing guidelines and downgrades, he is likely looking at a maximum of 18 months. CZ primarily lives in the United Arab Emirates, which is a non-extradition country with the U.S., making CZ’s agreement to appear in Seattle for sentencing all the more impactful. Summary: There were rumors leading up to the eventual press conference regarding the charges and plea deal.  The $4 billion is a massive fine but it looks like Binance was already getting ready to pay that for weeks now. CZ’s departure tweet is available here and the Binance official statement is here. Notably, the SEC was not a part of this settlement so its case against the exchange and CZ continues. It was well-known in the industry that Binance took some regulatory shortcuts in its rise to power, so this is not entirely surprising.  This article provides a neat timeline of events leading up to this settlement. Hopefully the new CEO Richard Teng can continue on the path started by his predecessor of compliance with basic AML/KYC obligations. It is also interesting and likely smart that Binance tapped a former compliance officer and regulator to lead the new era of Binance instead of the other co-founder who is conspicuously absent from the settlement. Briefly Noted: Coinbase Funded Challenged to Mixing Service Sanctions  Decision Appealed: The decision in the Coinbase funded challenge to the Tornado.cash sanctions have been appealed. As you may recall, back in August the lower court hearing that matter ruled in favor of the Treasury Department and issued summary judgment. The Blockchain Association has filed a brief in support of the Tornado Cash request for appeal. This was a solid article breaking down the decision behind the filing and its implication on the larger industry. Blackrock and Fidelity File Spot Ether ETF Applications: the Blackrock Spot Ether ETF application has officially been filed along with a matching filing from Fidelity. This comes at the same time as the SEC delays deciding on a variety of Bitcoin Spot ETF applications. Lawmakers Send Letters to State Agencies on Digital Asset Issues: Patrick McHenry, Richie Torres, and a bipartisan group of other lawmakers sent multiple letters this the past two weeks including this letter expressing concerns with the proposed IRS digital asset broker reporting rules and this letter urging agencies not to enforce SAB 121 after the Government Accountability Office’s finding that the SAB violated the Administrative Procedures Act. Domain Service Providers Fight over Patent Applications: The Ethereum Name Service (“ENS”) is in a fight with Unstoppable Domains over the aggressive patent application approach taken by the latter. ENS claims these patents are based on prior technology invented by ENS and others and intentionally put into the public domain for all to use. Conclusion: The past two weeks have been a whirlwind of activity in blockchain law, illustrating the complex interplay between cryptocurrency, regulation, and enforcement. From the SEC's latest lawsuit against a major U.S. crypto exchange to Tether's proactive measures in freezing funds linked to criminal activities, these events highlight the evolving landscape of digital finance. The House Financial Services Subcommittee's balanced discussion on the use of digital assets in illicit finance, along with significant legal developments involving major players like Kraken and Binance, underscores the ongoing challenge of ensuring security and compliance in a rapidly changing sector. As the industry continues to grapple with these issues, it becomes increasingly clear that the path forward requires a delicate balance between innovation, privacy rights, and the imperative to thwart financial crimes. The above events serve as a powerful reminder of the importance of vigilance, cooperation, and thoughtful regulation in shaping the future of digital currencies and their impact on global finance. 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.

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. In a blistering dissent against SEC overreach in digital asset enforcement actions, SEC Commissioner Hester Peirce stated “[the LBRY] case illustrates the arbitrariness and real-life consequences of the Commission’s misguided enforcement-driven approach to crypto.” Polsinelli previously covered the LBRY decision, and Polsinelli attorney Jonathan Schmalfeld is quoted in the dissent, noting the LBRY avoided the questionable fundraising pitfalls of many in the cryptocurrency space at the time and still felt the wrath of the SEC levied against it. However, despite the statements of Commissioner Pierce, the agency has continued in its enforcement agenda the past two weeks. The agency continues to pursue litigation against cryptocurrency exchange Coinbase, and dismissed certain aspects of the ongoing litigation in Ripple to seemingly gain quicker access to appellate review of earlier decisions in that case. There were also important developments in civil cases such as the trademark infringement case brought by Yuga Labs, and an action brought against the owners of the MetaMask wallet technology by certain alleged early developers. The criminal case against FTX founder Sam Bankman-Fried (“SBF”) also continued the past two weeks, with SBF taking the stand in his own defense. These developments and a few other brief notes are discussed below. SEC Dismissing Remaining Claims Against Executives in the Ripple Case: October 19, 2023 Background: The SEC has agreed to dismiss the remaining claims in the agency’s litigation against Ripple regarding the alleged aiding and abetting of securities law violations by Ripple executives Christian Larsen and Brad Garlinghouse. This means the only remaining issues for the underlying case would be measures of damages related to the SEC’s summary judgment win against the company for certain non-programmatic sales. Summary: While Ripple is calling this a win (which it certainly is), the case against the executives was always weak, so it seems like this is just a strategic move by the SEC to allow them to appeal after their request for interlocutory appeal was denied. So when we previously wrote there was “no chance of appellate review prior to 2024 as the SEC hoped for,” that was under the mistaken belief that the SEC would continue to vigorously pursue its case against the executives. In the absence of Congressional action in the near future, which seems unlikely given the House’s current struggles, an appeal of this case seems like the fastest path to anything resembling regulatory clarity. It also shows how motivated the agency is to remove the programmatic sales ruling from the ether. ConsenSys Sued by Former Employees Regarding Transfers of Assets which Devalued Employees’ Equity: October 19, 2023 Background: Joseph Lubin, one of the founders of the Ethereum Blockchain, formed a company in 2014 to develop tools for that network. These tools included the hugely popular MetaMask wallet. As many start-ups do, early contributors were granted equity in the original companies (which were a Delaware entity, and a Swiss “hub” entity”). However, in 2020 The Swiss entity transferred a vast majority of its assets to a new Delaware entity (CSI) in a $46.6 million sale. Even at the time, this was a controversial sale. The employees of the first two entities are now suing, saying this deal was a way to rob them of their equity. Summary: Back in August a similar lawsuit was filed by a former employee, and Joel Dietz also filed a lawsuit in August claiming invention of the MetaMask wallet, so this is another round of expected litigation over a highly successful start-up. Considering CSI raised in a Series D at $7B valuation last year, it is unclear if these are rightfully upset early developers or vultures circling, but time will tell. Either way, the earlier Swiss litigation is going to raise some early jurisdictional challenges for the employees to overcome. Coinbase Files Final Reply in Motion for Judgment vs. SEC: October 24, 2023 Background: Coinbase filed their Reply Memorandum in response to the SEC in what should be the final substantive briefing on the Coinbase Motion for Judgment on the Pleadings. While there may be requests from the parties to supplement their briefings, such as if there is a development in other cases to alert the Court to, this sets the stage for Coinbase’s attempt to gain an early dismissal of some or all of the SEC’s case against them.  Oral arguments on Coinbase’s Motion are scheduled for January 17, 2024. Summary: The Coinbase filing is well-written, but the exchange still faces an uphill battle to get the entire case dismissed at this stage. The briefing does a good job of pointing towards the SEC’s changed stance as to what the word “investment contract” means. However, the SEC names a litany of assets as being “crypto asset securities” and Coinbase concedes that some assets (such as the DAO Report tokens) would be securities which could not be traded on the platform. This means all the SEC had to do was name a single asset which, as plead, could plausibly be an unregistered security listing to survive this Motion for Judgment. Either way, even if Coinbase does not get a complete win on its Motion, even a partial win or a loss which educates the Court on these issues is a step in the right direction for the exchange. Yuga Labs Wins $1.6 Million in Trademark Infringement Lawsuit: October 26, 2023 Yuga Labs, the company behind Bored Ape Yacht Club and owners of the Crypto Punk intellectual property had damages decided in their trademark infringement case against Ryder Ripps and Jeremy “Pauly” Cahen.  Yuga had previously won on all its claims at summary judgment, and a trial was held to determine measures of damages. Yuga was awarded $1,575,362.92 in damages and its attorneys’ fees and costs in an amount still to be determined. Yuag was also granted an injunction over the defendants, which required all the associated domain names, social media accounts, and smart contract controls be handed over to Yuga and to permanently cease infringing on the Yuga trademarks. Tl;dr: Bad day to be an internet troll. The Court through the book at defendants here, in large part due to their conduct throughout the proceeding, stating “Defendants unnecessarily and inappropriately made disgraceful and slanderous statements about Yuga, its founders, and its counsel during litigation, including calling Yuga’s counsel criminals who support racism, antisemitism, beastiality (sic), pedophilia and accusing them of using cartoons to market drugs to young children. These statements were egregious and far exceed the bounds of acceptable conduct.” (internal quotes omitted). The pending appeal for the Rogers test issues which was pursued concurrently with the damages issues being decided in this case was also heard recently, with the judges appearing skeptical of defendants’ claims before ruling in Yuga’s favor. SBF Takes the Stand in Criminal Case Against Him: October 26, 2023 Background: SBF has taken the stand in his defense of the DOJ charges against him.  His first day of testimony largely occurred outside the presence of the jury, with the Court hearing testimony to determine certain pre-trial admissibility motions including details surrounding his proposed advice of counsel reliance testimony. The second day, the jury got to hear SBF’s side of the story on direct exam. As of writing this, the cross examination of SBF has just begun, and we will cover that along with the expected conclusion of the case on the next BitBlog Bi-Weekly  to be published on November 16, 2023. Summary: Most criminal defendants do not take the stand in their own criminal trials for good reason. The Fifth Amendment protects citizens from being compelled into giving self-incriminating testimony. Testifying waives that right, create potential additional charges for perjury, and that testimony can be pointed to by a judge during sentencing if convicted. Here, SBF apparently decided the risk of digging a deeper hole through his testimony was worth the chance he could convince the jury that his mistakes were not made knowingly (i.e., they lacked the requisite level of mens rea for conviction).  Time will tell if this strategic decision works out for the founder of the now-defunct cryptocurrency exchange FTX. Briefly Noted: Treasury Extends Comment Period on Proposed Crypto Reporting Rules: The IRS has extended its crypto tax rule comment period. Industry participants have criticized the proposed rules as unreasonably burdensome and unworkable. Industry group LeXpunK has also developed an AI-enabled tool to facilitate the drafting of comment letters in opposition to certain aspects of the proposed Treasury Regulations. FinCEN Proposed Mixer Designations Released: The United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) have published an 80-page proposal arguing that US financial institutions should “implement certain recordkeeping and reporting requirements” on transactions linked to convertible virtual currency mixing. Disproven Narrative on Crypto’s Use in Terrorism Financing Persists: The Wall Street Journal published an article on October 10 titled Hamas Militants Behind Israel Attack Raised Millions in Crypto. Elliptic has said its data was misinterpreted by the Wall Street Journal article, and Chainalysis also released data correcting the record on this issue (Hamas has requested its supporters not donate through digital assets, due to the ease and public traceability of digital asset transfers). Still, the Wall Street Journal article has been cited in multiple letters from legislators recently. dYdX Converts to Public Benefit Corporation: dYdX Trading Inc. has converted its corporate form to a public benefit corporation such that, under its new charter, it will not generate trading fee revenue under v4 of its DeFi trading platform.  As one of the few DeFi platforms that is reportedly incorporated in the United States, we wonder whether this may be an initial step towards being able to utilize any number of exemptions under securities and commodities laws that are available to persons organized exclusively for “religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any person, private stockholder, or individual.” If so, is it possible that dYdX (which currently does not allow users located in the U.S.) is looking for an alternative path to open its offering to U.S. persons without registration under SEC and CFTC regulations? SEC Enforcement Direct Gives Remarks: the SEC Director of Enforcement gave some remarks at the New York City Bar Associations’ Compliance Institute focusing on how companies can create a culture of compliance through education, engagement and execution. Firms in regulated industries should ensure they become aware of legal developments (which we can help with if you subscribe to the BitBlog), make applicable employees aware of the rules that might be applicable to them, and proactively executing policies necessary to maintain compliance with the law.  In a lot of areas, the path to compliance is clear; in many others, this is easier said than done in the absence of clear guidance that is supported by the law. Conclusion: The regulatory and legal landscape in the cryptocurrency sector remains both convoluted and volatile. Hester Peirce's outspoken dissent encapsulates a broader sentiment of skepticism towards the SEC's aggressive enforcement strategy, a stance clearly not hindering the agency's ongoing litigation efforts. Civil cases, too, are adding layers of complexity, underscoring the myriad challenges that innovators in the space face. The various unfolding legal sagas—be they criminal cases like that against FTX founder Sam Bankman-Fried or regulatory entanglements involving asset transfers—are emblematic of a sector still grappling with its place in the legal framework. Still, exciting legal and technological developments are occurring every day in the industry, and the attorneys are Polsinelli are excited to continue to assist individuals and entities working in or around the blockchain technology space. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. Also, please subscribe to the BitBlog for alerts when new stories or updates are posted by our attorneys.

On 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.

On November 9, 2021, the U.S. Securities and Exchange Commission’s (SEC) Division of Examinations (the “Division”) released a Risk Alert regarding various compliance issues for investment advisory firms offering robo-advisory services, also known as internet advisers. This Risk Alert is the product of the Division’s examinations under its Electronic Investment Advice Initiative (the “Initiative”).  While firms providing investment advice have been regulated for over two decades, their prevalence has dramatically increased in recent years.  This includes both investment advisers that provide investment advice exclusively through an interactive website under Rule 203A-2(e) under the Investment Advisers Act of 1940 (the “Advisers Act”), along with traditional investment advisers who supplement their investment advice through automated means. Electronic Investment Advice Initiative In the course of the Initiative, the Division focused on the following areas: Compliance programs to assess whether compliance policies and procedures, particularly those related to the provision of robo-advisory services, were adopted, implemented, reasonably designed, and tested at least annually pursuant to the “Compliance Rule” under Rule 206(4)-7 of the Advisers Act, which requires all registered investment advisers to maintain and enforce policies and procedures reasonably designed to ensure compliance with the Advisers Act. Formulation of investment advice to evaluate whether advisers gathered sufficient information from clients to form a reasonable belief that clients were receiving investment advice that was in their best interest based on each client’s financial situation and investment objectives. Where applicable, the staff also reviewed conflicts of interest disclosures and “customization” representations for adequacy and accuracy. Marketing and performance advertising practices for compliance with the old “Advertising Rule” or new “Marketing Rule” under Rule 206(4)-1 of the Advisers Act. Also, if relevant, the Division’s staff reviewed whether the advertised securities selection and portfolio management techniques were used when managing client accounts. Data protection practices to understand the firms’ policies and procedures regarding client data protection, including cybersecurity practices. Registration information to determine whether the advisers were eligible for SEC registration as investment advisers or eligible to rely on Rule 203A-2(e). Observations The Division noted a number of observations in the course of the Initiative, including the following: Compliance programs. o   Most the examined advisers had inadequate compliance programs. Specifically, many advisers’ policies and procedures regarding robo-advisory services did not adequately assess their performance, disclose changes in asset allocation or balancing policies, or take sufficient measures to protect client log-in credentials. o   Providers of “white label” platforms often lacked policies and procedures addressing the platform providers’ attention to these matters.  This underlies the obligation that may be created for a registered investment adviser to have policies covering its service providers or users under circumstances where others may affect the advice offered. o   Additionally, advisers also often failed to adopt a strict adherence with the Code of Ethics Rule under the Advisers Act by not identifying “all access persons” and then, in turn, not receiving all access persons’ required holdings or transactions. Formulation of investment advice o   While advisers commonly used questionnaires to collect data for investment advice, the Division staff found that some firms relied on just a few data points to form their advisement advice and did not sufficiently account for evolving client needs.  This is consistent with several recent enforcement actions where the SEC settled with advisers who failed to monitor clients for changing circumstances and suitability despite still charging fees. o   A number of advisers had disclaimers in their online terms and conditions that were not consistent with the SEC’s view of an investment adviser’s fiduciary duties.  For example, the SEC long has taken the position that a waiver of claims for violations of securities laws is inconsistent with an investment adviser’s fiduciary duties. Marketing and performance advertising practices o   Robo-advisers often made inaccurate or incomplete disclosures in their Form ADV filings, particularly regarding conflicts of interest, advisory fees, investment practices, and ownership structure. o   Advertisement-related noncompliance included: Vague or unsubstituted claims regarding services provided, investment options, performance expectations, and costs incurred; and Hypothetical performance results without adequate disclosures pursuant to Rule 206(4)-1 of the Advisers Act. Data protection practices o   Only a few robo-advisers had policies and procedures that addressed the firm’s systems and response following a cybersecurity event. Therefore, those advisers were not in compliance with Regulation S-ID or Regulation S-P, as applicable, because their services did not have written policies and procedures designed to detect, prevent, and mitigate identity theft. Further, many advisers did not deliver all required privacy notices. Registration information o   Notably, nearly half of the examined robo-advisers claimed reliance on the internet adviser exemption under Rule 203A-2 of the Advisers Act. This exemption requires that the adviser (a) provides investment advice exclusively through an interactive website (subject to a 15 client de minimis exception), (b) maintain for at least 5 years an easily-accessible record of its eligibility to rely on this exemption, and (c) is not an affiliate of another registered adviser relying on umbrella registration.  Many of these advisers either (1) did not have an interactive website, (2) concurrently provided investment advice outside of the interactive website (e.g. financial planning), or (3) were actually adviser affiliates in a control relationship and therefore ineligible to the Internet adviser exemption. Discretionary Investment Advisory Programs Additionally, the Initiative included a review of over two dozen robo-advisers who sponsor “discretionary investment advisory programs” under Rule 3a-4 under the Investment Company Act of 1940 (the “Investment Company Act”).  This rule serves as a safe harbor from Investment Company Act registration for certain discretionary investment advisory services of managed accounts. o   The Risk Alert notes that certain discretionary investment programs may meet the definition of “investment company” under the Investment Company Act unless the investment adviser fully complies with the nonexclusive safe harbor for discretionary investment advisory services under Rule 3a-4 of the Investment Company Act. o   Reliance on the safe harbor requires roboadvisers to (1) obtain client’s financial information and objectives and (2) inquire into whether the client wishes to impose reasonable restrictions on the management of the client’s account. Clients are also entitled to retain “certain indicia of ownership” as well as annual communication from the robo-adviser that provides an opportunity to make any changes to the client’s financial condition or objectives or account restrictions. The “indicia of ownership” must be to the same extent as if the clients held the securities and funds outside of the discretionary investment advisory program. o   Many robo-advisers collected insufficient amounts of information from clients. In particular, many advisers asked too few questions or received too few data points to be able to provide adequately personalized investment advice. o   Further, many advisers did not adequately allow clients to impose reasonable restrictions on their own accounts, or made it difficult for clients to impose these restrictions.  In particular, this was inconsistent with the Investment Company Act Rule 3a-4 requirement that clients be able to designate securities or types of securities that should not be purchased or that should be sold. o   Additionally, clients in discretionary investment advisory programs faced restrictions on the client’s ability to withdraw funds, voting rights, bring a legal course of action against an issuer in the client’s account, or did not receive legally-required documents such as trade confirmations and prospectuses. o   The Division staff also reiterated that Rule 3a-4 is designed to address only the status of the program under the Investment Company Act, not the obligations of any investment adviser under the Advisers Act.  Accordingly, investment advisers to registered investment companies relying on this rule should ensure that they are also compliant with the Advisers Act. Key Takeaways This Risk Alert, one of the longest and most detailed it has ever issued, shows that robo-advisors clearly are in the SEC’s crosshairs.  While there is a lot of content, we believe there are a few key takeaways: There may be quite a few investment advisers relying on Advisers Act Rule 203A-2(e) who may not rely on that rule. If an adviser is providing advice outside its interactive website, it may need to look to other exceptions and if it does not have any assets under management, it might be more proper for the adviser to be registered at the state level. Robo-advisers may be at risk of enforcement action if they do not collect sufficient information in their questionnaires to be able to select an appropriate investment strategy for their clients. All investment advisers – not just robo-advisers – should ensure they are compliant with applicable marketing and advertising rules.  Even if an adviser is relying on the new “Marketing Rule,” it may also have other restrictions under applicable state laws. Tech companies in the investment advice space should ensure that their related terms, conditions, and policies relating to their websites and applications do not result in a lapse of compliance obligations by their related investment advisers In addition to reviewing internal compliance with the applicable rules under both the Investment Company Act and the Advisers Act, robo-advisory service providers may also consider referring to the SEC’s Division of Investment Management 2017 “Guidance Update” regarding robo-advisers.  Advisers who provide automated internet investment advice – particularly those relying on Advisers Act Rule 203A-2(e) – should consider having their practices, policies, and procedures audited by compliance professionals, such as Polsinelli’s Investment Management and Funds team, in light of this Risk Alert.

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 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.