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 Changes aimed at addressing concerns about DeFi were also included, though they appeared only in an unpublished draft.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 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.

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

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

The focus in Web3 law the past few weeks has been on jurisdictional issues when litigating matters involving borderless digital asset transactions. This is expected to be an ongoing issue, as courts work through these challenges in both civil and criminal claims. Digital asset developers and users often have very little control over limiting transactions to certain jurisdictions without requiring the counterparty to perform identity verification (which raises a whole host of other issues), so these are not going to be easy determinations to make. There were also developments in pending stablecoin legislation, and the IRS is looking to finalize its digital asset reporting form for upcoming tax years. These developments and a few other brief notes are discussed below. Richard Heart Moves to Dismiss SEC Lawsuit Related to HEX/PulseChain: April 8, 2024 Background: Richard Heart has filed a Motion to Dismiss in the SEC’s case against him related to the $HEX cryptocurrency and PulseChain blockchain. Heart, the founder of PulseChain, is known for flashy displays of wealth which even industry participants have criticized. However, as a U.S. citizen who is a resident of Helsinki, Finland, the case raises interesting issues as to the extraterritorial reach of the SEC in borderless digital asset cases. Summary: While Richard Heart is a controversial figure on social media, the legal arguments around Heart’s jurisdictional defenses are something to watch. In this case, the SEC is trying to use the fact that PulseX is a Uniswap fork (i.e., took the same Uniswap opensource code with slight changes) as an E.D.N.Y. forum hook. It is a case worth following on that aspect alone, as it will have massive implications on what is required to create jurisdiction over international digital asset transactions. SEC Investigating Decentralized Finance Platform Uniswap: April 10, 2024 Background: The SEC issued a Wells notice to the Uniswap Foundation, signaling the agency’s intent to bring a suit against the DeFi giant. While the contents of the notice have not been made public, Uniswap’s Founder and Chief Legal Officer both had strong words against the agency. Taking the dispute public before any charges have been filed has been criticized by some and applauded by others. Summary: When FTX/3AC/Terra/Celsius failed, platforms like Uniswap, Coinbase, Kraken, and others were designed and run well enough to honor billions in user withdrawals at a rate that would bankrupt any bank with fractional reserves. If anything, the ability of Uniswap to handle such dramatic outflows showed the resiliency that DeFi is capable of. Also, interesting points from Gabe Shapiro and the Uniswap civil case on how the market maker smart contracts potentially at issue are not run by Uniswap. But since this is just a threat of a lawsuit at this point, the legal community will need to wait to see what the lawsuit itself looks like, and if it has anything to do with the recent fee switch proposal by Uniswap. Lummis-Gillibrand Payment Stablecoin Act Proposed in Senate: April 17, 2024 Background: Senators Lummis and Gillibrand have released proposed legislation titled the Lummis-Gillibrand Payment Stablecoin Act which incorporates some elements of their previously proposed omnibus crypto legislation but is focused exclusively on stablecoins. This is also distinct and has many important differences from the stablecoin legislation which has passed the House Financial Services Committee but has yet to be put up for vote for the full House. Cap Hill Crypto does a great job as always breaking down the bill. Summary: Apparently, Congresswoman Maxine Waters thinks the stablecoin bill in the House is “very, very close — very close” after previously trying to kill it in committee, and noted crypto-critic Sherrod Brown has reportedly said he is open to advancing a stablecoin bill under certain conditions, so it is looking increasingly likely that some version of stablecoin legislation has a (slim) chance of passing this year. It seems reasonable for depository institutions like banks or certain merchants to only be permitted to custody stablecoins that are provably backed 1-to-1 by the issuing entity (like Circle for USDC) so long as consumers have the choice to own and use other stablecoins. Avoiding another Terra/Luna and making dollar substitutes actually be back by dollars is something that should be generally supported. But this new bill faces criticism from various industry groups. Mango Markets Exploiter Convicted in Criminal Trial: April 18, 2024 Background: Avraham “Avi” Eisenberg was convicted on one count of commodities manipulation, one count of commodities fraud, and one count of wire fraud related to his role in the $110 million exploit of the digital asset platform Mango Markets. Avi previously admitted to his actions online, referring to his actions as a “profitable trading strategy” and asking “What are you gonna do, arrest me?” There will likely be an appeal on issues such as the choice of the New York forum for this trial, and the exclusion of Avi’s proposed expert testimony from being considered by the jury. Summary: Avi did not testify in the trial related to his Mango Markets exploit in 2022, but he was still convicted. While this was (likely) the correct result on the commodities manipulation count, it does bring to light flaws in a system where three different agencies (DOJ, CFTC, and SEC) all brought cases against Avi and all define the token at issue (MNGO) as different things. It also creates potentially problematic implications going forward if the use of a smart contract governed protocol in certain ways can be “fraud” despite no deceiving statements being made and those actions not meeting the required elements under the Computer Fraud and Abuse Act. You can read more about the conviction including quotes from Jonathan Schmalfeld in the Bloomberg Law article Crypto Trader’s Fraud Conviction Undercuts Exchange Code Defense. Briefly Noted: IRS Releases Draft Crypto Reporting Form: The IRS released a draft crypto reporting form which includes reporting by un-hosted wallet providers. Not sure if the IRS realizes that all that is required for an un-hosted wallet is something that can record the required amount of seed phrase words, i.e., a piece of paper. Coinbase Requested Interlocutory Appeal on Investment Contract Issues: Coinbase is seeking an interlocutory appeal of its Motion for Judgment loss regarding investment contract issues. Seemingly with a smart strategic move of not seeking review of the staking determination and limiting it to an issue which the SEC itself has stated is important enough for interlocutory appeal in its Ripple litigation. Generally, interlocutory appeal requests are denied, but with a case of this importance, it is possible that Judge Failla does want input from the Court of Appeals for these issues of law. Senate Republicans Release Counter to Senator Warren Bill: Senate Republicans have released a counter to the Senator Warren bill, which they titled the "Ensuring Necessary Financial Oversight and Reporting of Cryptocurrency Ecosystems Act" ("ENFORCE Act"). This has very little chance of passing but is instead a counter proposal to potentially make Senate Democrats back off certain aspects of their currently pending legislation. Conclusion: In recent weeks, the complex web of jurisdictional issues surrounding digital asset transactions has brought new challenges and developments to the forefront of Web3 law. From Richard Heart's jurisdictional defense against the SEC to the resilience of DeFi platforms like Uniswap, these cases highlight the evolving legal landscape in which digital assets operate—transcending traditional boundaries and questioning established regulatory frameworks. The proposed Lummis-Gillibrand Payment Stablecoin Act and the SEC's scrutiny suggest a shift towards greater regulation and oversight, while the conviction of Mango Markets' exploiter underscores the judicial system's effort to adapt to new forms of financial manipulation. As these developments unfold, they not only shape the immediate legal strategies of involved parties but also set precedents that will influence the future of digital asset regulation. The ongoing legal and legislative efforts signal a critical phase in defining the balance between innovation and regulation in the ever-evolving domain of cryptocurrencies. If you have any questions about how the above developments affect your blockchain plans or any other questions regarding the legalities around various aspects of this rapidly developing industry, contact any member of the Polsinelli Blockchain+ team to set up a time to talk and see how we can be of assistance. 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The Internal Revenue Service (IRS) was one of the first United States regulators to provide guidance on the tax treatment of virtual currencies such as Bitcoin. Starting back in 2014 with its release of Internal Revenue Bulletin: 2014-16, the IRS stated that bitcoin is taxed as a property. Then in 2019, the IRS addressed the tax implications of a hard fork in Revenue Ruling 2019-24. Mindful of the continued expansion and transition of this industry, the IRS released draft filing instructions for the 2022 Form 1040, U.S. Individual Income Tax Return, on October 17, 2022.  The draft instructions provide further clarity that IRS guidance applies to the full spectrum of what are called “digital assets” and address how digital assets should be reported on U.S. tax returns. The draft instructions to the 2022 Form 1040 indicate that the term “virtual currency” is now being supplemented with a broader term, “digital assets.” Since 2019, the Form 1040 has included a question regarding virtual currency requiring filers to check ‘yes’ or ‘no’ to disclose whether they had engaged in any transactions involving virtual currency during the tax year. The draft instructions now expand this disclosure to include all digital assets, “Virtual currency” is defined as: “…a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, or a medium of exchange.” The new “digital assets” definition highlights the IRS’ attempts to catch up with the evolving landscape and vastly broadens the scope of this question. Specifically, the IRS defines digital assets as: “…any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.” The IRS’ definition of digital assets explicitly includes Non-fungible Tokens (“NFTs”). The IRS’ inclusion of NFTs seems to signal that the IRS plans to treat NFTs like other digital assets rather than as artworks or collectibles, as some may have preferred. However, the IRS has not said anything explicitly in this regard and whether the IRS will tax the sale of NFT collectibles at a lower rate than physical collectibles is yet to be seen. In addition to providing an expanded definition of digital assets, the IRS has provided additional guidance on when to check ‘yes’ in response to the IRS’ question of whether or not the taxpayer has engaged in any transactions involving cryptocurrency. According to the draft 2022 Form 1040, the question will read: “At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions).” In addition to the inclusion of transactions that involve NFTs in the IRS requirement to check a box on Form 1040, the IRS’ question, as revised also captures other transactions that involve digital assets such as “play-to-earn-games” where taxpayers may earn digital assets. These additional instructions provided by the IRS raise several questions and concerns for tax professionals and for taxpayers. One question is given the broad scope of digital assets, why should the mere fact that a transaction is “cryptography secured” require it to be looked at differently on a tax form?  Another – Is it fair to add additional regulatory burdens on transactions simply for attempting to be more secure and transparent? The update to the form instructions is a signal that the IRS is trying to stay mindful of the developments occurring in the realm of digital assets and working to further enhance the government’s overall enforcement strategy from an income tax reporting perspective. With the adoption of this broader language, we hope that further regulatory guidance will be forthcoming and without that, we recommend taking a conversative and inclusive approach for any filing.