iThe 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.
The beginning of 2024 has been a pivotal period for the Web3 and digital asset landscape, marked by significant regulatory, legal, and operational developments. The approval of spot Bitcoin ETFs by the SEC, a milestone a decade in the making, represents not just a victory for cryptocurrency advocates but a recognition of digital assets' evolving role in mainstream financial structures. This regulatory shift, coinciding with the World Economic Forum's discussions on digital assets, underscores the sector's growing influence on global economic dialogue.
At the same time, the fight between the SEC and the digital asset exchanges Binance and Coinbase went to the courtrooms, with marathon oral argument sessions as both exchanges seek to get some or all of the SEC’s claims tossed early. These cases, which delve into complex issues such as the nature of tokens and investment contracts, reflect the broader challenges facing regulators and market participants in adapting existing legal frameworks to new technological realities.
These developments and a few other brief notes are discussed below.
SEC Approves Spot Bitcoin ETFs: January 10, 2024
Background: In 2013, the first spot Bitcoin exchange-traded fund (ETF) application was filed with the SEC. On January 10, 2024, almost 11 years later, the SEC finally approved the 11 U.S. ETF applications that track the spot price of Bitcoin. Six of the ETFs will be listed on the Chicago Board Options Exchange (CBOE), three will be on the New York Stock Exchange (NYSE) and two will trade on Nasdaq. This was such a landmark, that Commissioners Peirce, Crenshaw, Uyeda, and Chair Gensler all released statements regarding the approval. This comes after the D.C. Circuit struck down the SEC’s prior disapproval of a spot Bitcoin ETF as arbitrary and capricious.
Summary: As stated in all the Commissioner statements, people in the U.S. could largely buy spot Bitcoin before these approvals. However, now people can hold these investments in IRAs and other investment vehicles without worrying about self-custody or exchange hacks. This is a “watershed moment” in digital assets. Commissioner Pierce did not hold back in her release, stating, “[w]e squandered a decade of opportunities to do our job. If we had applied the standard we use for other commodity-based ETPs, we could have approved these products years ago, but we refused to do so until a court called our bluff.” The fact that these applications were approved exactly 15 years after Bitcoin pioneer Hal Finney’s iconic “Running Bitcoin” tweet is a fun coincidence. Now all eyes turn to spot Ether ETFs, as they are in a similar position as Bitcoin previously was with approved futures ETFs but no approved spot ETFs.
USDC Issuer Circle Is Looking to Go Public: January 10, 2024
Background: Circle Internet Financial (Circle) has confidentially submitted a draft registration statement on Form S-1 with the SEC. The company previously sought to go public through a special purpose acquisitions company (SPAC) but that proposed transaction timed out, and SPACs have fallen out of favor after many failed since their creations in 2021. This time, Circle plans to go public through a more traditional IPO process. USDC is the second-largest stablecoin by supply, with $25.2 billion to Tether’s $94.6 billion.
Summary: It will be interesting to see how the SEC approaches this application. As noted above, it took over 11 years for a spot Bitcoin ETF to be granted and the regulatory environment is far different today than when Coinbase was allowed to go public in 2021. Service providers like Circle have the potential to be increasingly important as digital asset transactions become more common place. This will be something worth following along with.
Coinbase Faces Off with SEC on Motion for Judgment Oral Arguments: January 17, 2024
Background: Oral arguments on the Coinbase Motion for Judgment on the Pleadings occurred on January 17. The hearing lasted over 4 hours, and interestingly, the SEC agreed that the tokens at issue themselves are not securities, something the agency previously disputed with its allegations of “crypto-asset securities” in various pleadings. The oral arguments focused on three major issues: (1) what the judge should be considering for the purpose of a 12(c) Motion for Judgment and what can be judicially noticed; (2) the status of the tokens named in the complaint and why sales on Coinbase would be security transactions as the SEC alleges; and (3) does this lawsuit raise Major Question Doctrine or Fair Notice issues?
Summary: One thing that stood out early was the Court clearly playing attention to the amicus briefs, giving flowers to the description of staking by various briefs as being more understandable than the SEC’s description. This included a wonderful moment where the judge asked: “what if your description of staking in the Complaint was demonstrably wrong? Can I take judicial notice of that?” The Court did not rule from the bench on any of these tough questions, as would be expected it would not. While Judge Failla seemed to express more skepticism towards the SEC's arguments than Coinbase's, it is impossible to know a Court’s ruling based on questions alone, and the SEC has a heavy advantage on the standard for dismissal at the pleadings stage.
Binance Faces Off with SEC on Motion to Dismiss Oral Arguments: January 22, 2024
Background: Binance also had its day in Court in its own battle with the SEC. While the unique issues in the Coinbase litigation are the Coinbase wallet and staking services, Binance has its own issues with its self-issued BNB token and its stablecoin BUSD which the exchange began winding down support for in November of 2023. This was another marathon hearing, lasting four hours, and with the Court asking tough questions from both sides of the dispute.
Summary: Judge Amy Jackson seemed equally skeptical of the claims by Binance that the BNB token was not originally sold in an investment contract as she was by the claims by the SEC that a stablecoin which cannot raise in value is an investment contract. Similar to Judge Failla, the Binance Court also asked the SEC for its limiting principle on when tokens are investment contracts vs. not. Interesting, while the SEC stated “the token itself is not the security” in Coinbase, here the SEC stated “the token itself represents the investment contract . . . the token represents the embodiment of an investment contract.”
Briefly Noted:
SEC Official Social Media Account Hacked: The SEC’s official account on X (formerly Twitter) was compromised and sent out a fake alert about the spot Bitcoin ETF products’ approval. It was noted by many that the compromise happened due to the SEC failing to follow its own guidance on digital security and disabling two-factor authentication on its account.
Special Master in Yuga Labs Recommends Award of Millions in Attorneys’ Fees: The Special Master in the Yuga Labs v. Ryder Ripps matter has issued findings recommending the Court award Yuga $6,983,432.62 in attorneys’ fees, $317,295.04 in costs, the Special Master’s fees and costs. These would be on top of the damages Yuga was already awarded on its trademark claims.
Genesis Settles with New York Regulators: Genesis has settled with New York and will cease operations in the state. Genesis was already winding down operations, so this seems like a regulator getting one last kick for the firm on its way out the door.
Crypto A Topic of Discussion at World Economic Forum: Crypto was once again a topic of discussion for multiple speakers at the World Economic Forum in Davos, Switzerland. Cantor Fitzgerald’s CEO went out of his way to vouch for Tether’s assets, and the head of JPMorgan is concerned that Satoshi is going to show up one day and erase all Bitcoin (that’s not how the technology works).
Conclusion:
The first few weeks of 2024 have set the stage for a year of significant evolution in the Web3 and digital asset sectors. With landmark regulatory approvals, high-profile legal disputes, and increasing global discussion on the role of digital assets, the industry is at a critical juncture. As it navigates these developments, the balance between innovation and regulation will continue to shape the trajectory of digital assets, offering both opportunities and challenges for the future.
