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.
As our latest Blockchain+ Bi-Weekly was about to be dropped, where were planning to welcome a slowdown in Web3 legal developments with Congress has been on break and federal agencies also largely quiet, suddenly possibly the most important court ruling related to digital assets came down on July 13th. The motions for summary judgments in the highly anticipated Ripple Labs vs SEC case were decided. In a split ruling, the SEC was granted summary judgment with regard to "institutional sales" of XRP and summary judgment was granted to Ripple with a ruling that "programmatic sales" of XRP to the public "did not constitute the offer and sale of investment contracts." Overall, these rulings are being viewed as an immensely positive milestone for digital assets in the United States.
We are working on a full Bitblog post about these rulings. In this update we highlight; an interesting strategic move made by counsel for Coinbase in its litigation defense against the SEC. unexpected moves by the crypto exchange Bittrex, which is exiting the US market, in its battle with the agency, up an update on comprehensive digital asset legislation meandering forward in both the House and Senate. and a few other brief notes.
Coinbase Files Early Answer in Legal Fight Against SEC: June 28, 2023
Background: On June 7, Coinbase waived formal service in the SEC’s lawsuit against it, giving Coinbase until early August to Answer or otherwise plead. In a shock to many, Coinbase, instead this past week, filed its Answer, and local rule required a letter of intent to move for judgment on the pleadings under FRCP 12(c). Due to the Fourth of July holiday weekend overlapping with the SEC’s applicable due date under the local rules, the SEC was given until July 7 to respond, which they did, announcing their expected intent to oppose.
Summary: This move is the fruition of months of strategic legal decisions by Coinbase going back to its amicus in the Wahi case and the Writ of Mandamus action Coinbase filed against the SEC in April. In football terms, Coinbase was running a hurry-up offense and ran a trick play/Hail Mary with its first possession in the game. And Coinbase ran months of decoy plays to set it up. The unique use of FRCP 12(c) and the use of a 33-page "Preliminary Statement" in its Answer to save page space, later on, is just some of the impressive lawyering that went into this strategy by Coinbase. This also puts Coinbase on a separate scheduling track from Binance, which is not expected to answer or otherwise plead in its separate action until September 21, 2023.
Bittrex Files Motion to Dismiss in SEC Lawsuit Against Departing US Entity: June 30, 2023
Background: Back in March, Bittrex announced it would be winding down US operations after nine years due to regulatory uncertainty. The SEC brought its lawsuit against them shortly thereafter, which caused Bittrex to convert its orderly winddown into bankruptcy. Bittrex has now filed a Motion to Dismiss the SEC’s lawsuit against it, arguing the secondary sales of the tokens at issue are not securities transactions and that the SEC lacks the authority to bring its lawsuit under the Major Question Doctrine.
Summary: As an initial matter, one could question how the SEC protects investors by bringing a lawsuit and forcing a company into bankruptcy where it was already winding down its US operations with the intent to return investor funds. One explanation is that winddown may be why the SEC took a seemingly aggressive approach in the case. For example, the SEC’s lawsuit alleges that DASH, a token with none of the usual securities hooks like a sale of pre-mined tokens and/or funding from investors instead of funding by validators out of block rewards, is a digital asset security. It is surprising to see Bittrex put up the stout defense it has under these circumstances, and it will be interesting to see how the Major Question Doctrine issue is argued after the recent SCOTUS ruling in Biden v Nebraska. The Major Question Doctrine is a recently revived legal principle that limits the executive branch’s power on issues of major economic or political significance unless there is a clear congressional delegation of power over that issue to an administrative agency. The Major Question Doctrine is often brought up regarding executive orders, and it’s unclear if it applies to enforcement actions like those brought by the SEC against Bittrex.
Treasury Department and SEC to Provide Opinions on Digital Asset Market Structure Bill: June 30, 2023
Background: Ranking House Financial Services Member Maxine Waters requested input on the Digital Asset Market Structure Bill discussion draft from both the Treasury Department and the SEC. Representative Waters is not known to be a proponent of the bill or the digital asset industry in general. Still, she is expected to be heavily involved in bill edits after her own stablecoin legislation died during the last Congressional session.
Summary: Congresswoman Waters requested the feedback by June 30, 2023, but nothing has been publicized regarding the agencies’ findings as of the publication of this blog post. With an expected bi-partisan digital asset bill to be introduced into the Senate in the near future, it appears there is a real possibility that legislation gets done this session, and previous opponents are looking to get their fingerprints on whatever that bill is rather than kill it completely.
Briefly Noted:
Unchained Podcast Hosts Debate on Crypto Compliance: Laura Shin hosted Rodrigo Seira of Paradigm and Aaron Kaplan of Prometheum on the Unchained Podcast to discuss the path to compliance for digital asset marketplaces. It was a hotly debated podcast and is worth listening to hear alternative sides of the regulatory debate amongst industry attorneys.
Blockchain Association Asks for Gensler Recusal: The Blockchain Association has taken the position that Gary Gensler should recuse himself from all digital asset enforcement decisions due to his alleged inability to stay impartial on such matters. This comes as even former SEC and CFTC Chairs criticize the litigation strategy taken by the current SEC.
Celsius Disclosure Hearing Date Set: The Bankruptcy Court in the Celsius case set August 8, 2023 as the hearing date for the court to consider and potentially approve and Disclosure Statement and proposed plan of reorganization of the Celsius Network. Objections are due by Aug 3, 2023.
Senate Finance Leaders Ask for Input on Crypto Taxation: In a letter dated July 11, 2023, the Republican and Democratic leaders of the Senate Finance Committee requested input regarding many aspects of taxation crypto and other digital assets from members of the digital asset community and other interested parties.
LBRY Gets No Relief from Federal Judge: On July 11, 2023, a Federal Judge in New Hampshire refused to provide any relief to LBRY and allowed for the SEC to impose an injunction and civil fines on them. We have previously written about the SEC’s success in obtaining Summary Judgment against LBRY and how this ruling shows the difficulty that many blockchain businesses have even when they are trying to comply with regulations. With this ruling, LBRY is all but certain to shut down and the question is if this ruling will have any impact on the expected upcoming decision in the Ripple case.
Conclusion:
The summer break in Web3 legal developments is ending, and industry legal developments will pick up as litigation advances and legislative efforts move forward. The next update is expected to have many more developments, including an expected bi-partisan Senate bill on digital assets.
If there was one major takeaway from the past two weeks, it looks like even some of the cryptocurrencies’ biggest prior detractors have accepted the inevitability of the technology’s use in everyday finance. Traditional finance is making more public moves into the sector, and it is increasingly likely that some form of digital asset legislation will reach the President’s desk this year. It is still unclear, however, what that legislation will look like or how the ongoing litigation will affect demand for the technology in the United States.
