iIt 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.
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.
