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.