While the nation was preoccupied with the significant developments in the Presidential race, advocates and promoters of the blockchain ecosystem were particularly attentive to the news, given the perception that the current administration is unfriendly to many within the industry. This upheaval comes during a period of relative optimism in the industry, given the current period of rising prices for digital assets, the addition of more digital asset exchange traded products available to the public, and certain high-profile investigations by the SEC coming to a close without litigation.
While Web3 legal developments seem to be looking up, there are still roadblocks, such as the ongoing litigation against various digital asset exchanges, which the Polsinelli Blockchain+ team analyzed in detail in our recent article here. As we enter the heart of summer and what is certainly an historic presidential campaign, the last few weeks have left many in the industry with a sustained sense of hopeful optimism in the potential for meaningful legal acceptance of digital assets in the United States.
These developments and a few other brief notes are discussed below.
Amicus Briefs Come Out in Support of Declaratory Judgment Action Against SEC: July 10, 2024
Background: Paradigm has filed an amicus brief in support of Lejilex’s action against the SEC pending in the Northern District of Texas. The Digital Chamber also filed in support of the action against the SEC, as did Coinbase and a coalition of seven state Attorney Generals. Many of the briefings focused on the major questions and doctrine issues, and if that has any chance of victory at a district court level, a Northern District of Texas judge is probably the best shot of that happening.
Analysis: While we often cover amicus briefs in the “Briefly Notes” section of these updates, this ground swell of support at the district court level for an exchange that doesn’t even operate yet warranted a fuller breakdown (the fact Paradigm cited to Commissioner Pierce’s Dissent in LBRY, where she quoted BitBlog author Jonathan Schmalfeld, helps too). The Digital Chamber’s brief, where they cite the forthcoming article The Original Public Meaning of Investment Contract by Edward Lee, was an especially fascinating read. Combined with the expediting briefing in the Consensys declaratory judgment action, the Lone Star State is going to be issuing some major rulings in the (relatively) near future. People can donate to support Lejilex’s efforts here.
Paxos Prevails; Avoids Litigation After SEC Wells Notice Regarding BUSD: July 11, 2024
Background: Paxos has been notified by the SEC that the agency staff will not be recommending an enforcement action be brought against the entity in connection with BUSD. This is following a ruling in the Binance case that the sales of BUSD on the Binance platform did not constitute securities transactions. Binance stopped offering BUSD in December of 2023 after Paxos was ordered by the New York Department of Financial Service to stop issuing it, but this is still seen as a win for the industry generally and a sign that perhaps the SEC is backing off its position regarding fully back stablecoins being securities.
Analysis: Honestly, the fact that the SEC is even issuing letters ending investigations is a step in the right direction. This comes the same week as the SEC agreed not to pursue charges against Hiro as issuers of the now-(mostly)failed Stax token, which was registered through Reg-A, resulting in the token’s slow death due to regulatory restrictions. This doesn’t mean all stablecoins are fine in the SEC’s eyes, especially algorithmic coins like those at issue in the Terra/Luna matter, but it is better than nothing.
Presidential Election Shakeups Seen as Advantageous for Crypto: July 15, 2024
Background: Former President Trump has announced that Ohio Senator J.D. Vance will be his Vice-Presidential running mate in the upcoming presidential election. Senator Vance is a well-known proponent of the digital asset industry who, prior to being announced as the potential VP, was working on his own legislation in the Senate similar to FIT21 in the House. Now that Biden has dropped out and endorsed Kamala to be the Presidential nominee, it appears regardless of who wins there will be an administration change and a potential associated change in policy on digital assets.
Analysis: An increasingly pivotal aspect of the presidential election is the prominence of cryptocurrencies as a significant issue, influenced by several digital asset factors. One is the role that prediction markets are playing in the election, with these markets again being the earliest and most reliable source of Trump’s pick. Another is that Vance is a Bitcoin owner who has preached the value of self-custody and pushed back at the SEC’s regulation by enforcement in the industry. However, industry participants may want to temper expectations at this point, as politicians and policy makers are hard to predict. For example, many thought Gensler, a former MIT professor who taught courses on blockchain technologies, would be pro-crypto, which turned out to be incorrect. However, the selection of Vance certainly signals that a change of administration could result in a historic opportunity for the industry to flourish in the U.S. While Kamala Harris has yet to take a firm position on crypto, the hope is that she will not be as firmly anti-crypto as the current administration. Topping all of this off, Donald Trump is expected to attend and speak at the upcoming Bitcoin conference in Nashville this weekend, and as of publication, event organizers extended an invitation for Kamala Harris to speak as well.
Spot Ether ETF Launches: July 23, 2024
Background: In our May 29, 2024 Bi-Weekly update, we covered the SEC rule changes that all but guaranteed certain spot Ether exchange-traded funds would be available to trade in the near future. The first of those products began trading on July 23, 2024. Some analysts are expecting spot Ether ETFs to reach over $4 billion by the end of the year, following the spot Bitcoin ETFs, which have been an objective success for the issuers of those products.
Analysis: This has been inevitable since the SEC did a surprise aboutface and approved certain rule changes that implicitly acknowledged Ether as a commodity and not a security. Of the issuers approved for trading, none include Ether staking, meaning the blockchain fees required for trading of spot Ether will be purely deflationary, without any offsetting staking rewards. This is something that could change if the next leadership structure is more open to digital assets being made available to traditional investors.
Briefly Noted:
Polsinelli Publishes Update in Exchange Litigation: As mentioned in the introduction, the Polsinelli Blockchain+ team published an article analyzing where the various SEC lawsuits against digital asset exchanges currently stand and what to expect from those lawsuits in the upcoming year.
Important Article Examining Technical Functionalities of MetaMask Wallet in Light of SEC v. Consensys: Daniel Barabander, the Deputy General Counsel at Variant venture capital, published an exceptional article breaking down the SEC’s lawsuit against Consensys and comparing the allegations in the Complaint to the technical functionalities of the swap feature in the MetaMask digital wallet. The article goes into great detail, including explaining how “setting slippage” is different than “setting a limit order” in transactions on DeFi protocols. Attorneys in the space are highly encouraged to read this article to better understand where DeFi and software integrates or conflicts with existing broker/dealer laws.
CFTC Chair Testifies on Digital Assets in Senate: CFTC Chairman Rostin Behnam testified before the Senate Agriculture Committee regarding oversight of digital commodities. One big takeaway was his statement that 70-80% of the crypto marketise non-securities, which stands in stark contrast with his counterpart at the SEC, who has gone on record saying a vast majority of digital assets are securities.
Republicans Add Crypto Policy to 2024 Official Policy: Republicans have stated they “will defend the right to mine Bitcoin and ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control.” They have also stood firm in opposition to the creation of a central bank digital currency. This marks the first time that digital assets have been included in an official party platform for either major U.S. political party.
SAB 121 Repeat Effort Fails to Obtain Enough Votes to Override Veto: As many expected, the efforts to repeal Senate Accounting Bulletin 121 (which requires banks to list crypto safeguarded for customers to be listed as liabilities on their balance sheets) failed to garner sufficient votes in the House of Representatives to overcome President Biden’s veto. This limits the ability of individuals to have their digital assets safeguarded by trusted bank providers, even if it has been reported that the SEC has exempted certain banks from required compliance with this accounting rule.
United Kingdom DAO Study Released: The Law Commission of England and Wales published a paper on DAOs to assist their legislative bodies with identifying areas of potential legal reform. The paper recommends further analysis be done on whether existing law should be reformed to facilitate the increased use of technology at a governance level where appropriate.
Conclusion:
The interplay between the ongoing political shifts and the blockchain industry's evolving landscape presents a pivotal moment for digital assets in the United States. While the current administration's stance has often been perceived as adversarial, recent developments such as the launch of spot Ether ETFs, successful resolutions to high-profile SEC investigations, and the growing support for pro-crypto legislation signal a potential turning point.
The upcoming presidential election further adds to this dynamic, with candidates’ varying perspectives on digital assets offering a glimpse of potential policy changes ahead. As we navigate these transformative times, the blend of optimism and caution within the industry underscores the anticipation of a more legally recognized and integrated future for digital assets.
