The 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 summer solstice has not led to a slowdown of regulatory interest and challenges to the digital asset ecosystem. The House Financial Services Committee held a hearing on the future of digital assets as it hopefully works to craft bills to provide a workable framework for regulating digital assets while the European Union moves ahead with its separate digital asset regulatory framework law.
The legal battle between Coinbase and the SEC on Coinbase’s mandamus action continues, with both sides litigating strategically to advance their positions in the separate lawsuit by the SEC against Coinbase. Binance also continues to litigate fiercely against the SEC, even in the face of recent consent order limiting the United States Binance entity’s ability to transfer certain assets during the pendency of the litigation.
These developments, together with a few other brief notes, are discussed below.
EU’s Comprehensive Digital Asset Legislation is Published: June 9, 2023
Background: In April 2023, the European Parliament voted through landmark legislation on cryptocurrency titled EU’s Markets in Crypto Assets (“MiCA”) with 517 votes in favor and 38 against. MiCA does not attempt to fit digital assets into an existing framework, but instead creates an entirely new disclosure and registration regime specific to digital assets. On June 9, the official version of the bill was published in the EU’s Official Journal, signaling formal passage of a bill onto the EU’s statute book.
Summary: Europe is one of largest digital asset markets in the world, so it is an important step for this industry for the EU to draft a specially tailored digital asset framework for fungible digital assets and other common assets such as stablecoins. This is particularly the case when the United States is still in the very early stages of creating any form of digital asset framework. When finalized, MiCA will apply directly across the EU without the need for special national implementation laws which many EU consumer protection initiatives that are passed are directives require. Due to the official publication, MiCA’s provisions will primarily begin to apply on December 30, 2024, with certain provisions taking effect slightly earlier on June 30, 2024.
House Financial Services Committee Holds Hearing on Stablecoin and Digital Asset Market Structure Draft Bills: June 13, 2023
Background: On June 13, the House Financial Services Committee held a hearing titled, “The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem” to discuss the Digital Asset Market structure discussion draft bill and the new stablecoin bill. Both hope to provide a framework for regulating digital assets. The House Financial Services Committee oversees the country’s economy through supervision of banks, the United States Treasury, capital markets, and currency production and distribution. The details on the hearing, including opening statements of the witnesses and committee memorandum are available here.
Summary: On June 6, it was the Committee on Agriculture holding a hearing on the draft digital asset legislation; this week the Financial Services Committee got their chance to analyze the Digital Asset Market Structure discussion draft bill. Coy Garrison, who was former counsel to SEC Commissioner Hester M. Peirce, answered a wide range of questions, ranging from what requirements trading platforms must meet to register with the SEC to the timeframe for how assets should transition from securities to commodities. Notable moments from the hearing include Chairman McHenry’s opening statement and witness questions. Representative French Hill also pointed out that both the Secretary of Treasury and the Chairman of the CFTC have emphasized the need for Congressional action to fill regulatory gaps over the market. An increasing number of Democrats (including Ritchie Torres, Josh Gottheimer, and others) are acknowledging the enduring presence of the crypto industry and need for regulations tailored to the industry. Even if this legislation is passed in Congress, there will still be several questions to be answered by regulators regarding the interpretation and implementation of the legislation.
SEC and Coinbase Provide Further Briefing in Coinbase Mandamus Action Asking SEC to Give Regulatory Clarity: June 13, 2023
Background: Back in April, Coinbase filed a mandamus action asking the Third Circuit to Order the SEC to respond to Coinbase’s Petition for Rulemaking, either agreeing to provide a regulatory framework for digital assets through tailored rulemaking or denying Coinbase’s request and standing by the SEC Chair Gary Gensler’s assertion that the rules are clear as is. The three-judge panel issued a letter order asking for answers on three questions from the SEC, and both sides have now responded. The SEC’s response is available here, while Coinbase’s rebuttal to that response is available here.
Summary: After the three-judge panel asked the SEC for clarification on certain issues, the SEC was firm in their assertion that there was no merit to those issues and asked for the panel to dismiss or issue a 120-day stay for SEC staff to further consider the Petition for Rulemaking. Coinbase responded, asking the panel to deny the SEC’s stay request or limit the stay to 60 days, after which the SEC would need to have a firm answer to the Petition for Rulemaking. Both sides are litigating strategically. The SEC’s 120-day stay request would not require the SEC to file anything additional in this mandamus action until after Coinbase’s expected Motion to Dismiss is fully briefed in a separate action by the SEC against Coinbase. Coinbase’s requested deadline would fall in the middle of that briefing. The panel ended up retaining jurisdiction over the matter as requested by Coinbase but granting the SEC’s 120-day stay to allow the SEC staff to further consider Coinbase’s Petition for Rulemaking.
“Hinman Speech” Documents Unsealed: June 13, 2023
Background: In June of 2018, then acting Director of the SEC’s Division of Corporate Finance gave a now-famous speech titled Digital Asset Transactions: When Howey Met Gary (Plastic) in which he (in his personal capacity) opined that “sufficiently decentralized” opined that digital assets such as Bitcoin and Ethereum were not securities and should be exempt from securities disclosure regimes. After a protracted legal battle, the SEC was forced to unseal comments made by SEC staff to draft versions of the “Hinman Speech” documents, and those comments were publicly released on June 13.
Summary: The documents unsealed had some expected, but interesting comments from members of the SEC staff from 2018 when the industry was still in its very early stages. Those comments included apparent recognition of “regulatory gap[s]” in the space regarding decentralization, and the SEC staff not believing an issuer holding a large amount of tokens is of any significance in a Howey analysis (an issue which LBRY got dinged on in dicta). But largely, these were the types of comments which would be expected from the SEC staff at the time and does not significantly change the regulatory environment for digital assets in 2023.
Binance.US Has Asset Transfer Limited by Consent Order: June 17, 2023
Background: On June 5, 2023, the SEC filed 13 charges against various Binance entities, including its U.S. entity Binance.US. The full complaint can be reviewed here. The SEC alleges that Binance has been operating as an unregistered securities exchange against U.S. law. This comes at the same time that Binance entities and Binance’s founder Changpeng Zhao are defending against a separate action brought against them by the CFTC. The SEC also requested that Binance.US’s funds be held in a U.S. bank for potential freezing during the legal proceedings.
Summary: Even though they are in a challenging position, Binance.US is litigating fiercely in their defense on many issues alleged by the SEC and CFTC. On June 12, Binance.US added four more attorneys to its defense team, including George Canellos, a former co-director of the SEC’s enforcement division. Binance.US also opposed the SEC’s motion to freeze their assets in an emergency motion on June 12. After that hearing, at the direction of the Court for the parties to reach an agreement without requiring the Court issue its own ruling, the parties filed a Consent Order. The Consent Order prevents Binance.US from spending corporate assets except for ordinary business purposes and gives the SEC expedited discovery into how Binance.US custodies its assets. Additionally, Binance.US must transfer control of the access keys for its digital wallets to the U.S. within 14 days. Binance has also filed a motion taking issue with the SEC’s press release following entering of the agreed Consent Order by the parties.
Briefly Noted:
Celsius Discloser Statement Filed: On June 27, the greatly anticipated Disclosure Statement for the Joint Chapter 11 Plan of Reorganization of Celsius Network LLC and certain of its affiliates was filed. The statement and related plan of reorganization outlines the expected recovery for among others the “Earn” creditors. We are analyzing these documents and will be sending a separate update about it.
Coinbase Supreme Victory: Though not related directly to digital assets, it’s good to see a digital asset company winning at the Supreme Court level. The Supreme Court recently ruled in favor of Coinbase, holding that Coinbase’s mandatory arbitration provision was binding and consumers seeking to sue the entity would need to resolve those disputes in arbitration rather than public courts.
Conclusion:
The digital asset market and regulatory landscape has experienced significant developments in the last few weeks. The SEC continues its legal efforts against industry actors who they view as non-compliant. Congress also gets one step closer in its legislative efforts to provide regulatory clarity. These develops are expected to slow down as Coinbase and Binance prepare initial responsive pleadings to the SEC’s actions against them and as Congress goes on break from June 24 until July 9. Then a rapid succession of further developments can be expected again.
These events highlight the evolving regulatory landscape surrounding digital assets and set the stage for further discussions and legal battles.
