Highlights of the Last Two Weeks in Blockchain+
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 past two weeks have seen a rapid succession of blockchain legal developments, a few of which we touch on below. On a positive note, the US House of Representatives released a comprehensive 162-page Digital Asset Market Structure Bill discussion draft, marking a significant step towards a regulatory framework for digital assets. The House Committee on Agriculture also held a hearing to discuss the Digital Asset Market Structure discussion draft.
On the less positive side of things, while the Securities and Exchange Commission (“SEC”) settled its insider trading case against a former Coinbase employee and it also filed lawsuits against Binance and Coinbase, alleging that these two prominent businesses in the industry operated unauthorized securities exchanges.
Each of those developments is broken down below.
US House of Representatives Releases Discussion Draft on Digital Asset Market Structure Bill: June 2, 2023
Background: On June 2, a comprehensive 162-page Digital Asset Market Structure Discussion Draft was released, accompanied by a concise 2-page summary of the bill and a detailed 9-page section-by-section breakdown. A hearing was scheduled for Tuesday, June 6, with the House Committee on Agriculture, responsible for overseeing the CFTC, under the title “The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets.” This hearing discussed the draft in detail, and you can read more about the hearing results below. Notably, this bill stands out as the most comprehensive proposal on digital assets put forth by Congress to date.
Summary: This bill fulfills the pledge made by House Financial Services Committee Chair Patrick McHenry in late April to present a regulatory framework bill for digital assets through the House in the coming months. While it is likely that a significantly amended version of this bill will pass the House, its chances of successfully passing the Senate and obtaining the President’s approval are uncertain. Nonetheless, we hope there may be a change of perspective in the Senate and Executive branches concerning their current stance on cryptocurrencies. You can read more about this bill in our in-depth breakdown on the BitBlog, available here.
SEC Reaches Settlement in Insider Trading Case Involving Former Coinbase Employee: May 30, 2023
Background: The SEC recently sought a consent judgment (i.e., settlement) in its legal battle against a former Coinbase employee, Ishan Wahi, and his brother, Nikhil Wahi. The case revolves around allegations of insider trading concerning specific digital assets listed on the Coinbase platform. Prior to the SEC’s announcement of the settlement, the Wahi brothers had filed a Motion to Dismiss, with several industry players offering strong amicus support.
Summary: While the SEC is positioning this settlement as a victory, the settlement doesn’t admit any conclusions about whether the tokens themselves are securities. Additionally, the settlement does not impose any fines on the Wahi brothers, as they are already subject to penalties through their criminal pleas to the Department of Justice (“DOJ”). One could speculate that the SEC recognized the weaknesses in its case regarding the secondary sales of digital assets and chose to retreat from the unexpectedly robust opposition. Alternatively, a more realistic perspective suggests that the SEC recognized the need to allocate resources for a significant legal battle against Coinbase and decided not to use those resources for a relatively insignificant fight against the Wahi brothers.
SEC Files Lawsuit Against Binance: June 5, 2023
Background: The SEC has filed 13 charges against Binance, including its US entity and its primary platform, its founder Changpeng Zhao (known as “CZ”), and several related companies. The full complaint can be reviewed here. Binance has disputed the allegations, expressing its intention to challenge the claims in court. The lawsuit contains several alleged and potentially damaging internal communications from the prior CFTC lawsuit and an additional quote where the Binance Chief Compliance Officer in 2018 allegedly stated, “we are operating as a [expletive] unlicensed securities exchange in the USA, bro.” The SEC is requesting that Binance.us’s funds be held in a US bank for potential freezing during the legal proceedings.
Summary: Ever since the unflattering communications were disclosed in the CFTC lawsuit, the industry has been awaiting follow-up SEC/DOJ legal actions. The SECs focus on the publicly traded and relatively compliant US firm, Coinbase rather than the overseas entity Binance has always been somewhat perplexing. Binance’s alleged strategic decision to separate operations from Binance.us, at least in part to buffer its international operations from US enforcement actions, will be tested. The SEC lawsuit allegations name ten tokens as securities: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI.
SEC Files Lawsuit Against Coinbase: June 6, 2023
Background: The SEC has also formally initiated anticipated charges against Coinbase, with the SEC accusing Coinbase of functioning as an unauthorized securities exchange, broker, and clearing agency. The full complaint can be accessed here. In response, Coinbase’s CEO, Brian Armstrong, issued a statement via Twitter, available here. The SECs lawsuit alleges 13 digital tokens as securities: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. The collective market value of these 13 tokens amount to $37 billion.
Summary: The SEC v. Wahi settlement, which was speculated to conserve resources for the impending Coinbase lawsuit, proved accurate. While the allegations against Coinbase list several new tokens as opposed to Wahi, the Coinbase Complaints format is predominantly consistent with the allegations in the Binance and Wahi lawsuits. Noteworthy allegations include claims by the SEC that the Coinbase non-custodial wallet and staking-as-a-service offerings operate as unauthorized broker/dealer services/products. Further state actions are anticipated. The industry has been gearing up for this significant lawsuit, so initial reactions will likely be intense, followed by a protracted legal battle.
House Committee on Agriculture Holds Hearing on Digital Asset Legislation Proposal: June 6, 2023
Background: On a notably active Tuesday, the same day the Coinbase lawsuit was announced, the House Committee on Agriculture conducted a hearing titled “The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets.” The hearing focused on the above-discussed Digital Asset Market Structure discussion draft. Access to the hearing can be found here, and the materials, including written versions of the opening statements by the witnesses, are available here.
Summary: This two-part hearing featured influential witnesses, including CFTC Chairman Rostin Behnam (during Part 1), followed by Coinbase CLO Paul Grewal, Robinhood CCO Dan Gallagher, and others (during Part 2). Committee Chair Glenn “GT” Thompson (R-PA) began with a statement addressing the SEC’s legal actions against Coinbase. Without discussing specifics, he noted that this type of regulatory action underscores the need for the hearing. There was broad agreement at the hearing that legislative measures for the industry are necessary, and the conversation focused on the form of this legislation. There was also a Financial Services Committee hearing on Tuesday, June 13, but that hearing occurred after the drafting of this bi-weekly update was finalized and is expected to be covered in the following update.
Conclusion:
The digital asset market and regulatory landscape has experienced significant developments in the last few weeks. The SEC has redoubled its legal efforts against its viewed industry non-compliance, and Congress’s prospective legislative efforts are rapidly developing. These events highlight the evolving regulatory landscape surrounding digital assets and set the stage for further discussions and legal battles.
