/>iWith Bitcoin hitting record highs and breaking a barrier long seen as aspirational, and with a new administration making key appointments, the year is ending with much excitement and momentum for the digital assets industry. A surge in M&A activity among Web3 companies is setting the stage for 2024, as these companies seek to solidify their business strategies and position themselves for growth in 2025.
However, not all year-end developments are positive. Litigation remains a significant challenge for the industry, with the SEC opposing Binance’s most recent dismissal efforts and Coinbase facing lawsuits over its delisting of competitive assets.
As 2024 comes to a close with digital assets seemingly gaining traction in the U.S., the industry remains optimistic that 2025 could be the year crypto breaks into mainstream consumer applications and sees broader public adoption across various use cases.
These developments and a few other brief notes are discussed below.
House Financial Services Committee Holds Hearing on FinTech: December 4, 2024
Background: The final meeting of this congress for the House Financial Services Committee was entitled Innovation Revolution: How Technology is Shaping the Future of Finance and was dedicated to discussing developments in financial technologies, including blockchain-enabled technologies. The Digital Chamber sent a letter ahead of the hearing to request certain digital asset-focused efforts be made a priority in the next Congress. There was also testimony from the CEO of the Stellar Foundation and the CEO/Co-Founder of Anchorage Digital. This was Chair McHenry’s last hearing as he is set to retire, so he asked it to be dedicated to an issue he is passionate about regarding improving the financial sector through technological innovation. Many in attendance on both sides of the aisle wore his trademark bowtie in recognition of his Congressional leadership over the years.
Analysis: The hearing had a few interesting moments, like French Hill’s questioning of the digital asset representatives about how both had been debanked. Or Brad Sherman bringing out a poster board of President-elect Trump’s prior tweets disparaging crypto. The general theme from Republicans was building on Chair McHenry’s groundwork in trying to encourage American FinTech. The Democrats’ theme was bipartisan collaboration on things already in the works, like the stablecoin bill that passed Committee. Rep. Hill will be taking the gavel from current Chair Patrick McHenry when McHenry retires from public office in January. Rep. Hill was the head of the digital asset subcommittee, so he will be especially focused on that during his time leading the House Financial Services Committee.
SEC Files Response in Opposition to Binance Motion to Dismiss: December 4, 2024
Background: The SEC has filed its memorandum in opposition to the latest attempts for early dismissal by the Binance entities in the case where the SEC accuses those entities of being unregistered securities brokers/dealers. As we previously covered, the Binance entities focused their dismissal efforts on the seemingly arbitrary nature of the SEC classifying ETH/BTC as commodities. Binance argued there was a lack of pooling of funds by the issuers of the tokens at issue, claiming the SEC’s allegations are an “investment of money and a common enterprise” instead of the required “investment of money in a common enterprise.” The SEC’s response argues the issuers of the tokens at issue “are targeting secondary market investors with widespread promotions touting purchases of the assets as investments in an enterprise whereby the issuers’ ongoing efforts to increase demand for the assets may lead to an increase in their value.”
Analysis: The outstanding question remains: what facts apply to the tokens at issue in this case that don’t also apply to Ether, making Ether a commodity but the tokens at issue securities? The SEC also claims, “Secondary market sales, by definition, mean an investor does not put funds ‘in the hands of the issuer’” (pg. 15), which seemingly ignores that the vast majority of investment contract law is regarding the sale of goods bundled with some sort of service agreement, which could be sold in a secondary market transaction and would still result in the issuer (who also provides the services) getting money. Of the exchange cases, this judge seems to be the one most willing to push back on the SEC’s positions at the motion to dismiss stage, so we will wait to see how this pans out.
New Proposed SEC Chair Announced: December 4, 2024
Background: President-elect Trump has officially announced he plans to nominate Paul Atkins for SEC Chair to replace current Chair Gary Gensler. Atkins is a former SEC Commissioner, advisor to the Digital Chamber, and the co-chair of the Digital Chamber’s Token Alliance. He also was on a podcast entitled “Keep Your Government Hands Off My Crypto,” if that gives any sense of how he personally feels digital asset regulation should be handled. He also has firm roots in TradFi, having served as the chair of a stock exchange and founding the compliance firm Patomak Global Partners, which primarily caters to financial services companies.
Analysis: It is impossible to overstate what a change this is expected to be at the SEC. Already, there is an expectation that the Ethereum ETF products will be permitted to participate in staking and share those staking rewards with holders, along with a host of other changes to existing policies. While it is fair to be cautiously optimistic, after the industry was burned by Chair Gensler despite his experience as a professor at MIT teaching a course on digital assets, it appears that there will be a workable path to clear compliance with U.S. law for digital asset participants in the near future. The official mission statement of the SEC is to (1) protect investors; (2) maintain fair, orderly, and efficient markets; and (3) facilitate capital formation. Atkins’ history is firmly grounded in all three and will hopefully provide more balance to an agency that has prioritized perceived investor protection over the other two.
Coinbase Sued Over Wrapped Bitcoin Delisting: December 13, 2024
Background: Coinbase has been sued over its decision to delist wrapped Bitcoin (“wBTC”) while at the same time releasing Coinbase’s own competitive wrapped Bitcoin product (“cbBTC”). For those unfamiliar, Bitcoin can be “wrapped” by exchanging one Bitcoin on the Bitcoin network for a token on a different network, which can serve as a proxy for the deposited Bitcoin and be exchanged at any time for that same Bitcoin back. This allows users to use their digital asset on different networks. The providers of the wrapped proxy token charge fees on the exchanges, and in return for those fees, promise to keep the Bitcoin exchanged for the wrapped version of that Bitcoin safe. The lawsuit accuses Coinbase of violating various antitrust laws by delisting a competitor product over feigned security concerns.
Analysis: This is certainly an interesting case that will be worth following. The Complaint itself is worth reading, if nothing more than for the paragraphs mocking memecoins, including paragraph 67, which reads: “[t]he webpage for Dogwifhat announces proudly that the cryptocurrency is ‘LITERALLY JUST A DOG WIF A HAT,’ with a parody of promotional language crossed out in red. A scrolling ticker across the top of the website repeatedly informs purchases that ‘I mean bro, it’s literally a dog wif a hat.’ The dog does, indeed, have a hat—and Coinbase chose to list this coin six days before delisting wBTC.” While there are certainly different risks (and possibly regulatory treatment) involved with a wrapped token, which requires trusting the custody of the underlying asset, versus a memecoin, the lawsuit does seem to raise issues worth considering on the centralization of on and off ramps to digital assets.
Briefly Noted:
Avalanches Raises with $250 Million Private Token Sale: Avalanche has sold $250 million of locked tokens. Avalanche has gained attention as one of the front runners to be the primary layer-1 blockchain in Web3 gaming.
Japanese Crypto Exchange Goes Public: Japanese crypto exchange Coincheck went public on the Nasdaq through a $1.3 billion SPAC merger. This is the first shoe to drop, as more crypto companies will be looking to go public after the turnover at the SEC, reportedly including stablecoin giant Circle and others.
Corporate Transparency Act on Pause: While not directly crypto related, the injunction issued against enforcement of the Corporate Transparency Act is certainly important for crypto companies, especially those who do not have the identifying information for their participants that could be deemed control persons under the Act. We’ll need to wait to see if this is a temporary respite or if something more permanent is on the horizon.
Heavily Redacted FDIC “Pause Letters” Revealed: The court overseeing the Coinbase FOIA action against the FDIC has released the heavily redacted responsive letters. There was also a subsequent order regarding these heavy redactions, ordering the FDIC “cannot simply blanket redact everything that is not an article or preposition.”
Compound Plaintiffs Seek Service Via Community Proposal: The Plaintiffs in the Compound class action are seeking to serve the DAO via proposal on the DAO’s governance page, which anybody with the necessary tokens can make. We have seen service via NFT, but this is a new one.
Conclusion:
Looking ahead, as the dust settles around these regulatory disputes, market shifts, and industry realignments, the broader Web3 ecosystem is gearing up for its next phase. With Congress poised to reassess policy priorities, a new SEC Chair in the wings, and industry participants seeking more transparent pathways to compliance, the stage is set for meaningful progress.
If 2025 indeed proves to be the year digital assets permeate everyday consumer applications, it will have been forged in the crucible of a rapidly evolving legal, financial, and technological environment. The emerging patterns of thoughtful engagement with lawmakers, refining of product offerings, and increased public awareness—fueled by both controversy and innovation—suggest the next chapter may well see crypto moving from the fringes toward more mainstream acceptance and utility.
