/>iAfter a relatively quiet October for Web3 legal developments, November has kicked off with significant activity, primarily centered around ongoing lawsuits and regulatory enforcement actions. In addition to these legal developments, the recent election results indicate a shift in the U.S. administration, with incoming leadership signaling a strong focus on crypto and digital assets. Coupled with a new Congress that appears to be more pro-crypto than its predecessor, we can expect rapid developments in Web3 law through the end of 2024 and into 2025.
That said, the new administration may also pose unintended challenges for the industry. Increased focus on national security concerns could lead to restrictions on certain projects or activities in the U.S., along with potential disruptions in trade and strained alliances, all of which will require careful navigation.
The potential implications of this shift are significant. While many uncertainties remain, there are growing reasons for both optimism and caution. This could be a once-in-a-lifetime opportunity to shape legal frameworks and protections for digital assets. From updates to the IRS tax code to potential changes in securities laws, the regulatory landscape could evolve to better reflect the reality of digital assets.
As we move forward, it’s essential for legal professionals and industry experts to remain informed and engaged. By advocating for thoughtful regulation, the U.S. can maintain its leadership in fostering a safe, secure, and innovative environment for digital assets.
These developments and a few other brief notes are discussed below.
SEC Seeks to Dismiss Declaratory Judgment Action by NFT Creators: October 28, 2024
Background: The SEC has filed a Motion to Dismiss in a declaratory judgment action brought by various NFT creators seeking clarity that the digital artworks they sold were not unregistered securities transactions under federal securities laws. The SEC’s motion, made under Fed. R. Civ. P. 12(b)(1), argues that the agency is protected by sovereign immunity from having its enforcement discretion challenged and that the claims are not ripe because the SEC has not yet brought charges against the particular plaintiffs who are bringing the action against the SEC.
Analysis: As stated by one Plaintiff: “Respectfully, I’m asking the SEC to explain why I can’t do exactly what Stoner Cats did,” referring to the action by the agency against the creators of the online comic series Stoner Cats, which was fined $1 million by the SEC and ordered to destroy all remaining digital art in the creator’s possession. It seems like the agency has been backed in the corner, on one hand stating that the action is not ripe, while at the same time arguing that the rules for digital assets based on 1940’s “investment contract” case law are clear despite multiple courts disagreeing with the agency on that point.
Amicus Support Action for Token Airdrop Clarity: October 28, 2024
Background: Coinbase, a16z/Paradigm, and Coin Center have filed amicus briefs in support of an action brought by a Texas apparel company seeking a declaratory judgment that its potential token airdrop to merchandise purchasers does not violate federal securities laws. The SEC had previously moved to dismiss on procedural grounds stating that the SEC is immune from being required to answer the action and that the action’s claims under the Administrative Procedure Act are not ripe.
Analysis: The a16z/Paradigm brief says it well at pg. 16, stating, “Given the similarity between the allegations against [Justin Sun] and other companies and the facts presented by Beba, it is unsurprising that the SEC has offered no explanation why the threat of enforcement is not credible.” In reality, it seems that the main thing that has prevented the SEC from bringing lawsuits against virtually all digital asset participants to date is seemingly a lack of resources. The amicus all strike a similar tone—after years of attempting to get guidance from the SEC and Congress on how to operate legally compliant digital asset companies, the only recourse left is either the courts or abandoning the U.S. entirely.
Oral Arguments on SEC v. Heart Motion to Dismiss Occur: October 31, 2024
Background: On Halloween, there were oral arguments heard in the SEC v. Heart case on the Defendants’ Motion to Dismiss. The SEC has alleged that Hex founder Richard Heart and three unincorporated entities that he allegedly controls conducted unregistered offerings of crypto assets that allegedly raised more than $1 billion from investors. The dismissal arguments mostly centered around the extra-territorial approach the SEC has applied to the case, but also included discussions of the allegations of fraud and the propriety (or lack thereof) of naming software as named entities in a lawsuit.
Analysis: The Blockchain+ team has been following this case, and we were quoted in a Bloomberg law article about it earlier this spring, so it feels appropriate to continue to follow as the case raises important issues applicable for many companies seeking to avoid U.S. jurisdictional laws regarding digital assets. It appears that the SEC has abandoned the argument that it can name software as a defendant in a lawsuit. It also appears the SEC may be claiming that the actions that allegedly give rise to jurisdictional claims (fall of 2022) occurred after the alleged securities offering occurred (spring of 2022). It remains unclear if or how one can retroactively make an offering a “U.S. offering” based on actions that occurred after the alleged sales.
Blockchain Gaming Developer Receives SEC Wells Notice: November 1, 2024
Background: Blockchain-based gaming infrastructure developer Immutable Pty Ltd. has reportedly received a Wells notice from the SEC informing the company of anticipated agency action related to certain sales of IMX tokens in 2021. According to the SEC Enforcement Manual, a Wells notice is generally only issued after SEC staff have completed their investigation but before making a formal recommendation to the Commission. Here, Immutable claims the Wells notice was issued mere hours after first being contacted by the SEC informing the company of the investigation.
Analysis: The IMX token is listed on Binance, Kraken, and Coinbase, so it is surprising the SEC is targeting Immutable instead of the plethora of token issuers of the tokens named in the SEC’s lawsuits against those exchanges. It is possible the SEC is seeking to have active litigation against a wide range of actors (such as the recent market maker targeted actions) from exchanges to issuers to developers—so this is the “gaming” developer the agency has its eyes set on.
FOIA Requests Reveal Banks Blocked from Accepting Digital Asset Customers: November 2, 2024
Background: Coinbase has revealed that it has unearthed at least 20 documents from its successful FOIA requests to the FDIC where the agency tells banks to “pause” or “refrain from providing” or “not proceed” with offering crypto-banking services. This is an ongoing request, and Coinbase recently served additional requests on the FDIC so more documents can be expected. The Coinbase head of legal stated: “We’ll keep pushing to get clarity from our regulators through FOIA requests and any other means necessary.”
Analysis: The “shadow cap” of not allowing banks to have more than a certain percent of their customer deposits be from digital asset companies is something that was suspected to be a part of Chokepoint 2.0 and which a Silvergate executive Declaration seemed to support. It will be interesting if further documents are made public or if anything will come of these efforts, as it is expected the incoming administration will replace current banking regulatory heads with individuals who are more open to digital asset companies obtaining traditional U.S. banking services.
Binance Entities Move to Dismiss SEC’s Amended Complaint: November 4, 2024
Background: Back in September, the SEC filed an Amended Complaint against Binance, and the redline revealed the primary changes were adding facts to try to avoid there being a ruling as a matter of law on certain third party token sales (also, an added footnote about how the SEC didn’t mean “crypto asset security” when the SEC said, “crypto asset security.”). Binance U.S. has now moved to dismiss the over 800-paragraph Amended Complaint. Binance’s foreign entity also moved to dismiss, available here. Binance U.S.’s main argument is that the SEC cannot articulate any distinguishing factors as to why the tokens the agency named were sold in securities transactions, while Ether and Bitcoin were not, stating “the legal requirements of Howey do not shift based on the SEC’s enforcement whims.” Binance U.S. is also focusing on the lack of pooling and classifying the SEC’s allegations as an “investment of money and a common enterprise” instead of the required “investment of money in a common enterprise.”
Analysis: The Motion to Dismiss filed by Binance U.S. included 19 exhibits, which is unusual, as such motions typically cannot rely on external evidence or facts. However, the SEC’s heightened fact pleading also means the agency incorporated documents by reference into the Amended Complaint, which the Court can consider in reaching its determination. Binance U.S.’s exhibits primarily point to listing pages for Bitcoin and Ether, stating if those listing pages do not convert BTC/ETH into securities, then listing pages from other assets with identical information cannot support security law violation allegations. Binance U.S. also (probably smartly) stayed away from the “investment contracts require contracts” arguments, which it previously lost on, instead leaning into the lack of pooling in a common enterprise.
Briefly Noted:
Regulation by Enforcement Tracker Launched: The Blockchain Association has launched a great website showing data behind the SEC’s “regulation by enforcement” approach against America’s leading crypto companies. This and the awesome effort spearheaded by Polygon Labs to start preparing a list of real world positive use cases are great resources.
SEC Commissioner Rebukes Approach to Crypto (Again): Commissioner Peirce recently gave a speech titled Hobs and Hobbes: Wharton FinTech Lecture where she reiterated her negative view on how the SEC has approached digital asset regulation. “Rather than working with crypto market intermediaries and token issuers to facilitate registration, we have brought enforcement actions for failure to do the impossible: register with a Commission that has failed willfully to articulate a viable path to registration.”
SEC Moves to Dismiss Some Kraken Defenses: The SEC has moved for judgment on the pleadings on Kraken’s Major Question, Lack of Fair Notice, and Due Process affirmative defenses, claiming these were decided on Motion to Dismiss as being inapplicable. The Court is unlikely to dismiss any of these affirmative defenses, which would cut off discovery into these issues by Kraken and be an appealable issue the Court has no reason to create, but it is something worth monitoring.
Fairshake PAC Performance: According to Stand with Crypto, a bipartisan group of 257 candidates rated “pro crypto” won their House elections along with 16 in the Senate (as opposed to “anti-crypto” rated candidates, which only won 115 and 12 seats in the House and Senate, respectively). The biggest wins were Yadira Caraveo (D-CO), Sarah McBride (D-DE), and Bernie Moreno (R-OH) winning over their anti-crypto opponents in part on the backs of crypto-PAC spending in their favor. Also Richie Torres (D-NY), who was expected to win but has been a staunch advocate for sensible digital asset laws and will continue to be a force in the House. Combined with some massive wins in the primaries, the industry’s lobbying efforts are something that politicians will certainly factor into ongoing policy decisions.
FTX Sues Various Platform Users: FTX filed ~25 lawsuits recently seeking to claw back funds from various individuals that received funds from FTX, including Anthony Scaramucci, the alleged Compound governance attacker, Deltec Bank, Binance founder CZ, and others. That said, this is seemingly an aggressive approach to clawbacks and such, which may or may not have merit, so whether these lawsuits go anyway is yet to be seen.
Hong Kong Moving Forward in Crypto: The Hong Kong Stock Exchange is introducing bitcoin and ether index prices in November and looking into tax issues and trading platform licensing.
Conclusion:
November marks an inflection point in the ongoing regulatory and legal battles shaping the future of digital assets in the U.S. and beyond. With a pro-crypto Congress set to take office, pressure is mounting on regulatory bodies to provide clearer guidelines, yet agencies like the SEC remain steadfast in their enforcement-first approach.
As illustrated by Binance's legal defenses and the increasing amicus support from industry advocates, the crypto sector is actively pushing back on the lack of clear regulatory frameworks, fighting for operational clarity and fair treatment under the law. At the same time, global developments, like Hong Kong's proactive stance, highlight the competitive pressures facing U.S. regulators and lawmakers.
The combination of ongoing legal battles, shifting political priorities, and the potential for new policies presents both opportunities and challenges for the industry. The only thing certain is that we are in for an interesting ride.
