It’s fitting that our second October Web3 legal update arrives on Halloween, as many in the industry might find the current legal landscape for digital asset products and services quite spooky. While the past few weeks have seen relatively few major legal developments, there have been significant updates in ongoing litigation and intense maneuvering for the upcoming administration, regardless of who it may be. As we approach the election, this will be our last update before we hopefully know who the next president will be—an outcome that could have substantial implications for the regulatory direction of the Web3 sector as we move through 2024 and beyond.

These developments and a few other brief notes are discussed below.

Coinbase Looking for Summary Judgment in Freedom of Information (“FOIA”) Action: October 15, 2024

Background: Coinbase has asked for permission to file for partial summary judgment in its pending FOIA action against the SEC. Coinbase initially sought certain documents regarding the SEC’s investigation into the conversion of the Ethereum network from proof-of-work to proof-of-stake, which the SEC refused to produce under a claim of investigatory privilege. Now that the SEC has announced it has closed that investigation, Coinbase is claiming that privilege no longer exists and is asking the Court to force the SEC to produce such documents.

Analysis: These FOIA requests occurred long before the SEC brought charges against the largest digital asset exchange in the U.S., but the two actions are certainly intertwined at this point. Coinbase partially won its fight to compel some discovery documents from the SEC in the ongoing direct litigation between Coinbase and the SEC, while these ongoing proxy fights also continue. In addition to requests for documents from the SEC, Coinbase is also pursuing FOIA requests against the Federal Deposit Insurance Corporation and others. While using the FOIA as a tool in litigation against a government entity is not common, if Coinbase is successful here, it may become a trend for addressing regulators perceived as not playing fair or being transparent.

Financial Industry Regulatory Authority (“FINRA”) Publishes Metaverse Update: October 24, 2024

Background: FINRA, the self-regulatory organization that regulates broker-dealers, among other things, released a publication on The Metaverse and the Implications for the Securities Industry. In FINRA’s press release about the publication, it stated in part: “Staff from FINRA’s Office of Financial Innovation (OFI), which is part of the Office of Regulatory, Economics and Market Analysis (REMA), launched a research initiative focusing on the opportunities and risks that the metaverse may present for the industry. This initiative led to the publication of this report. As part of our research, OFI staff engaged with more than two dozen stakeholders, including securities firms and other financial institutions, hardware and software providers, academics, industry observers, and government entities.”

Analysis: The publication is mostly a recitation of what is otherwise known: regulations that apply in the real world also apply in the “metaverse,” which FINRA defines as “the next evolution of today’s internet.” While there are heavy warnings about the risks of firms trying to function in this new iteration of the internet, the Report also states how much opportunity there is, stating it is “expected, by some, to contribute over $3 trillion to global Gross Domestic Product (GDP) by 2031.” Of particular note is the attention given to the use of gaming assets along with the discussion of data visualization, digital twins, and virtual trading applications in the financial sector.

Crypto Council Asks Supreme Court to Consider Issue of Internet Infrastructure Based Jurisdiction: October 25, 2024

Background: The Crypto Council for Innovation has filed an amicus brief asking the United States Supreme Court to determine if the location of third-party hosting servers can be considered as a valid factor in determining if certain transactions fall under U.S. securities laws. Full brief here. This support of Binance’s request to appeal to the Supreme Court comes in response to the Binance v. Anderson case, where the Second Circuit ruled that the extraterritoriality doctrine established in Morrison v. National Australia Bank—which held that U.S. securities laws do not apply to transactions occurring outside the United States—was inapplicable when the entity being sued uses servers in the United States to process certain challenged transactions.

Analysis: The Web3 space has been subject to some expansive interpretations by the SEC regarding jurisdiction and venue, such as in the claims against Richard Heart, where the agency argued that his use of Uniswap code—developed in New York—created a forum hook in the E.D.N.Y.) or claiming jurisdiction over Justin Sun and the Tron Network because Justin Sun often travels in the United States. Given the growing prevalence of cross-border transactions and the complexities of modern internet networks, it would not be entirely surprising if the Court accepted this case or one like it for appeal. Additionally, allowing jurisdiction merely because hosting servers (or nodes) are located in the U.S. could create a dangerous precedent not only for Web3 but for users of the internet in general.

Briefly Noted:

Venture Firm Release Annual State of Crypto Report: a16z has released its annual State of Crypto Report, and among its most interesting findings are the data points showing the use of crypto is at an all-time high based on monthly active wallets, with its key uses being in stablecoins and DeFi.

SEC and Ripple Plan to Appeal: The SEC filed its required form in the Ripple litigation appeal (potentially 1 day late), stating they will be appealing the ruling regarding sales on secondary marketplaces and in-kind payments not being “sales” but is not appealing the underlying ruling that the XRP token itself is merely a line of computer code and not a security. Ripple will likewise be appealing certain rulings regarding “essential ingredients” of a securities transaction and issues surrounding fair notice.

CFTC Briefs Appeal of Election Prediction Markets Case: The CFTC has filed its opening brief in the Kalshi federal election prediction markets case. While this case is important for crypto as many prediction markets are offshore and use stablecoins for payments, it is also equally important as one of the first cases post-Loper Bright regarding agency authority to reach the appellate level.

SEC Announces Examination Priorities for 2025: The SEC’s Division of Examinations released its 2025 examination priorities. The only change of note for crypto was, in two instances, shortening “crypto asset securities” to just “crypto assets.”

Conclusion:

While the last few weeks of October have been relatively quiet for new legal developments in the Web3 space, it is clear that the groundwork is being laid for significant future shifts. Coinbase’s push for transparency through its FOIA action against the SEC and the ongoing jurisdictional challenges highlighted by the Crypto Council’s appeal to the Supreme Court underscore the evolving legal landscape. Meanwhile, FINRA’s focus on the metaverse, coupled with ongoing high-profile litigation like the SEC and Ripple appeals, demonstrates the ongoing tug-of-war between innovation and regulation.

As we move into 2025, the priorities and decisions from key regulatory entities, influenced by the upcoming election and the new administration, will shape the direction of the Web3 industry, potentially altering the balance between risk, opportunity, and compliance in this rapidly changing digital frontier.