/>iIn the last few weeks, decisions by regulatory agencies and courts overseeing cryptocurrency disputes have dominated the Web3 legal news. This can be expected to continue, even as Congress comes back from its August break, as those agencies look to close out their financial year on September 30 and look to set budgets and agendas for the next year. However, with both the SEC and CFTC already embroiled in significant lawsuits against well-funded digital asset industry participants, those agencies must be feeling a strain on resources at this point.
Meanwhile, settlements for actions dating back to pre-2023 conduct continue to be finalized, as both the industry participants and agencies overseeing those participants look to put prior alleged misdeeds to rest and move forward with ongoing business.
These developments and a few other brief notes are discussed below.
NFT Secondary Marketplace OpenSea Receives SEC Wells Notice: August 28, 2024
Background: The NFT marketplace OpenSea has reportedly received a Wells notice from SEC staff indicating the SEC’s staff intends to recommend a lawsuit for securities law violations be brought against the platform operator. At its peak in early 2022, over $6 billion of NFT sales a month occurred on its platform, but those numbers have sharply declined as competitors like Magic Eden and Blur emerged and NFT sales generally declined. There is no word yet as to the content of the Wells notice or what NFT sales will be at issue in any action brought by the agency. Opensea has pledged $5 million in legal defense fees for any creators on the platform similarly targeted by the agency.
Analysis: It is easy to imagine that the transactions alleged to be unregistered securities transactions will be sales involving Impact Theory or Stoner Cats, which the SEC has previously alleged to be securities and settled with the issuers thereof (over dissents from Commissioners Peirce and Uyeda). The charges could also stem from trades of Uniswap liquidity pool tokens or similar ERC-1155 types of tokens, which may resemble financial products. With outstanding Wells notices against Robinhood, UniSwap, and now OpenSea, there can be expected a flurry of new SEC lawsuits in the months leading up to and following the upcoming Presidential election, with Chair Gensler currently expected to leave his position at the SEC regardless of the election’s outcome.
Uniswap Settles With CFTC: September 4, 2024
Background: The CFTC issued an Order filing and settled charges against Uniswap for an agreed-upon fine of $175,000. Commissioners Mersinger and Pham issued separate dissenting statements. The Order does not accuse Uniswap of creating the futures products at issue but instead states that “by operating a front-end user interface (the Interface) that facilitated and provide[d] a purchaser with the ability to source financing or leverage from other users or third parties,” Uniswap meets the definition of an “offeror” of the futures products under the applicable statute.
Analysis: Anybody can still buy and sell the futures products the CFTC takes issue with by interacting directly with the application or through using a block explorer such as etherscan. The CFTC’s issue is merely with the interface provided by Uniswap, i.e., making it easier to interact with these assets. This begs the question of exactly how user-friendly a website needs to be to make it an “offeror,” according to the CFTC. Commissioner Mersinger had an especially strong dissent, stating, “This case has all the hallmarks of what we have come to know as regulation through enforcement: a settlement with a de minimis penalty that bears little relationship to the conduct alleged, sweeping statements about the broader industry that are not germane to the case at hand, and legal theories that have not been tested in court.”
Coinbase Partially Wins in Discovery Dispute with the SEC: September 5, 2024
Background: Coinbase has partially won its Motion to Compel certain discoveries in the lawsuit brought against the exchange by the SEC. In an Order issued orally by Judge Failla, the Court held that “I agree with Coinbase that it should be able to defend itself against these very significant charges by obtaining at least some of the evidence it seeks in discovery. And as I have hinted at in the past, there’s a degree to which the SEC is the architect of Coinbase’s current discovery demands. By pleading the complaint as it did, it is the SEC who set the parameters of the universe of permissible discovery.”
Analysis: This is just the first discovery skirmish in this high-profile litigation, and there can be expected further disputes over documents that the SEC logs as protected from discovery under the deliberative process privilege or others. The SEC also gained a partial victory in resisting efforts by Coinbase to get discovery into certain aspects of Chair Gensler’s communications. However, the SEC will be required to conduct substantial efforts at document collection, production, or privilege logging, which could limit resources the agency has to devote to other ongoing and anticipated lawsuits in the digital asset space such as those mentioned above. This discovery battle is seemingly part of a two-part strategy by Coinbase, which also has requested documents through a FOIA action in a separate court.
Kalshi Predictive Markets Wins Lawsuit on Summary Judgment Against the CFTC: September 9, 2024
Background: Kalshi predictive markets won its lawsuit against the CFTC after the agency sought to block the company from offering prediction markets on U.S. election outcomes. Due to the proximity to the upcoming election, the CFTC has filed an emergency motion to stay the ruling pending an expedited appeal. Kalshi first brought this lawsuit in November of 2023, after the CFTC issued a final order, prohibiting Kalshi from offering prediction markets on certain federal elections due to Kalshi’s status as a federally regulated exchange.
Analysis: CFTC Chair Behnam has made regulation of prediction markets a priority at the CFTC, with the agency proposing rulemaking regarding prediction markets earlier this year. Coinbase has commented on the CFTC’s proposal regarding the regulator entering an area that has been traditionally left to the states. Others in the space have also joined in the opposition to the CFTC’s proposed expansion of authority. While the memorandum with the reasoning for the Court’s decision has not been released yet, this could be a major blow to the agency in imposing regulations on prediction markets, which often use cryptocurrency and smart contracts to manage and settle event outcome payouts.
Briefly Noted:
SEC Reserves Rights to Challenge Distributions in FTX Bankruptcy: The SEC has filed a document in the FTX bankruptcy reserving the agency’s “rights to challenge transactions involving crypto assets" and specifically, payments made in stablecoins.
MakerDAO Moves Towards Freezable Stablecoin: MakerDAO is moving DAI to “USDS” which will be the upgradable format of the stablecoin that has transfer and freezing functionalities that USDC and USDT have. While DAI will still exist, since all the support and liquidity will likely transfer, one of the last remaining major censorship resistant stablecoins is probably not long for this world.
SEC Commissioner Calls for Crypto Registration Form: SEC Commissioner Uyeda said in a recent fireside chat that the SEC needs a custom S-1 registration form for digital asset securities. “I hope at some point, whether it’s Gensler or any of his successors, will think about, we’ve now had a fair amount of regulatory uncertainty on digital assets, maybe we ought to move forward with some legislation or rulemaking,” Uyeda said.
SEC Fines Advisory Firm for Crypto Custody Failures: The SEC hit Galois Capital Management LLC with a $225,000 fine for “failing to comply with requirements related to the safeguarding of client assets, including crypto assets being offered and sold as securities.” The Order/press release does not state which of the tokens were “crypto assets that were offered and sold as securities” and thus improperly stored on FTX (or Fireblocks), so it is hard for others to know how to comply going forward based on this Order alone.
Robinhood Settles with California Regulators over Prior Cryptocurrency Transfer Restrictions: Robinhood settled with the California DOJ over old (2018-2022) cryptocurrency trading restrictions. The good thing about self-custody options is that you are not limited by the platform you buy digital assets on for where those assets can be used/sold. Robinhood has allowed users to transfer digital assets to self-custody wallets since 2022.
Conclusion:
The legal and regulatory landscape for the cryptocurrency and broader Web3 space remains highly dynamic, as recent actions by the SEC, CFTC, and other authorities demonstrate. With the end of the fiscal year approaching, agencies like the SEC and CFTC are pushing forward with key enforcement actions despite strained resources, while major players in the digital asset space continue to navigate ongoing litigation and regulatory uncertainty.
As we move toward 2025, the outcome of these disputes—particularly those involving high-profile platforms like OpenSea and Uniswap—will have lasting implications for the future regulation of the industry. Industry participants should continue to monitor these developments closely as they may reshape how digital assets are treated under U.S. law in the coming years.
