/>iAs Congress is on its August recess, litigation over digital asset issues continued with major developments in the Yuga Labs trademark case and the SEC cases against Kraken and Consensys. While these matters all involve factual underpinnings specific to blockchain technology, the resulting rulings will have implications far surpassing the specific facts of those cases, including how courts rule on certain trademark and venue disputes going forward.
With the matchup for the November 2024 U.S. Presidential election now set, campaign donations from blockchain and cryptocurrency companies are significant, with estimates suggesting that nearly 50% of all corporate campaign donations come from this sector. This election is shaping up to be one of the most interesting and exciting in history, with another ~70 days to go. The blockchain community is benefiting from increased support across both parties, a marked shift from just a year ago when such backing seemed unlikely.
These developments and a few other brief notes are discussed below.
Oral Arguments Conclude in NFT Trademark Ruling Appeal: August 15, 2024
Background: Oral arguments occurred in the Yuga Labs v. Rider Ripps appeal (starts around the 39-minute mark). Yuga was awarded $1,575,362.92 in damages at the district court level and another roughly $7 million in fees and costs following a Special Master’s assessment. A prior appeal of the same case over Rogers test issues was decided in Yuga’s favor back in October of 2023. Much of the oral arguments focused on the effects of the Jack Daniel's Properties v. VIP Products decision on the case, and buyers of NFTs which the judges questioned as having “a different understanding and are coming at this from a different place” from consumers of more ordinary goods, like sneakers.
Analysis: This case highlights the need to have counsel who understands the technology at issue in litigation over these matters, as judges questioned “[w]hat are we even talking about? What is an NFT?” during oral arguments. As this is a trademark case, much of the underlying decision rests on what a “reasonable consumer” of NFTs would know. The explanation as to how an NFT can have verifiable provenance while still also being potentially confusing as to source or origin to consumers requires a level of combined practical and technical understanding of NFTs which very few attorneys possess.
Consensys Continues Fight with SEC Over Venue for Securities Law Battle: August 16, 2024
Background: Back in April, Consensys Software Inc. (developer and provider of leading self-custody digital wallet MetaMask) sued the SEC for declaratory and injunctive relief in the Northern District of Texas. Complaint is available here. The SEC, in part, mooted that lawsuit through a letter stating the staff was not recommending charges be brought related to the company’s role in “Ethereum 2.0” (i.e., the protocol switch from proof of work to proof of stake). The SEC also brought a separate lawsuit against Consensys in the Eastern District of New York, alleging the digital wallet’s staking and swapping functionalities violate federal securities laws. The SEC moved to dismiss the Texas action, and Consensys responded in opposition.
Analysis: Consensys argues that under applicable Fifth Circuit precedent, the district court that first receives the lawsuit over the controversy at issue should retain jurisdiction (i.e., the “first to file” rule). Generally, federal courts will often side with the government on venue issues and allow the government’s proposed venue to adjudicate matters when another valid venue is offered. But this is the same district that just struck down the Federal Trade Commission’s noncompete ban and gave nationwide application to the ruling, so it is possible due to the expedited briefing schedule in place that this Texas federal court will want to retain jurisdiction if it feels like the SEC is trying to run from the court’s authority.
Motion To Dismiss Fully Briefed in Private Class Action Against Lido DAO: August 22, 2024
Background: Back in December of 2023, a putative class action was filed against Lido DAO, amongst others, regarding the sale of LDO tokens and alleging such sales were unregistered securities transactions. In response, Lido DAO’s token holders voted to create a legal entity, “Dolphin CL, LLC,” for the purpose of hiring counsel and representing Lido DAO’s interests in the litigation. That entity filed a Motion to Dismiss, which was opposed by Plaintiffs, and has been fully briefed now with the latest Reply in Support.
Analysis: The arguments raised by Dolphin’s Motion to Dismiss are sound, in that the plaintiffs allege the DAO is a partnership with joint/several liability for members without meeting certain required elements (namely, the alleged partners having the ability to approve or disapprove additional parties from joining the partnership). However, the interesting part of this case is not the partnership law arguments, but rather how Lido DAO went about forming their defense. Creating a legal entity for purpose of defense rather than trying to wrap a DAO beforehand is a seemingly solid strategy in avoiding what the Dolphin Motion refers to as a “Hobson’s choice” of having a default judgment levied against them or supporting the claim that the software at issue is in fact a legal entity capable of being sued. Certainly, a case worth following.
Kraken Loses Attempt at Early Dismissal of SEC Lawsuit: August 22, 2024
Background: During oral arguments in the SEC v. Payward, Inc. et al. (“Kraken”) case’s hearing on Kraken’s Motion to Dismiss, the Court forecasted its intent to deny Kraken’s motion. So it comes as no surprise that the written Order released on August 23rd did exactly that, allowing the SEC’s lawsuit against the digital asset exchange to move forward into further litigation. The Court rejected the SEC’s “misstatements” about the tokens at issue themselves being securities, stating “[t]o the extent it tries to argue that the individual tokens that form the basis of transactions on Kraken are investment contracts, or are themselves securities, its argument cannot proceed.” However, the Court distinguished the reasoning for dismissal of certain secondary sales in Binance and also refused to apply the major questions doctrine to the SEC’s actions.
Analysis: This brings the win rate for the “Investment Contract Require Contracts” argument to exactly zero after that argument was rejected in Ripple, Binance, Coinbase, and now Kraken. It remains to be seen if that argument will ever win, since it makes sense as a limiting factor. Is it reasonable to expect the efforts of others based on your payment if there is no agreement or promise for those efforts? Additionally, the article from Edward Lee on The Original Public Meaning of Investment Contract also supports the view that the argument has legal merit. But eventually, if the losses keep stacking up, it will be hard for attorneys to keep advancing that argument in court.
Briefly Noted:
FinCEN Withdrawals Proposed Self-Hosted Wallet Rules: The 2020 FinCEN unhosted wallet proposal, which would require having KYC information for every unhosted wallet to which individuals transfer certain amounts of digital assets, has been formally repealed. As the identity of the owner(s) of any particular digital wallet is often unknowable for the individuals interacting with those digital wallets, the repeal of this rulemaking proposal is good news for the industry at large.
Arrest of Telegram CEO in France: On Sunday, April 25, Pavel Durov, the CEO of Telegram, was arrested in France as he was disembarking from his private jet. The arrest stems from allegations of criminal activities involving the Telegram messaging platform. Details on the specific charges and Telegram's role are still emerging.This case could have significant implications for the accountability of digital platforms in hosting content. Additionally, the French prosecutors' actions may serve as a warning to those developing extraterritorial blockchain networks.
Abra Settles With SEC: On August 26, the Securities and Exchange Commission announced a settlement with Plutus Lending LLC (operating as “Abra”) for failing to register its retail crypto asset lending product, Abra Earn. The SEC also settled charges against Abra for operating as an unregistered investment company. This settlement follows Abra's June 2024 agreement with the Conference of State Bank Supervisors on behalf of 25 state regulators for conducting digital currency transactions without proper licenses. We hope that with these settlements behind it, Abra will be well-positioned to continue as a leading company and drive innovation in the industry.
Industry Advocacy Groups Submit Amicus in Various Cases: The Digital Chamber filed an amicus brief in the SCOTUS case regarding a derivative action against NVIDIAfor failing to disclose in SEC filings the chip maker’s dependence on cryptocurrency mining to drive ongoing sales. Additionally, the Blockchain Association and DeFi Education Fund have joined the amicus in a case challenging the SEC’s consolidated audit trail (“CAT”) database.
SEC Fights for Jurisdiction Over Creator of Pulse Chain: The SEC pushed back against Richard Heart’s jurisdictional defenses, claiming his in-person podcast appearance in Miami and virtual appearances in the United States subject him to United States securities laws and give the Court jurisdiction over him in those disputes. The case is currently pending in the Eastern District of New York.
Fifth Circuit Ruling on Geofence Warrants Has Digital Asset Implications: While not directly crypto related, this recent ruling in the 5th Circuit struck down the use of “geofence” warrants, which are warrants to access location information for users who have opted into having internet providers retain location history. This could have massive implications for the use of the John Doe subpoenas against centralized exchanges and other cryptocurrency platforms like SFOX and Circle and was fairly universally upheld prior to this recent case law.
Shaq NFT Lawsuit Avoids Dismissal: The Court hearing the lawsuit against Shaq related to his Astrals NFTs has allowed most the claim to advance, ruling against The Big Aristotle’s motion to dismiss and holding that his NFTs could be plausibly alleged as securities.
Digital Chamber Appoints President: The Digital Chamber has announced the former Chief Policy Officer Cody Carbone has been promoted to President of the organization. Cody has led the Digital Chamber’s policy and legal efforts since 2022, and the editors of the Blitblog have worked closely with Cody in his previous role, including on preparing the Chamber’s amicus brief in the Hermès case. We congratulate Cody and look forward to continuing our collaboration with him.
Conclusion:
As the blockchain and digital asset landscape continues to evolve, the ongoing legal battles and regulatory developments underscore the growing importance of understanding the intersection between technology and law. The recent cases involving Yuga Labs, Kraken, Consensys, and others highlight how pivotal the outcomes of these disputes will be—not just for the parties involved, but for the broader implications they hold for the digital asset industry.
As we approach the November 2024 U.S. Presidential election, the increased involvement and influence of the blockchain community signal a new era of political engagement for the sector. With the industry's support becoming increasingly bipartisan, the coming months promise to be both challenging and transformative for those navigating the complex legal and regulatory landscape of digital assets.
