Our last update included a whirlwind of activities, with the surprisingly bipartisan House of Representatives vote on FIT 21 and the SEC’s approval of certain Ether spot ETF rule change proposals coming in quick succession. This update is back to business as usual: pending industry litigation continues to move toward a final resolution, and the President made good on his promise to veto a bill that would have reopened the door for most banks to be able to take custody of digital assets.

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

President Biden Vetoes Bill to Overturn Staff Accounting Bulletin 121 (“SAB 121”): May 31, 2024

Background: President Biden went through with his threat and vetoed the bipartisan bill that passed the House and Senate to overturn Staff Accounting Bulletin 121. The bill would have repealed the SEC’s accounting guidance requiring SEC-registered companies to treat digital assets held on behalf of customers as liabilities, effectively making it infeasible for most banks to meet other regulatory requirements if they custody digital assets. This veto came after a bipartisan group of lawmakers urged President Biden not to go through with his threat to veto the measure.

Analysis: President Biden’s statement that “[m]y Administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets” seemingly rings hollow in a statement where he is vetoing a bill that had bipartisan sponsorship and passed with 60 votes (including Chuck Schumer) in a Democrat-controlled Senate. SAB 121 is internal SEC guidance that the Government Accountability Office has already determined failed to abide by the Administrative Procedures Act. It is also unclear how taking away trusted custodial options protects consumers. After a few weeks where it looked like the Administration may have started to reverse course on crypto policies, which are increasingly becoming a wedge issue for the upcoming election, it was disappointing to see the veto of a bill that had the backing of traditional banks and digital asset industry participants alike.

Coinbase Finalizing Briefing in Rulemaking Appeal: May 31, 2024

Background: Coinbase has now completed its briefing in its appeal of the SEC’s denial of rulemaking, filing the Reply in Support of its Petition. The head of legal at Coinbase summarized their filing on Twitter, claiming “[t]he SEC is bent on choking the digital asset industry and is refusing to provide the necessary rules the industry has requested in order to tighten the squeeze.”

Analysis: Coinbase faces an uphill battle on this, as Congress has not mandated that the SEC pass any such rulemaking. Best case scenario for the industry would be the Court forcing the agency’s hand, but it would still be a massive win if this results in dicta regarding the inability of digital asset participants to abide by existing rules. For those who missed it, it is worth reading the Paradigm three-part series on why “come in and register” is not possible, with citations to specific rules and reasoning.

Dapper Labs Settled NBA Top Shot Securities Class Action

Background: Dapper has agreed to a tentative settlement of $4 million in the class action alleging the sale of NBA Top Shot NFTs were securities transactions. While the settlement still needs to be approved by the Court, if this stands, it seems like a good result for the company after losing its Motion to Dismiss largely due to the Court finding the centralized flow blockchain makes certain securities arguments issues of fact for trial. Dapper would have likely spent more than $4 million in litigation and discovery if taken to trial, so this is an easy out for them.

Analysis: Dapper gets liability protection for all sales from when it was the only market in town to buy and sell their NFTs and can now use the existence of additional marketplaces as a defense for lawsuits going forward. It seems like a win for Dapper, as $4 million should barely make a dent in the company’s bottom line. Dapper CEO Roham released a tweet claiming the settlement affirms that it was agreed that Flow blockchain was a decentralized public network and Top Shot NFTs are not securities.

Briefly Noted:

SEC Private Funds Rule Overturned by 5th Circuit: The Fifth Circuit vacated the private fund adviser rules that would have greatly increased compliance burdens and overhead for many fund managers. These would have applied to registered investment advisers to private funds and may have disproportionately affected crypto venture managers, most of whom cannot rely on the venture capital fund adviser exemption from registration. Our detailed alert is available here.

Industry Players Back Super PAC: Coinbase has also now donated $25 million to crypto super PAC Fairshake, bringing its funding up to $75 million from Coinbase, Ripple, and a16z alone. Fairshake is a PAC that supports crypto-friendly candidates through funding, research, and advertisements. In the latest Harris poll, 33% of respondents said they take into consideration a candidate’s stance on crypto, and 77% believe a U.S. presidential candidate should have an informed perspective on crypto.

House Subcommittee Hold Hearing on Tokenization of Assets: The House Financial Services Subcommittee on Digital Assets held a hearing regarding the tokenization of real-world assets. While the hearing had notable detractors, most of the focus was on the various benefits for cheaper and faster settlements and improved transparency that the integration of blockchain technologies into transactions can offer.

SEC Faces Lawsuit on Document Request Responses: The American Securities Association has filed a lawsuit against the SEC in the Middle District of Florida alleging the agency has failed to comply with certain Freedom of Information Act requests regarding the agency’s enforcement actions of off-channel broker/dealer communications during COVID when those individuals were unexpectedly shifted to work from home. This is added to the list of declaratory judgment actions taken against the agency.

Robinhood Purchases Crypto Exchange Bitstamp: Robinhood is buying crypto exchange Bitstamp to expand crypto operations outside of the United States. It appears companies are shifting focus and funding outside of the United States, with American industry regulation still in flux, unlike in other countries.