Hopefully you all enjoyed your Labor Day weekend here in the states! This week, there were three major stories with the SEC bringing its first enforcement action against an NFT issuer, Grayscale winning its appeal against the SEC, and the SEC v. Coinbase judge issuing an important ruling in the separate UniSwap case she was overseeing. There were also some interesting updates in the Binance and Ripple cases.
Here’s everything that happened last week in Web3 law:
NFTs Can Be Securities
The SEC brought its first enforcement action and against an NFT issuer, charging Impact Theory, LLC with conducting an unregistered offering of crypto asset securities in the form of NFTs. Without admitting or denying the SEC’s findings, Impact Theory agreed to a cease-and-desist order, and agreed to pay a combined total of more than $6.1 million in disgorgement, prejudgment interest, and a civil penalty.
Tl;dr– This is less about Impact Theory (which was LARPing as an NFT project and is probably fine paying their fines/shutting down) and more about the SEC finding obvious low hanging fruit and a consent judgment to sneak in a new legal theory (this time, that creator royalties are somehow evidence of a security instrument). This was a great dissent by Commissioners Peirce and Uyeda. Yes, no matter what form the sale takes if a token is sold in exchange for an investment of money in a common enterprise, with an expectation of profit arising from the efforts of a promoter or a third party, that’s probably a security transaction. But it seems like the shadow factor of “is this something we traditionally regulate as a security” is grinding away.
Grayscale Wins Appeal of SEC’s Denial of their Application for a Spot Bitcoin ETF
Grayscale won their appeal of the SEC’s denial for their Bitcoin Spot ETF product, with a unanimous ruling from a three-judge panel that the SEC’s denial was arbitrary and capricious. The Court ruled that there was no basis for the SEC to claim that a Bitcoin Spot ETF would be any more subject to potential manipulation that the Bitcoin futures ETF which had already been granted by the agency.
Tl;dr– This is big for a few reasons. The first is that this is more egg on the SEC’s face, with three highly respected judges of differing political backgrounds, all looking at the SEC’s actions towards a digital asset product and deeming the SEC as acting “arbitrary and capricious” which is a high standard to meet. It will be interesting if the SEC uses this decision as a way out of a losing battle, or if they find alternative reasons to deny the Grayscale petition along with requests for similar products from financial giants like Blackrock.
UniSwap Obtains Dismissal in Class Action from Same Judge as SEC v. Coinbase
UniSwap won on a Motion to Dismiss in a class action brought against the platform, its developers, and its VC backers. Plaintiffs claimed that UniSwap should be liable for actions of third parties, who used the UniSwap code and front end to create liquidity pools for “meme coins” which were then pump and dumped on retail. The Court dismissed the claim, due to the UniSwap code being open-source and due to lack of any evidence that the Defendants had any involvement with the actual liquidity pools at issue in the lawsuit.
Tl;dr– The big news from this case are the apparent swipes that District Judge Katherine Failla made at the current digital asset regulatory environment, saying things such as “the Court declines to stretch the federal securities laws to cover the conduct alleged, and concludes that Plaintiffs’ concerns are better addressed to Congress than to this Court.” This is the same judge overseeing the SEC v. Coinbase matter. While these cases obviously have differing facts and circumstances, she at least suggests a level of a level of skepticism as to the SEC’s position that virtually all tokens except Bitcoin are securities.
Other Stories
Republicans on the House Financial Services Committee are not happy with the Fed’s program to “enhance the supervision of novel activities” such as those involving crypto. It seems like banks are being punished with additional regulatory costs simply for servicing a sector that the current administration doesn’t like.
I really enjoyed this video from Coinbase CEO Brian Armstrong about ideas in crypto that he is excited about and hopes people build. Also, as a borderline ETH maxi, this Fidelity Digital Asset research study on ETH was music to my ears.
Ripple filed its opposition to the SEC’s request for interlocutory appeal, claiming the SEC’s attempt to frame the issue as a purely legal issue rather than a fact specific application of law to facts. I think at the end of the day, the issues get certified for appeal, and it becomes an issue as to whether the 2nd Circuit wants to hear that appeal before a final trial on the merits.
Everybody is trying to guess what the contents of the sealed SEC motion against Binance is. With 37 exhibits, it seems likely to be juicy, but if I had to guess it has something to do with fund movements the SEC doesn’t understand rather than DOJ charges. Time will tell!
This is barely crypto news, but BitBoy Crypto firing Ben ‘BitBoy’ Armstrong is hilarious. In typical BitBoy fashion, he claims this is all a conspiracy against him and everybody is out to get him. I’m sure the guy who is known for making violent threats didn’t make these violent threats, though.
Twitter got a money transmitter license in Rhode Island and elsewhere, reportedly in an effort to create a Twitter payment function that is being built for crypto functionality as well.
Gary Gensler is expected to testify in front of the Senate Banking, Housing, and Urban Affairs Committee on September 12, and before the House Financial Services Committee on September 27. Wonder if he will answer the “is ETH a security?” question after it has been reported that the SEC is set to approve an ETH futures ETF.
In a surprise to nobody, the SEC has deferred ruling on the various institutional Bitcoin spot ETFs (BlackRock, Fidelity, VanEck and Bitwise). It has 240 days in total from publication date in mid-July of these applications to accept or deny, and it wouldn’t be shocking to see the SEC use every one of its allotted days before issuing a decision.
Lufthansa (German air carrier) passengers can receive a Polygon-based NFT by simply scanning their boarding pass, which is pretty neat. My parents’ generation collected post cards and passport stamps. Ours will be able to preserve those memories in tokens.
Robinhood is going to buy back $605.7 million worth of its shares which were seized from SBF. It seems odd that the government can just seize and sell off your assets before SBF has been convicted of any civil or criminal charge, but I also don’t feel bad for this particular individual.
Conclusion
If you have any questions or would like me to write about anything else, let me know on either of my twitter pages! As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.
The NFTtorney 