Intro/Disclaimer: Since late 2022, I’ve prepared weekly updates for attorneys at my firm to stay abreast of the latest Web3 legal developments. The biggest stories are included in Bi-Weekly posts on the firm’s BitBlog, where we provide concise tl;dr overviews and insights into how these developments might ripple through the industry. In pursuit of a more thorough and personal discourse, I also share expanded versions of these updates on my personal blog every Tuesday. Here, you’ll find my unvarnished perspectives, offering a deeper dive into the nuances of these legal narratives. Please note, the views and opinions I express, both on BitBlog and my personal blog, are solely my own. They do not reflect the official stance or endorsement of my firm.
The SEC sued Consensys, the developers of the largest self-custodial digital wallet (MetaMask). The IRS released their digital asset tax rules. The Court in SEC v. Binance ruled on Binance’s Motion to Dismiss. And that was all just Friday. To say last week was a crazy week in Web3 legal developments would be an understatement. While the crypto markets have been largely sideways in typical “sell in May and go away” fashion, the legal developments have not stopped. It is going to continue to be a busy summer, with the expected staggered developments in the various ongoing cases and new cases being filed every day.
Here’s everything that happened last week in Web3 legal:
SEC Sues MetaMask Developers, Consensys
The SEC has filed a lawsuit against the creators of the MetaMask digital wallet, Consensys Software Inc., alleging the digital wallet’s staking and swapping functionalities violate federal securities laws. The SEC’s lawsuit was brought in the Eastern District of New York while developers’ declaratory judgment action is pending in the Northern District of Texas over those wallet functionalities, so there is a jurisdictional fight underway to start the matter off.
Tl;dr: Judge Fallia in the Southern District of New York ruled against the SEC on its similar wallet swapping claims brought against Coinbase, so the SEC’s choice of jurisdiction (bringing the lawsuit in a separate New York district court rather than in Texas where the currently pending Consensys action is) is certainly something the parties will butt heads over. This lawsuit has some troubling claims regarding “efforts of others” which calls into question the SEC’s investor protection role while the SEC is seemingly discouraging developers from having their smart-contracts audited. The SEC also named the staking services offered by Lido and Rocket Pool as securities offerings without naming the corporate entities behind those projects themselves, staying true to SEC fashion of naming companies that can’t defend themselves in lawsuits. SCOTUS has now said the Major Questions Doctrine prevents agencies from using outdated laws on new issues, curtailed in-house admin adjudications, and denied that agency legal interpretations are entitled Chevron deference. So I don’t think the current SCOTUS is going to be sympathetic to the SEC’s attempted land-grab in crypto if/when these cases reach the higher courts.
Court Rules on Binance Motion to Dismiss in Suit Against the SES
The Court in SEC v. Binance has ruled on the Binance Motion to Dismiss, allowing a majority of the SEC’s claims advance to discovery, but dismissing some major sections of the lawsuit. The nearly 90-page Order gave a strong rebuke of the popular “investment contracts require contracts” claim raised by many of the exchange defendants, but an equally strong rebuke of the SEC’s “embodiment” theory that digital assets can “embody” an investment contract scheme.
Tl;dr: The main charges which were dismissed were regarding secondary sales of BNB, primary sales of the Binance stablecoin BUSD, and the Binance “Simple Earn” program which were all found not be properly alleged securities law violations. Judge Jackson did not mince her words, stating “the SEC seemed to speaking out of both sides of its mouth” at the hearing on the Motions to Dismiss and “the agency’s decision to oversee this billion dollar industry through litigation –case by case, coin by coin, court after court – is probably not an efficient way to proceed, and it risks inconsistent results that may leave the relevant parties and their potential customers without clear guidance.” But just as in Coinbase, any of the Major Question Doctrine or “investment contracts require contracts” defenses will need to wait for appellate courts to have any chance of success.
Coinbase Sues SEC and FDIC over FOIA Requests
Coinbase has filed lawsuits against the SEC and the FDIC regarding those agencies alleged failure to comply with Coinbase’s Freedom of Information Act (“FOIA”) requests. In a Twitter thread, Coinbase’s head of legal said “@SECGov has claimed sweeping authority, but refuses to provide any rules, let alone consistent or coherent ones. While @FDICgov pressured financial institutions to cut off the industry from the banking system. Today we filed lawsuits under the Freedom of Information Act for requests we made over a year ago seeking important information to which we, and the public, are entitled.”
Tl;dr: Due to the various carveouts and end-arounds, it is very hard to get anything of substance through a FOIA request unless you are willing to file a lawsuit to enforce it. Even then, it takes a sophisticated legal team like only a few companies (like Coinbase) can afford to push these matters as needed to make headway. Will be very intrigued to see what all is eventually produced after 6+ months of litigation (minimum) and then another few months of document review/production. It seems unlikely that Coinbase will be able to get documents here that they wouldn’t get in discovery in their pending cases against the SEC, but no harm in leaving no stone unturned, I guess.
Other Stories
The IRS dropped their final digital asset broker reporting rules (in a Friday news dump. Thanks for that), and while they punted on how to deal with DeFi or self-custodial wallet applications, they appear to require operational compliance starting in 2025. So, that’s fun. Thank God there are people like Jason to break down these tax laws for us normal people who use Turbo Tax.
Interesting to see MiCA digital asset laws getting ready to go into effect, platforms are offering alternatives to stablecoins like gold NFTs. Potentially a lesson for the U.S. to heed, as good intention legislation ends up hurting consumers and forcing them into objectively inferior products (people don’t buy and sell things with gold; this isn’t the 1400’s).
The fact that the U.S. government is calling Coinbase an illegal broker/dealer while asking Coinbase to serve as a broker/dealer for the government’s seized Bitcoin is, at minimum, funny.
VanEck is the first to take the plunge, filing an S-1 with the SEC to offer spot SOL ETF. I see this an election play, so they are on file and the clock ticking against the SEC when whoever wins the presidency is determined and the SEC Chair is forced to address this application. SOL bros, rejoice!
Jump Crypto President Kanav Kariya has announced he is leaving the firm amidst rumors of CFTC investigation. Hopefully he can come out unscathed and enjoy his riches on an island somewhere.
The Biden administration has re-hired Carole House, who was the co-author of the Executive Order on Ensuring Responsible Development of Digital Assets. Pretty sure that everything to come out of the White House after that Order has been objectively terrible for the industry, so I guess back to where things were just kind of bad is a step in the right direction?
I am once again asking people to simply use the applications they want and be pleasantly surprised if you get rewards rather than airdrop farming. Or just bring back ICOs. Anything would be better than these regulatory shell games.
Not directly a crypto decision, but the recent SCOTUS ruling in Jarkesy against the SEC using administrative courts in monetary fraud cases will have fairly drastic effects across multiple administrative agencies. While I do believe there is a place for specialized courts, that place should be in the judicial and not the executive branch. Combined with the ruling in Roper overturning Chevron deference, and this SCOTUS is not going to look kindly on agency overreaches.
The DOJ has upped the bounty for Ruja Ignatova, AKA the “Crypto Queen” behind the OneCoin fraud who has been on a fugitive since 2017. I guess over a billion in stolen funds helps you evade even a $5 million bounty.
Crypto super PAC Fairshake got a dub, after spending $2 million to primary out Congressman Jamaal Bowman for a more crypto-friendly George Latimer. Do I love how much of a role money plays in politics? Not really. But if it’s going to happen, I’d rather it be the good guys with the bigger wallets.
Congressman Matt Gaetz has introduced a bill which would allow individuals to pay taxes in Bitcoin, which would be hilarious if the receipt contains Bitcoin connected to Silk Road or elsewhere and the Government has to bring a civil foreclosure action against itself.
Governance fight! Polymarket has a disagreement with its chosen arbitrator, and this was bound to happen.
LEJILEX has filed a Motion for Summary Judgment in its case against the SEC, requesting a Declaration that its planned exchange operations do not violate federal securities laws. The same day as the SEC filed their Second Motion to Dismiss. I have no idea what is going on with this weird procedural posture, but I am very much looking forward to reading the briefing. You can also donate to support their cause like I did here.
It has been fun seeing how many people cite to crypto prediction markets for election related predictions. Polls can be deceiving and spun, but people tend to vote with their wallets accurately.
Conclusion
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Warpcast. 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 