Off the Blockchain+, November 4-11, 2024

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 tl;dr overviews and insights into the biggest stories from the past two weeks. I post the weekly updates on my personal blog every Tuesday, where I also provide links to more obscure legal developments and otherwise discuss industry trends and stories. 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.

Bitcoin hit all-time highs, pretty much every major token is in the green, and it appears the next Congress will have more Democrats and Republicans who have openly supported the digital asset industry than any Congress before it. But it’s not all sunshine and rainbows for crypto, as there can be expected flurry of activity from the SEC during this lame duck period, and the existing cases brought by the agency remain in hotly contested litigation.

Here’s everything that happened last week in Web3 legal:

Binance Entities Move to Dismiss SEC’s Amended Complaint

Back in September, the SEC filed an Amended Complaint against Binance, and the redline revealed the primary changes were adding facts to try to avoid there being a ruling as a matter of law on certain third party tokens sales (also, a funny footnote about how the SEC didn’t mean “crypto asset security” when the SEC said, “crypto asset security.”). Binance U.S. has now moved to dismiss the over 800 paragraph Amended Complaint (Binance’s foreign entity also moved to dismiss, available here). Binance U.S.’s main argument is that the SEC cannot articulate any distinguishing factors as why the tokens the agency named were sold in securities transactions, while Ether and Bitcoin were not, stating “the legal requirements of Howey do not shift based on the SEC’s enforcement whims.” Binance U.S. also focusing on lack of pooling and classifying the SEC’s allegations as an “investment of money and a common enterprise” instead of the required “investment of money in a common enterprise.”

Tl;dr: The Binance U.S. Motion to Dismiss included 19 exhibits, which is rare because a Motion to Dismiss generally cannot rely on outside facts. However, the SEC’s heightened fact pleading also means the agency incorporated documents by reference into the Amended Complaint which the Court can consider in reaching its determination. Here, Binance U.S. primarily points to its listing pages for Bitcoin and Ether, stating if those listing pages do not convert BTC/ETH into securities, then listing pages from other assets with identical information cannot support security law violation allegations. Binance U.S. also (probably smartly) stayed away from the “investment contracts require contracts” arguments which it previously lost on, instead leaning into the lack of pooling in a common enterprise.  I am still upset about Judge Failla falling for the SEC’s “ecosystem” and “inherent value” arguments in Coinbase, so I am not impartial when I give glowing reviews to the latest Binance filings. Especially when it dunks on the SEC in Fn. 32/33 calling out the SEC for citing to fake/no-name accounts as what a reasonable buyer would see before purchasing.

Oral Arguments on SEC v. Heart Motion to Dismiss Occur

This technically happened last week, but on Halloween there were oral arguments heard in the SEC v. Heart case on the Defendants’ Motion to Dismiss. The arguments mostly centered around the extra-territorial approach the SEC has applied to the case, but also included discussions of the allegations of fraud and the propriety (or lack thereof) of naming software as named entities in a lawsuit.

Tl;dr: The Blockchain+ team has been following this case and a few of us were quoted in a Bloomberg law article about it earlier this spring, so it feels appropriate to continue to follow as the case raises important issues applicable for many companies seeking to avoid U.S. jurisdictional laws regarding digital assets. It appears that the SEC has abandoned the argument that software is capable of being named as a defendant in a lawsuit (which was something that shouldn’t have been brought in the first place). It also appears the SEC played fast and loose with dates of when actions allegedly occurred giving rise to jurisdictional claims (fall of 2022) and when the alleged securities offering occurred (spring of 2022).

Other Stories

SEC Commissioner Rebukes Approach to Crypto (Again): Commissioner Peirce recently gave a speech titled Hobs and Hobbes: Wharton FinTech Lecture where she reiterated her negative view on how the Agency has approached digital asset regulation. “Rather than working with crypto market intermediaries and token issuers to facilitate registration, we have brought enforcement actions for failure to do the impossible: register with a Commission that has failed willfully to articulate a viable path to registration.” That’s a quote which is guaranteed to be used in cases against the agency roughly 1 bazillion times.

SEC Moves to Dismiss Some Kraken Defenses: The SEC has moved for judgment on the pleadings on Kraken’s Major Question, Lack of Fair Notice, and Due Process affirmative defenses, claiming these were decided on Motion to Dismiss as being inapplicable. I don’t think the Court dismisses any of these, which would cut off discovery into these issues by Kraken and be an appealable issue the Court has no reason to create, but it was at least worth mentioning. 

Fairshake PAC Performance: According to Stand with Crypto, a bipartisan group of 257 candidates rated “pro crypto” won their House elections along with 16 in the Senate (as opposed to “anti-crypto” rated candidates, which only won 115 and 12 seats in the House and Senate, respectively). The biggest wins being Yadira Caraveo (D-CO), Sarah McBride (D-DE) and Bernie Moreno (R-OH) winning over their anti-crypto opponents in part on the backs of crypto-PAC spending in their favor. Also, shout out Richie Torres (D-NY) who was expected to win, but has been a staunch advocate for sensible digital asset laws and will continue to be a force in the House. Combined with some massive wins in the primaries, and the industry’s lobbying efforts are something that politicians will certainly factor into ongoing policy decisions.

Influencer Agreements in Crypto: I enjoyed this quick write-up on legal issues surrounding agreements with Key Opinion Leaders (aka, “KOLs” or “Influencers”) in the digital asset space. Always love when a lawyer who is just generally in crypto provides subject matter expertise from outside of crypto.

Tokenization Update for Asset Managers: Shoutout @kkirkbos for bringing to my attention the latest Project Guardian Asset and Wealth Management Funds Framework which is a pretty great breakdown of tokenization in the asset manager sector.

Degen Token Has Public Dispute With Provider: The developers behind the Degen token got into a public fight with its L3 rollup development provider, which just shows the importance of having adults (lawyers) in the room for when these agreements are made so these disputes can be avoided. The public fight was a bad look by all involved.

FTX Sues Various Platform Users: FTX filed ~25 lawsuits recently seeking to claw back funds from various individuals that received funds from FTX, including Anthony Scaramucci, the alleged Compound governance attacker, Deltec Bank, Binance founder CZ, and others. The fact that the alleged exploiter filed a claim in the bankruptcy with his real name and information is wild. That said, this is seemingly an aggressive approach to claw backs and such which may or may not have merit.

OpenSea Teases New Platform: Opensea, once the primary NFT trading platform, is teasing  “version 2.0” coming. Long overdue, and the platform maybe past saving, but I wish them the best. Especially if it means retroactive rewards for all the money I spent on Jpgs on their platform.

BitcoinFog Founder Sentenced: The most popular crypto mixer for Silk Road users, BitcoinFog, had its alleged founder sentenced to 12 years in prison. There were some shenanigans with the tracing experts which make this ripe for appeal, but until then Mr. Sterlingov will be fighting that appeal from a federal prison.

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.