Over the past few weeks, decisions by regulators and courts overseeing cryptocurrency litigation have dominated Web3 legal news. This can be expected to continue even as Congress returns from its August recess, as these agencies look to close out their fiscal years on September 30 and set budgets and programs for next year. However, with the SEC and CFTC already embroiled in major lawsuits against well-funded players in the digital asset space, these agencies must be feeling the strain on their resources at this point.
Meanwhile, settlements for actions dating back to conduct prior to 2023 continue to be finalized, as industry participants and the agencies overseeing those participants seek to end past alleged wrongdoing and continue ongoing activities.
These developments and some other brief notes are discussed below.
Secondary NFT Marketplace OpenSea Receives SEC Notice Wells: August 28, 2024
Background: NFT marketplace OpenSea has reportedly received a Wells notice from SEC staff indicating that SEC staff intends to recommend that a securities law lawsuit be filed against the platform’s operator. At its peak in early 2022, its platform generated over $6 billion in monthly NFT sales, but those numbers have declined sharply with the emergence of competitors like Magic Eden and Blur and the overall decline in NFT sales. It’s unclear what Wells’ notice will contain or what NFT sales will be at issue in any action brought by the agency. OpenSea has pledged $5 million in legal defense fees for any creators on the platform similarly targeted by the agency.
Analysis:It’s easy to imagine that the transactions that would be unregistered securities transactions will be sales involving Impact Theory or Stoner Cats, which the SEC has previously claimed were securities and settled with their issuers (despite Commissioners Peirce and Uyeda’s dissents). The charges could also come from trading in Uniswap liquidity pool tokens or similar ERC-1155 tokens, which may resemble financial products. With Wells’ pending notices against Robinhood, UniSwap, and now OpenSea, we can expect a wave of new SEC lawsuits in the months leading up to and following the upcoming presidential election, with Chairman Gensler currently set to leave his post at the SEC regardless of the election’s outcome.
Uniswap Reaches Agreement with CFTC: September 4, 2024
Background: The CFTC issued an order to file and settle charges against Uniswap for an agreed penalty of $175,000. Commissioners Mersinger and Pham issued separate dissenting statements. The order does not accuse Uniswap of creating the futures products at issue, but instead states that “by operating a front-end user interface (the Interface) that facilitated and provided a purchaser with the ability to obtain funding or leverage from other users or third parties,” Uniswap meets the definition of an “offerer” of futures products under applicable law.
Analysis:Anyone can still buy and sell the futures products that the CFTC is having trouble with by interacting directly with the app or using a block explorer such as etherscan. The CFTC’s problem is simply with the interface that Uniswap provides, that’s to say, facilitating interaction with those assets. This raises the question of exactly how user-friendly a website must be to make it an “offeror,” according to the CFTC. Commissioner Mersinger delivered a particularly strong dissent, stating: “This case has all the hallmarks of what we know as regulation by enforcement: a regulation with a de minimis “Sanctions that have little bearing on the alleged conduct, general statements about the entire industry that are irrelevant to the case at hand, and legal theories that have not been tested in court.”
Coinbase Partially Wins SEC Dispute Over Discovery: September 5, 2024
Background: Coinbase has partially won its motion to compel certain discovery in the SEC’s lawsuit against the exchange. In an oral order issued by Judge Failla, the Court stated: “I agree with Coinbase that it should be able to defend itself against these very important charges by obtaining at least some of the evidence it seeks in discovery. And as I have suggested in the past, the SEC is to some extent the architect of Coinbase’s current discovery requests. By litigating the complaint as it has, it is the SEC that has set the parameters of the universe of permissible discovery.”
Analysis:This is just the first discovery skirmish in this high-profile litigation, and further litigation over documents that the SEC marks as protected from discovery under the deliberative process privilege or otherwise can be expected. The SEC also scored a partial victory in resisting Coinbase’s efforts to obtain discovery of certain aspects of Chairman Gensler’s communications. However, the SEC will have to undertake substantial efforts to collect, produce, or mark documents, which could limit the agency’s resources for other ongoing and anticipated digital asset lawsuits, such as those noted above. This discovery battle is apparently part of a two-pronged strategy by Coinbase, which has also sought documents through a FOIA action in a separate court.
Kalshi Predictive Markets Wins Summary Judgment Lawsuit Against CFTC: September 9, 2024
Background: Kalshi Predictive Markets won its lawsuit against the CFTC after the agency sought to block the company from offering prediction markets on U.S. election results. Due to the proximity of the upcoming election, the CFTC filed an emergency motion to stay the decision pending an expedited appeal. Kalshi first filed the lawsuit in November 2023, after the CFTC issued a final order barring Kalshi from offering prediction markets on certain federal elections due to Kalshi’s status as a federally regulated exchange.
Analysis:CFTC Chairman Behnam has made regulating prediction markets a priority within the CFTC, with the agency proposing to regulate prediction markets earlier this year. Coinbase has commented on the CFTC’s proposal, which would see the regulator enter an area traditionally left to states. Other industry players have also joined in opposing the CFTC’s proposed expansion of authority. While the memorandum containing the court’s reasons for the decision has not yet been released, it could be a major blow to the agency’s efforts to regulate prediction markets, which often use cryptocurrency and smart contracts to manage and settle payouts for event outcomes.
In short:
SEC Reserves Right to Challenge Distributions in FTX Bankruptcy:The SEC filed a document in the FTX bankruptcy reserving for the agency the “right to challenge transactions involving crypto assets,” and specifically payments made in stablecoins.
MakerDAO Moves Toward Freezable Stablecoin: MakerDAO is moving DAI to “USDS,” which will be the scalable stablecoin format with the transfer and freezing features that USDC and USDT have. While DAI will still exist, since all backing and liquidity will likely be transferred, one of the last major censorship-resistant stablecoins likely won’t be around for long.
SEC Commissioner Requests Registration Form for Cryptocurrencies:SEC Commissioner Uyeda said in a recent fireside chat that the SEC needs a customized S-1 registration form for digital asset securities. “I hope that at some point, whether it’s Gensler or one of his successors, will think about: We have some regulatory uncertainty now around digital assets, maybe we should move forward with legislation or regulation,” Uyeda said.
SEC Fines Advisory Firm for Violating Cryptocurrency Custody Policy:The SEC fined Galois Capital Management LLC $225,000 for “failing to comply with requirements relating to the protection of customer assets, including crypto assets offered and sold as securities.” The order/press release does not indicate which of the tokens were “crypto assets that were offered and sold as securities” and therefore improperly stored on FTX (or Fireblocks), so it is difficult for others to know how to comply going forward based on this order alone.
Robinhood Reaches Settlement With California Regulators Over Previous Restrictions on Cryptocurrency Transfers:Robinhood has reached a settlement with the California Department of Justice regarding the old cryptocurrency trading restrictions (2018-2022). The advantage of self-custody options is that you are not limited by the platform on which you buy digital assets as to where those assets can be used/sold. Robinhood has allowed users to transfer digital assets to self-custody wallets since 2022.
Conclusion:
The legal and regulatory landscape for cryptocurrencies and the broader Web3 space remains highly dynamic, as demonstrated by recent actions by the SEC, CFTC and other authorities. As the fiscal year approaches, agencies like the SEC and CFTC continue to pursue enforcement actions with limited resources, while major players in the digital asset industry continue to face ongoing litigation and regulatory uncertainty.
As we approach 2025, the outcomes of these disputes, particularly those involving leading platforms like OpenSea and Uniswap, will have lasting implications for future regulation of the industry. Industry participants should continue to monitor these developments closely, as they could reshape how digital assets are treated under U.S. law in the years to come.
