- Paul Atkins, Trump’s nominee to head the SEC, will take a different approach than Gary Gensler.
- This does not mean that he will be able to wipe the legal slate clean.
- The ongoing court cases will have profound implications for developer and DAO liability.
In December, the crypto industry welcomed the appointment of attorney Paul Atkins to head the United States Securities and Exchange Commission.
Atkins previously led an effort to create best practices for issuing cryptocurrency, and he replaces a man, Gary Gensler, who was vilified by investors and industry executives for an approach they dubbed “regulation by application”.
According to an analysis by Paradigm, a crypto venture capital firm, more than half of the crypto-related enforcement actions taken by the SEC since 2015 occurred during Gensler’s three-year tenure.
A major industry trade group said its members have spent at least $429 million fighting SEC lawsuits.
A different approach
Crypto lawyers said Atkins’ tenure would be very, very different. But that doesn’t mean Atkins will instantly wipe the slate clean.
“It’s unusual for a new president to dismiss all pending cases,” Jason Gottlieb, president of Morrison Cohen’s digital assets practice, said in December at an industry conference.
For all the angst over SEC lawsuits, some of the biggest court cases facing crypto developers and businesses come from other agencies like the U.S. Department of Justice, as well as civil actions brought by abandoned investors and business partners.
Here are a few to watch out for in the new year.
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Samuels v. Lido DAO
Last year, a US judge ruled that Ooki DAO – an apparently managerless cooperative where crypto tokens grant membership and voting rights – was a traditional company that should have registered with the commodities regulator of the country.
But the decision had little impact on crypto’s other “decentralized autonomous organizations” or DAOs.
Indeed, Ooki DAO never defended itself in court and the resulting technical knockout did not set a legal precedent that others had to follow.
Another case might.
In 2024, a Californian named Andrew Samuels sued Lido DAO and some of the industry’s most prominent venture capital firms. He alleged that Lido sold unregistered securities in the form of its governance token, LDO, and that venture capital firms should be held responsible.
That’s because the backers — the list includes Andreessen Horowitz, Dragonfly and Paradigm — held so many LDOs that they effectively ran the project, Samuels claimed.
The judge in the case found his argument plausible and the case is moving forward.
Lido is the largest liquid staking protocol. It allows investors to lock up Ether for a 3% annual return while receiving stETH, a tradable version of their locked Ether that they can use in the Ethereum ecosystem.
Like many decentralized finance protocols, Lido is managed by a DAO, a cooperative that uses blockchain-based voting. DAOs often operate without a legal entity and are governed by individuals who hold governance tokens, which grant voting rights.
DAOs are intended to help crypto projects realize the cypherpunk ideal of distributed, uncensorable software, with no leaders or official headquarters – just members scattered around the world.
But not all DAOs are truly decentralized, which exposes some to legal action.
And with the legal status of crypto tokens in dispute in the United States, regulators have argued that some DAOs are actually unregistered businesses.
Previous cases, like the one involving Ooki DAO, have held DAO members responsible for cooperative missteps.
“These cases have mostly been decided on pretrial pleadings rather than on the merits,” said crypto attorney Moishe Peltz. DL News.
Paradigm argues that its relationship with Lido DAO does not meet any of the criteria for a partnership: there was no agreement to run a business together or to share Lido’s profits and losses.
But the judge is not convinced.
“It is not yet clear who might be a member of the partnership,” Justice Vince Girdhari Chhabria wrote in an opinion issued in November.
All he knows is that there is indeed a business there and someone is responsible for it.
The observation is important. “This affects all DAOs, as well as all DAO token holders, meaning everyone who participates in crypto,” Peltz said. “So it’s really far-reaching.”
The next hearing in the case is scheduled for January 10.
Coinbase vs. SEC
Crypto’s legal counter-offensive has already borne fruit. After all, it was Grayscale’s decision to fight the SEC that paved the way for crypto exchange-traded funds.
This, in turn, led to an influx of institutional money and contributed to the incredible rally that saw Bitcoin repeatedly break its 2024 all-time high.
Crypto’s legal push will continue into 2025, with a small clothing company in Waco, Texas, and two NFT artists suing the SEC over its sue first, ask questions later approach to regulating the crypto industry. cryptography.
Coinbase’s SEC lawsuit may be the biggest.
In 2022, Coinbase, one of the world’s largest crypto exchanges, petitioned the SEC, asking it to create “a new regulatory framework” that would address the key question facing digital assets: whether securities or raw materials?
At the heart of this request was an attempt to resolve a Catch-22, Coinbase said.
“The SEC has asked digital asset companies to ‘register’ under threat of legal action, but registration is neither required nor possible under existing rules, which were designed decades ago for traditional financial assets and businesses,” Coinbase said in a March filing. .
“It’s an extraordinary remedy that happens very rarely.”
— Miller Whitehouse-Levine, DeFi Education Fund
The SEC rejected the request in December 2023, and Coinbase filed a lawsuit.
Separately, the SEC sued Coinbase in June 2023 for operating an illegal exchange and allowing investors to trade assets that had not been registered as securities. Coinbase denies the allegations.
The SEC called Coinbase’s request “extraordinary.” Miller Whitehouse-Levine, CEO of cryptocurrency advocacy group DeFi Education Fund, agrees.
In effect, the court would order the SEC to create tailor-made rules for crypto if Coinbase wins.
“It’s an extraordinary remedy that happens very rarely,” Whitehouse-Levine said. DL News.
He came away from the oral arguments with the impression that the court would indeed seek this extraordinary remedy. But this is not a guarantee, and the arrival of a new administration favorable to cryptocurrencies could come into play.
“Who knows?” he said. “They might just want to sit on this and see what the new commission does.”
Both sides laid out their arguments in briefs in May, and a decision could come any day, according to Whitehouse-Levine.
“Usually they try to make decisions within six months,” he said. “It’s time to make a decision.”
United States vs. Storm
The lawsuits against Roman Storm, co-founder of Tornado Cash, have galvanized crypto cypherpunks, who say the crackdown on crypto mixer poses an existential threat to the development of open source and privacy-preserving software.
Tornado Cash is a self-executing, non-scalable software that helps users conceal the movement of their crypto on Ethereum, a public ledger where every transaction is otherwise visible to anyone with some know-how and an internet connection.
In 2022, the United States sanctioned Tornado Cash, citing its use by hackers affiliated with North Korea. An appeals court recently ruled that the Treasury Department did not have the authority to sanction the protocol.
In August 2023, Storm was indicted on three counts of conspiracy: money laundering; operating a money transfer business without a license; and violate US sanctions.
He faces decades in prison if convicted. Alexey Pertsev, another Tornado Cash developer, was sentenced to five years in prison by a Dutch court in 2024. He is appealing his conviction.
Critics of the Storm lawsuit have compared it to suing a gun maker after a shooting, or an automaker after an accident: The shooter or distracted driver was at fault, critics say, not the ‘tool.
And the implications are serious.
“The government would be free to target software developers aligned with politically disadvantaged causes and industries, who would have little defense or recourse,” the DeFi Education Fund wrote in a legal brief it filed with the court for support Storm.
Storm’s trial, originally scheduled for this month in Manhattan, was postponed until April.
Storm is seeking donations to fund its multimillion-dollar defense, and some industry heavyweights, like Ethereum co-founder Vitalik Buterin, have already made contributions.
Aleks Gilbert is DL News‘ DeFi correspondent based in New York. You can contact him at aleks@dlnews.com.
