crypto courts – victory
The court system was in no mood for a summer vacation this week.
Following Tuesday’s decision in favor of Grayscale and its efforts to convert its Bitcoin Trust investment vehicle into a Bitcoin ETF, a fraud class-action lawsuit brought by 6 individual investors against the Uniswap protocol, was dismissed according to a court filing late Tuesday.
A short summary of the decision: a dismissal is a victory for Uniswap and digital assets, in general, as the courts slowly layout guardrails where it can and where Congress has not.
In the Uniswap decision, the same judge who is presiding over the Securities and Exchange Commission (SEC) complaint against Coinbase, Judge Katherine Polk Failla, begins by embracing decentralization and not the plaintiff’s claims.
Judge Failla says:
“Plaintiffs claim that they lost money after investing in what turned out to be various ‘scam tokens’ that were issued and traded on the Protocol (the ‘Scam Tokens’ or ‘Tokens’). Due to the Protocol’s decentralized nature, the identities of the Scam Token issuers are basically unknown and unknowable, leaving Plaintiffs with an identifiable injury but no identifiable defendant.”
Among the defendant’s absolved of the lawsuit’s claims are venture investors Paradigm and Andreessen Horowitz (a16z) as well as Uniswap Labs and its foundation.
crypto courts – Congress
The need for Congress to step in is cited by Judge Failla on multiple occasions in her decision. For example:
… on page 6:
“… each of them, theoretically could register their tokens with the Securities and Exchange Commission (the “SEC”), but such registrations are few, as Congress and the courts have yet to make a definitive determination as to whether such tokens constitute securities, commodities, or something else.”
… on page 28:
“… 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.
… and, on page 47:
“Whether this anonymity is troublesome enough to merit regulation is not for the Court to decide, but for Congress.”
crypto court victory – reaction
Reaction among the legal community on crypto X was swift this week in reaction to the Uniswap dismissal.
Stephen Palley, counsel with law firm Brown Rudnick, began:
“what we are seeing in the clash between law and crypto is a paradigmatic shift in risk allocation, still fundamentally unaddressed by circa 19th century regulation in which intermediaries were necessary and needed oversight..”
“but the concept of the intermediary — exchange, broker, dealer, clearing agency, even *agent* — changes when software can make direct connections and evaluate financial and business risk for you. the risk doesn’t disappear: it moves to technology rails and platforms.”
“risk can’t be destroyed, it can only be moved. I call this the first law of lawmodynamics. the hard question that we have yet to fully grapple with is how we regulate and control tech risk as old school intermediaries fade into technological obsolescence.”
In a Tweet thread of her own, Haun Ventures CEO Kathryn Haun, noting the decision’s intent to hopefully create a call-to-action for Congress, said: “Today’s decision out of SDNY highlights the extent to which some in the federal judiciary appreciate the uncharted territory on the applicability of securities laws to an asset class as broad as crypto….” Read more.
Paradigm counsel Rodrigo Seira summarizes his reaction to the Uniswap dismissal – @RSSH273 on X
Congressional Republicans kept up the steady drumbeat of “no Central Bank Digital Currencies (CBDCs)” this week.
House Financial Services Digital Assets, Financial Technology and Inclusion Chair Rep. French Hill (R, AR) said on Wednesday on X, “Americans have a right to financial privacy. We do not need a CBDC that can track your purchases like China does with their Digital Yuan. The authority rests with Congress, not unelected bureaucrats, to create and implement a CBDC. And that’s non-partisan.”
This doesn’t mean some type of wholesale, bank-to-bank, CBDC isn’t something which might arise. The trouble is: would a wholesale CBDC be perceived by the anti-CBDC public as an easy on-ramp to a retail CBDC? And how many voters of both parties are in that anti-CBDC crowd?
Republicans are riding this issue and Democrats seem on the sidelines on CBDCs. It will be interesting to see if this changes as the next general election approaches and digital assets evolves courtesy of the courts.
Fox Business Eleanor Terrett reports that SEC Chair Gary Gensler is coming to Congress in September. She said on X: “SEC Chairman Gary Gensler has agreed to testify before [Senate Banking Committee] on Tuesday September 12th and before [the House Financial Services (HFS)] on Wednesday September 27th.”
These hearings will go with two other HFS hearings reported last week by Chamber of Digital Commerce policy executive Cody Carbone: HFS has a Digital Asset Subcommittee hearing on CBDCs on September 14; and, a hearing with FinCEN on national security is scheduled on September 20.
regulation by enforcement
In a little-noticed dissenting statement unrelated to digital assets released on Tuesday, Commodity Futures Trading Commission (CFTC) Commissioner Caroline Pham took a swing at the use of regulation by enforcement rather than rule-making at her own agency. The subject of her dissent was an enforcement action’s settlement with investment bank Goldman Sachs:
“Regulation by enforcement has a darker counterpart. This order and settlement reflects the Commission’s disturbing trend of ‘examination by enforcement’—where the Division of Enforcement imposes a disproportionately high civil monetary penalty for one-off, non-material operational or technical issues with no misconduct, harm to clients, or financial losses, and that every other major regulatory authority addresses through an examination program conducted by supervisory staff (i.e., examiners).”
This rings with digital asset industry criticism of the SEC whose Chair, Gary Gensler, has invited to “come in” and share with the Commission what companies are up to in the space. And then, the companies run afoul of the Commission (e.g. Coinbase).
still more tips
Opinion: The SEC Strikes Out Again on Crypto With Grayscale – The Wall Street Journal
SEC chair Gary Gensler’s court losses are piling up in crypto – Axios
Elon Musk’s X Has Licenses in Multiple U.S. States to Process Payments, Including Crypto – CoinDesk
‘Altcoins’ central to Hong Kong crypto firm HashKey’s first liquid fund – Reuters