US digital asset disputes updater: exploring the latest cases, regulatory developments, and legal trends

Key Takeaways:

• Major stablecoin acquisition bodes well for stablecoins generally
• Ripple appeal issues filed
• Section 12(a) liability for digital assets once again an issue
• Beba, DeFi Education Fund oppose SEC’s motion to dismiss airdrop lawsuit

Recent Legal Developments

Ripple Appeal Details Emerge

Over the last two weeks, Ripple and the SEC both filed Forms C in their Second Circuit appeal. Ripple explained in its addendum B section that it would focus on four questions of law, three of which are particularly noteworthy: whether (1) an “investment contract” must have the “essential ingredients” of a contract which imposes post-sale obligations on the seller and gives the buyer a right to demand and receive profits from the seller’s activities; (2) the district court erred in concluding that some of Ripple’s XRP transfers met the Howey test; and (3) Ripple raised a genuine dispute of fact that it lacked fair notice of a Section 5 violation as a result of the SEC’s uncertainty in digital asset regulation. The SEC explained that it would focus on whether the “district court erroneously granted partial summary judgment in favor of defendants with respect to Ripple’s offer and sales of XRP[.]” 

Insight: This cross-appeal which has emerged in Ripple again echoes last week’s updater in that crypto companies are more than willing to push back—and especially so following from Ripple’s July, 2023 victory over the SEC in the Southern District of New York. Ripple is raising significant issues, no doubt seeking a Second Circuit ruling which settles major principles of law which the digital asset industry has long been seeking: crypto’s non-status as a security. We will continue to watch this case as it unfolds, providing updates throughout. 

Stripe’s Major Stablecoin Moves

The last two weeks have similarly provided major stablecoin news: first, Stripe using Paxos’ stablecoin payments platform, and, second, Stripe outright acquiring stablecoin platform Bridge. The Stripe-Bridge deal was valued at $1.1 billion, the crypto industry’s largest M&A transaction deal ever. Paxos’ relationship with Stripe, as well as Stripe’s acquisition of Bridge, present a renewed interest in stablecoins.

Insight: Crypto M&A may be back on the table as crypto winter appears to be fading. The acquisition being the largest deal in crypto thus far demonstrates both the maturity of the digital asset field, as well as a major leap forward for stablecoins. When examined alongside Senator Bill Hagerty’s proposed stablecoin legislation, it becomes clear that there is a flurry of activity in this area. Given the ongoing debate about central bank digital currencies (“CBDCs”) versus stablecoins (and perhaps now also tokenized treasuries?), Stripe’s moves here certainly demonstrate the potential of stablecoins.

Civil Liability Revisited: Hardin v. TRON Foundation and Section 12(a)

Last week, Southern District of New York judge Vernon S. Broderick issued an opinion in Hardin v. TRON Foundation concluding that plaintiffs’ allegations were sufficient to show that TRON acted as a statutory seller under Securities Act Section 12(a). Judge Broderick acknowledged that plaintiffs had standing to bring their Section 12(a)(1) claim against the defendants, but that they did not have standing to bring Section 12(a)(2) claims because their purchases were on the secondary market. Personal jurisdiction was also found here. 

Insight: Digital assets are no stranger to Section 12(a) cases—Hardin v. TRON Foundation is but another opinion to emerge from the past few years on 12(a) seller/solicitor liability. The challenge, however, is that these new opinions have increasingly leaned on social media posts to find sufficient allegations of solicitation, following from the 11th Circuit’s holding in Wildes v. BitConnect International PLC. As such, Hardin here begs this question again: when is a social media post a solicitation? When is such a post not? Does retweeting count? Rules for the road here are necessary, particularly given that all of these cases draw from the Supreme Court’s Pinter v. Dahl, decided before the advent of social media.

Beba and DeFi Education Fund Oppose SEC’s Motion to Dismiss Airdrop Suit

Beba LLC, a Texas-based apparel company, and the DeFi Education Fund (“DEF”) together sued the SEC earlier this year over Beba’s plan to airdrop its own token. The suit proactively seeks to show that Beba’s airdropped token is not an investment contract, and therefore not a security, as well as the SEC’s violation of the Administrative Procedure Act in failing to follow rulemaking procedures with regard to cryptocurrency regulation. The SEC recently moved to dismiss these claims, arguing a lack of standing, ripeness issues, and sovereign immunity. Beba and DEF countered, countering that they have standing under the “credible threat” doctrine, and that their claim is ripe as a result. 

Insight: Beba and DEF’s lawsuit may be pre-enforcement, but there appears to be a real issue afoot in the case. Given that there is little current regulatory guidance from the SEC beyond its allegations in enforcement actions that digital assets are securities—but only in certain, specific contexts—and that it has been over seven years since the SEC’s investigative report on The DAO, the claims make sense. Beba and DEF are doing what much of the rest of the industry is doing: seeking clarity through the courts. This case is, at minimum, teeing up an interesting preliminary issue for the courts to clarify regarding the administrative state and its APA obligations.

The Mempool: Noteworthy Reads:

• a16z’s Crypto Report: a16z has issued its 2024 State of Crypto Report, reviewing a number of issues and producing some noteworthy findings. Chief among these findings is that crypto activity has hit all-time highs, and a confirmation that stablecoins are finding a market fit.
• On Stablecoins, “The Monetary Upgrade”: Peter Schroeder has published a great examination of stablecoins on his Substack, The API Economy. In the article, he examines the rise of stablecoins and their use, ultimately staking out his point that “[s]aid more explicitly, stablecoins like USDC on L2s [(layer 2s)] have become the most efficient payment rails in the world.” In light of Stripe’s stablecoin acquisition, this is a must-read.
• Examining Crypto.com’s SEC Lawsuit: A recent opinion piece on CoinDesk examined Crypto.com’s lawsuit against the SEC, providing great insight into the case. Author Aaron Brogan explains that Crypto.com’s “arguments on the merits are strong,” but also notes that the company seeking a declaratory judgment could pose problems of ripeness. 

If you have any questions about these developments or your own digital asset-related litigation matters, please contact NRF’s Digital Asset Disputes team to set up some time to discuss your questions.