US digital asset disputes updater: exploring the latest cases, regulatory developments, and legal trends
Key Takeaways:
- CFPB proposes Regulation E rule including cryptocurrencies
- IRS finalizes DeFi broker rule, industry challenges
- CFTC settles its case against Gemini
Recent Legal Developments
Over the holidays, there were a number of developments in crypto litigation and regulation—almost too much to cover! Ahead of the incoming change of administration, there has been a flurry of activity: a big Wells Notice, crypto-related rules proposed and finalized, lawsuits, and settlements. The regulatory headwinds for crypto are certainly shifting, but is it too soon to say that a sea change has occurred?
The CFPB’s Proposed EFTA/Regulation E Rule Covering Crypto
Last Friday, the CFPB proposed a significant interpretive rule reading crypto into Regulation E’s (and therefore the Electronic Fund Transfer Act’s) ambits. The interpretive rule broadened the scope of Regulation E’s definitions of “financial institutions,” “funds,” “accounts,” and the securities/commodities exception to Regulation E. Drawing upon its interpretation of the term “funds” under the EFTA, the CFPB provides that the term “would include stablecoins, as well as any other similarly-situated fungible assets that either operate as a medium of exchange or as a means of paying for goods or services.” This definition draws upon Judge Denise Cote’s Rider v. Uphold HQ Inc. in defining cryptocurrencies as “funds.”
Insight: This rule is undoubtedly an attempt to reconcile the dueling Southern District of New York rulings (discussed on page 7) on the EFTA’s application to cryptocurrency. Moreover, it seems that the rule has been under the CFPB’s consideration for some time. With that said, this rule has potentially far-reaching consequences for cryptocurrency protocols. The primary risk is, of course, that the EFTA applies to cryptocurrencies. However, a secondary and under-discussed risk is that the CFPB may be inadvertently roping in DeFi wallets as well. If “accounts” include non-custodial wallets and “financial institutions” include non-custodial wallet providers, then DeFi faces additional risk as well.
Our practice group has significant experience with EFTA/Regulation E litigation—please reach out to us if you have any questions about the potential ramifications of this rule or litigation concerns.
IRS Finalized Tax Rule Roping in DeFi, Industry Challenges
Just ahead of the new year, the IRS finalized its rule adding reporting requirements for DeFi “brokers.” The rule “contains final regulations regarding information reporting by brokers that regularly provider services effectuating certain digital asset sales and exchanges.” Moreover, the rule “require[s] these brokers to file information returns and furnish payee statements reporting gross proceeds on dispositions of digital assets effected for customers in certain sale or exchange transactions.” Defending its inclusion of DeFi protocols, the IRS stated that “the term broker is not limited to conventional securities brokers. Rather, the statutory language defines the term broker to include several other types of market participants.” To that end, the term “broker” was amended to include anyone who provides a “trading front-end service.”
Immediately after the rule was finalized, trade associations sued to prevent its enforcement. In the complaint, the trade associations contend that “the Final Rule requires the creation and insertion of intermediaries that do not exist—indeed, whose absence is the entire crux of DeFi’s innovation—and whose existence would destroy Defi’s direct user-to-user framework, subject users to all the risks inherent with intermediated transactions, and deprive people of their choice to transact without relying on expensive, unsecure third-party intermediaries.
Insight: This rule’s finalization is somewhat surprising—particularly when viewed in tandem with the CFPB’s newly-proposed rule. Accordingly, the rule also represents a continued push by agencies and regulators to categorize DeFi in a way that does not appear congruent with the technology. As Blockchain Association’s Marisa Tashman Coppel noted: “Even though these [DeFi] providers do not effectuate transactions – the user is the one who does – the IRS wrongly defines them as brokers.” Perhaps, then, this rule will ultimately face the same fate as the SEC’s broker rule—but only time will tell.
CFTC Settles Its Case Against Gemini
The CFTC has settled its case against crypto exchange Gemini. Originally, the CFTC has sued Gemini for allegedly making statements that “Gemini officers, employees, and agents knew or reasonably should have known . . . [were] false or misleading with respect to, among other things, facts relevant to understanding whether the proposed Bitcoin Futures Contract would be readily susceptible to manipulation.” The consent order entered on January 6, 2025, required that Gemini would pay the CFTC $5 million in civil money penalties. To that end, Gemini did not admit or deny the CFTC’s findings.
Insight: As Gage has stated in our Regulatory Intelligence commentary section, the CFTC’s settlement may represent a more dovish stance toward crypto with the incoming change of administration. It is unclear what exactly prompted this settlement, but it is nevertheless positive news that agencies are willing to work with exchanges.
The Mempool: Noteworthy Reads and Listens:
- Decentralization and Digital Asset Law: This week, particularly in light of the above rulemaking, we’re revisiting 16z’s Miles Jennings’ article in CoinDesk on why decentralization matters. As Jennings emphasizes, “decentralization is the distribution of control and decision-making, eliminating the need for a central authority[.]” To that end, Jennings calls for a regulatory framework not dissimilar from the SEC’s 2019 Framework for Digital Assets that “isn’t predicated on the existence of centralized intermediaries.”
- Former CFTC Chair Chris Giancarlo on the Future of Crypto: Unchained recently posted a discussion from former CFTC Chair Chris Giancarlo discussing crypto’s future. Giancarlo points to the SEC’s bad spate of policies, but points to hope for the future regulatory environment of the incoming administration. Interesting discussion—it’s worth a listen!
If you have any questions about these developments or your own digital asset-related litigation matters, please contact NRF Digital Asset Disputes Partner Eric Martin or Associate Gage Raju-Salicki to set up some time to discuss your questions.