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

Key Takeaways:

• SEC and Ripple agree to end enforcement suit
• NYAG and Galaxy Digital Settlement
• Tornado Cash Sanctions De-Listing

Recent Legal Developments

March somehow saw even more regulatory and disputes developments for crypto than February—who could have imagined that possible! The SEC has ended most—nearly all—of its major “regulation by enforcement” cases, and there are new state-level actions on the horizon. We’re also seeing the SEC moving away from activities like proof-of-work mining and meme coin tokenization as grounds for enforcement—pairing nicely with the agency’s most recent roundtable on token securities status. In all, there’s increasingly a trend within crypto disputes away from national regulation and toward state-level enforcement and private actions. That said, a market structure bill may be en route in Congress, which could provide national regulatory clarity.

SEC and Ripple End Enforcement Suit

Ripple Labs and the SEC have agreed to end the long-standing litigation between the two parties. The suit, which began in late 2020, saw Judge Analisa Torres of the Southern District of New York issue a significant ruling that some XRP sales were not securities. As part of the agreement, it appears that the SEC will return $75 million to Ripple Labs of the original district court judgment, which was $125 million. In exchange, Ripple has agreed to drop its cross-appeal against the SEC, while the SEC had already signaled its intentions to drop its appeal in the Second Circuit.

Insight: The end of this lawsuit is a significant victory for Ripple, particularly given that they are receiving money back from the original judgment. As the SEC takes a step back from its enforcement actions and instead seeks to provide regulatory clarity, it’s clear that the end of the Ripple lawsuit demonstrates a good-faith effort to work with crypto industry members to pursue that path. 

NYAG and Galaxy Digital Reach Agreement Over Luna Failures

The NY state Attorney General and Galaxy Digital Holdings, headed by Mike Novogratz, have settled following a market manipulation investigation concerning Terraform Labs’ failed Luna token. Per the NY AG’s Assurance of Discontinuance, “Novogratz’s statement failed to disclose that Galaxy had sold its tokens all along, on most occasions right after receiving them, and that on the date of his statement [(March 30, 2022)], Galaxy held minimal Luna tokens.” Per the settlement, Galaxy Digital agreed to pay the State of New York $200,000,000. 

Insight: In a turn away from federal enforcement—just as the Ripple suit, among other SEC suits, ends—New York appears with its own action. Although this action against Galaxy Digital is ultimately a settlement, it still demonstrates a looming concern protocols, exchanges, and industry members should be aware of: state and private actions. Just as this news emerged, the Western District of Pennsylvania held that SmartFi would have to face an ongoing suit from token purchasers. While these stories aren’t explicitly related, they nevertheless demonstrate that even as federal enforcement potentially winds down, there are still significant risks in an industry without much guiding law. 

Treasury Removes Tornado Cash from Sanctions List

At the end of March, the Treasury Department announced that it would be de-listing specific Tornado Cash smart contracts from its sanctions registry, ultimately stemming from the Fifth Circuit’s decision in Van Loon v. Department of Treasury. The Fifth Circuit, examining the cryptocurrency mixer protocol at issue, determined that Tornado Cash’s smart contracts could not be “property” under the International Emergency Economic Powers Act. In February, the plaintiffs in Van Loon filed their motion for entry of judgment in the Western District of Texas, citing the Fifth Circuit’s “instructions to grant [Plaintiffs’] motion for partial summary judgment.” Following this motion, Treasury de-listed Tornado Cash from its sanctions registry. However, there now appears to be a squabble over mootness in the Western District of Texas—one which is still unfolding.

Insight: Undoubtedly, the Fifth Circuit’s decision ultimately resulting in de-listing smart contracts from Treasury’s sanctions registry is another significant win. However, in their most recent filing, plaintiffs argue that “Defendants have been on a multi-month mission to evade an adverse judgment in this case.” Treasury, prior to, had asserted that “vacating the designation of Tornado Cash in its entirety could have significantly ‘disruptive consequences’ for national security and law enforcement.” For that reason, “the decision to delist Tornado Cash should be left to the agency on remand.” The issue, then, has become whether Treasury will evade entry of judgment here—which is somewhat unclear. 

The Mempool: Noteworthy Reads and Listens:

• On Token Definitions: a16z crypto continues to provide easily-digestible token taxonomies for legal and non-legal readers alike. The framework walks through a number of token subsets, and even includes a helpful flow chart for readers. 
• Robert Schwinger’s Crypto Whirlwind: NRF’s Robert Schwinger has just released an article recapping all of the major developments in crypto law and policy from the last few months. The article covers President Trump’s executive orders, congressional movement on stablecoins, and major regulatory developments from the SEC. It serves as a great primer for all of the major developments of recent. 
• The SEC on Proof-of-Work: The SEC’s Division of Corporate Finance has again released a statement, this time focusing on proof-of-work mining and mining pools. Ultimately, the Division of Corporate Finance found that mining, even mining pools, are not securities transactions. Rather, the Division explained that these were ministerial activities. While not a huge surprise, it’s great to see the SEC critically evaluating all aspects of cryptocurrency. 

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 qu