US digital asset disputes updater: Exploring the latest cases, regulatory developments, and legal trends
October 23, 2024
Key takeaways:
- New SEC enforcement moves signal no changes in regulatory agenda
- Showing strength, crypto companies sue the SEC
- Staking taxability questions presented to court again
- A new NFT civil liability suit
- SEC states digital assets alone are not securities
Recent Legal Developments
The SEC Appeals Ripple, Charges Cumberland DRW
The past two weeks have been full of big SEC moves as its regulation by enforcement regime continues: filing a notice of appeal in its case against Ripple and charging Cumberland DRW with being an unregistered crypto market dealer. These actions come on the heels of SEC Commissioner Mark Uyeda stating that the SEC’s policies “over the last several years have been just really a disaster for the whole [crypto] industry[.]”
Insight: Clear from both its Ripple appeal and its enforcement action against Cumberland DRW is the SEC’s continued push for regulation by enforcement. An appeal in Ripple is little surprise: it seems that the SEC is adamant in its intent to regulate some digital assets. This same impetus likely animates the Cumberland DRW enforcement action—which perhaps also implicates the SEC’s explanation in its updated dealer rule from earlier this year that digital asset securities fall within the purview of the rule. Nevertheless, it’s clear that the crypto industry will not be shaken by the SEC’s actions.
Crypto Pushes Back
Mirroring the SEC’s flurry of recent activity came crypto’s response: Crypto.com filed suit against the SEC, alleging that the SEC overstepped its regulatory grounds, Ripple filed a cross-appeal against the SEC, and crypto exchange Bitnomial too sued the SEC alleging overreaching by the agency regarding XRP futures contracts.
Insight: From the last two weeks alone, it is readily apparent that digital asset exchanges and companies are ready to push back against the SEC. The industry as a whole remains resolute in crypto’s status as non-security, with these lawsuits joining the ranks of others against the SEC. Given the undercurrent of limitations on administrative actions following Loper Bright, it is entirely possible that these cases may see success in the same way that Grayscale’s lawsuit did.
Clarifying Whether Staking Proceeds are Taxable
Stakers on the Tezos network have filed a lawsuit against the IRS alleging that staking rewards should be treated as property not taxable until sold. Think tank CoinCenter is supporting this challenge, explaining in a post that “[t]he IRS unlawfully seeks to tax block reward tokens as ‘income’ the moment they come into existence. The IRS’s policy is illegal because block rewards are new property and therefore not themselves ‘income.’”Insight: Staking has been a hot-button topic for a long time, not just for the IRS. Tokens as staking rewards are somewhat similar to Bitcoin as “mining” rewards—the only difference is that validation is random as opposed to the first to solve a given equation. As CoinCenter noted in its post, “[m]ining gold isn’t a taxable event, and mining bitcoin is no different.” As such, this litigation may yet provide clarity as to the taxability of blockchain rewards.
NFT Civil Liability Lawsuits Grow
Following on from a series of recentNFT civil liability lawsuits, a group of investors have sued Eden Gallery Group and others alleging fraud, unjust enrichment, and violations of the New York’s consumer protection laws. This lawsuit again presents larger questions about NFT liability, particularly for statements made online regarding these projects.
Insight: Eden Gallery is but another case in the growing field of NFT civil litigation, but the case interestingly does not allege Securities Act violations. As such, this case is distinguishable from Harper v. O’Neal, and is perhaps more similar to the cases filed against Dolce & Gabbana or OpenSea. Nevertheless, given that the door is now open for NFT civil litigation under various state consumer protection laws and federal laws (e.g., securities laws like Section 12(a)(1)), we expect more cases like Eden Gallery to come in the near future.
SEC Issues a Retraction?
A new article by Variant Fund’s Jake Chervinsky and the DeFi Education Fund’s Amanda Tuminelli points out a recent retraction by the SEC with regard to digital assets as securities. As the authors explain, the SEC amended its complaint in its case against Binance, noting that “the SEC is not referring to the crypto asset itself as the security; rather . . . the term is a shorthand.” The SEC then stated that it “regrets any confusion it may have invited in this regard[,]” while also adding that “the crypto asset is the subject of the investment contract.”
Insight: The SEC’s apology is undoubtedly boon to crypto as a whole. Even though courts will still have to wade through an investment contract Howey analysis, the notion that tokens are not securities in and of themselves is at least settled. However, the SEC’s retraction also muddies the waters a little more: there is now less clarity as to when the agency will find a token to be a security, creating less predictability for the industry.
The Mempool: Noteworthy Articles and News
- On Geofencing and the Courts: Variant Fund has published an interesting article examining geofencing best practices for digital asset companies. The article examines Supreme Court precedent, as well as Williams v. Binance.
- Stablecoin Bill Proposed: Senator Bill Hagerty proposed draft legislation aimed to create a clear regulatory framework for stablecoins. The draft bill received support from members of the digital asset industry, applauding a return to the stablecoin discussion.
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.