US digital asset disputes updater: Exploring the latest cases, regulatory developments, and legal trends
Key Takeaways:
- Fifth Circuit holds that immutable smart contracts are not “property” for sanctions purposes
- Former SEC Commissioner Paul Atkins nominated as next SEC Chair
- Ex-Celsius CEO Mashinsky admits to fraud and pleads guilty in criminal trial
Recent Legal Developments
Fifth Circuit Decides Van Loon v. Department of the Treasury, Holding Immutable Smart Contracts Not “Property” Under Sanctions Regime
The Fifth Circuit has held that Tornado Cash, a cryptocurrency mixer operated through "immutable smart contracts," is not "ownable," nor is it a set of "contracts" or "services" under the OFAC's definition of "property." In the ruling, the Fifth Circuit provided a clear explanation of blockchain technology and smart contracts, evincing a deep understanding of the underlying technology. The Fifth Circuit reasoned that the International Emergency Economic Powers Act "grants the President broad powers to regulate a variety of economic transactions, but its language is not limitless." OFAC's definitional regulation for the word "property" is now recognized as one such limit with respect to immutable smart contracts. As the Court said, immutable smart contracts like these are not "owned" by anyone—they are just software.
Insight: In this way, SEC Commissioner Hester Peirce was prescient in her remarks on the SEC's final dealer rule, when asking, "[h]ow can a software protocol register as a dealer?" Here, the case is not that Tornado Cash is a "dealer" under securities law, of course, but the principle nevertheless rings true: how can immutable software be owned in any meaningful way? The Fifth Circuit’s depth of understanding not only informs the opinion, but underscores the need for lawyers to thoroughly familiarize themselves with blockchain as a novel technology. Absent such an understanding, this case might have reached a different result.
Former SEC Commissioner Paul Atkins Nominated as Next SEC Chair
Paul Atkins, former SEC Commissioner, has been nominated by President-elect Donald Trump to lead the Securities & Exchange Commission. Atkins has a long history with crypto, having joined The Digital Chamber’s Token Alliance as co-chair in 2017, and joining The Digital Chamber’s advisory board in 2020. Industry members have also shared their excitement about Atkins’ nomination.
Insight: Atkins, working alongside Commissioners Peirce and Uyeda, represent a regulatory sea change for crypto with respect to the SEC—one which will almost certainly see the end of soon-to-be former SEC Chair Gary Gensler’s regulation by enforcement regime. As noted, Atkins has been deeply involved with The Digital Chamber for years now, and clearly understands cryptocurrency. With that in mind, his approach to crypto should comport with that. It is also likely that he will make some personnel changes at the agency, potentially shuffling around the SEC’s enforcement priorities.
Celsius CEO Mashinsky Pleads Guilty in Criminal Trial
Alexander Mashinsky, former CEO of Celsius, has pleaded guilty to securities and commodities fraud in a hearing this past week. Mashinsky ran the crypto platform Celsius, which had its own proprietary token, CEL. In July of 2023, Mashinsky was indicted with fraud and conspiracy counts to “inflate the price of the company’s bitcoin-linked CEL tokens by saying they had sold to the tune of $50 million.” He did not inform the public that he was selling his stake. In a release, the Department of Justice explained that Mashinsky “illicitly manipulated the price of CEL, Celsius’s proprietary crypto token, while he was secretly selling his own CEL token at artificially inflated prices. As part of his plea, [Mashinsky] has agreed to forfeit over $48 million in proceeds from his illegal schemes.”
Insight: In light of Sam Bankman-Fried’s trial and consequent jail time for FTX’s fraud, Mashinsky’s guilty plea comes as little surprise. However, Celsius’ implosion nevertheless had the same effect as FTX’s: sowing distrust for crypto. As the industry has recovered to reach new highs—e.g., Bitcoin reaching a $100K benchmark this past week—Mashinsky’s fraud can be called out as such in an industry which otherwise seeks only regulatory clarity to act in accordance with the law.
The Mempool: Noteworthy Reads:
- Section 1960 Analyzed: Daniel Barabander (Variant Fund), Amanda Tuminelli (DeFi Education Fund, and Jake Chervinsky (Variant Fund) have put out a new working paper on money transmitting businesses and Section 1960. The paper offers a great analysis of these issues, and specifically references the Roman Storm indictment.
- Crypto Priorities for Congress’ Lame Duck Session: Blockworks’ Casey Wagner put together a brief analysis of what to expect of Congress with respect to crypto in the last few weeks of the lame duck session. Not much is to be expected, but there is potential for versions of the FIT21 bill and the Clarity for Payment Stablecoins Act to move quickly next session.
- On De-banking: Jorge Jraissati in CoinDesk’s opinion section discusses de-banking following from a16z partner Marc Andreessen’s appearance on Joe Rogan’s podcast where he discussed the issue. Jraissati’s article speaks to the importance of awareness with respect to this issue, making for an informative read on the matter.
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.