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Coinbase Replies to the SEC; Paradigm Files Amicus Brief; Tornado Cash Update; FIT21 Passes the House

Coinbase Replies to the SEC on Its Interlocutory Appeal

What happened?

On May 24, Coinbase filed a reply brief in support of its motion for an interlocutory appeal on the question of whether a digital asset transaction carrying no post-sale obligations can be an “investment contract” falling under the SEC’s jurisdiction. Coinbase argues that this is a novel legal question that could “shape or distort a multi-trillion-dollar industry” and should be considered at the appellate level before the case proceeds. Coinbase first moved for appeal in April, and the SEC responded on May 10. 

Coinbase argues that expedited appellate review of the question is warranted because it is “a clear and controlling question” of law on which there is “substantial ground for difference of opinion.” Coinbase also argues  that a successful interlocutory appeal on this issue would lead to the dismissal of most of the SEC’s claims against Coinbase, further strengthening the case for immediate review.

Specifically, Coinbase emphasized that in the Ripple case last year, the SEC itself requested an interlocutory appeal for the same question and acknowledged that this question has “industry-wide significance” and that there are “substantial grounds for difference of opinion.” 

For Coinbase’s interlocutory appeal to proceed, its motion would have to be first granted by Judge Katherine Polk Failla of the Southern District of New York, and then the Second Circuit Court of Appeals would have to agree to hear the appeal.

What does this mean?

If Coinbase succeeds in this interlocutory appeal and the Second Circuit agrees to answer the certified question for appeal, it will be the first time a federal appellate court will weigh in on the classification of digital assets as investment contracts. If the appeal is not successful, the case will proceed normally at the district court under Judge Failla, moving to discovery and eventually, motions for summary judgment and/or trial.

Paradigm Files Amicus Brief in Challenge to SEC’s “Dealer Rule”

What happened? 

On May 24th, Paradigm filed an amicus brief in support of the Crypto Freedom Alliance of Texas and the Blockchain Association in their lawsuit challenging the SEC’s new regulatory definition of “dealer” (the “Dealer Rule”) 

Paradigm argues that the ambiguities of the Dealer Rule would improperly categorize digital asset industry participants who fall within the statutory “trader” exception as “dealers.” That exception means, in essence, that people trading for their own account are generally not considered dealers. Paradigm’s brief points out the many unanswered questions that render determining the “line” between a trader and a dealer impossible under the SEC’s new framework.  

The brief also argues that the act of having to register as a dealer is impossible for the digital assets industry and the compliance requirements that traditional security dealers have to comply with would be impossible for digital asset participants to meet as well. 

What does this mean?

This rule would leave participants in securities markets of any kind unable to determine whether or not they are subject to dealer regulatory obligations. On that basis alone, it should be remanded to the agency, and we appreciate the court’s consideration of these important issues. 

Tornado Cash Developer Replies to Government’s Opposition to their Motion to Dismiss 

What happened?

On Friday the 24th, Roman Storm filed a reply in support of his motion to dismiss the indictment against him in the criminal case, United States v. Storm. DEF has previously covered Storm’s motion to dismiss and filed an amicus brief in support. This reply responds to the government’s opposition to Storm’s motion to dismiss. 

Within his reply, Storm lays out arguments that the government failed to address and highlights multiple factual concessions made by the government in their opposition. First, Storm argues that the government conceded that Tornado Cash was a legitimate business with a legitimate purpose, enhancing privacy for transactions on the blockchain. Second, the government conceded that the alleged criminal misuse occurred after Tornado Cash became immutable and publicly available. Last, the government conceded that Storm and other defendants did not commit any of the unlawful transactions allegedly processed by Tornado Cash and that Storm did not have an agreement with the criminals that did. 

Along with his reply to the opposition to the motion to dismiss, Storm also replied to the government’s opposition to compel discovery and suppress evidence. Of note, Storm challenged the theory the government used to obtain a search warrant for his residence. Storm alleges that the warrant lacked any “credible legal basis to seize items that it admits were not within the premises to be searched.” Specifically, the government relied on an affidavit which alleged that the cryptocurrency to be seized from Storm existed “on the wallet” the government intended to seize from the residence. Storm emphasizes that the government acknowledged that the “cryptocurrency is not located in Mr. Storm’s house or even on the devices it seized but exists entirely on the internet.” Existing precedent lays out the pathway to seize cryptocurrency through warrants, however, Storm argues that the proper procedure was not followed here.

What does this mean?

The brunt of the arguments in this reply brief dispel the government’s contention that the parties disagree on certain factual matters, requiring a trial. As highlighted earlier, Storm contends that only pure legal issues remain, which the court can adjudicate without the need for a trial. Most of the issues boil down to legal rather than factual disagreements, especially regarding interpretation of “money transmitting” and sanctions law. It remains to be seen what the court will rule on this matter: the court could choose to dismiss particular counts, if persuaded by Storm’s argument, or allow all the counts to proceed to trial. 

FIT21 Passes House 

What happened?

On May 22, the Financial Innovation and Technology for the 21st Century Act (FIT21) passed the House of Representatives with a bipartisan vote of 279-136. FIT21 establishes federal rules  categorizing "digital assets" into digital securities and digital commodities, and includes a test for decentralization to clarify which regulator will oversee digital asset projects. FIT21 provides the Commodity Futures Trading Commission (CFTC) with new jurisdiction over digital commodities and clarifies the Securities and Exchange Commission’s (SEC) jurisdiction over digital assets offered as part of an investment contract. Additionally, the bill specifies that blockchain protocols and developers are excluded from the definitions of digital asset “dealers,” “brokers,” and “trading systems,” and it excludes certain “decentralized finance activities” from the bill’s scope. 

Before its passage, SEC Chairman, Gary Gensler, wrote a public letter to Congress warning the bill "would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk." Additionally, the Biden Administration released a Statement of Administration Policy on FIT21, highlighting opposition to the bill, but notably omitting language of a veto of the legislation.  

What does this mean? 

FIT21 is the first-ever regulatory framework for cryptocurrency market structure in the United States to pass a chamber of Congress. Its passage reflects an increase in bipartisan action to provide regulatory clarity for the industry. While the Democratic Caucus chose to oppose the bill, they did not actively whip votes against it. Over 71 House Democrats voted for the bill, signaling greater bipartisanship on crypto legislation. Next, the bill heads to the Senate.

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