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HFSC Hearing; British APCG Report; SEC Responds to Coinbase; DEF "Exchange" NPRM Comment Letter

Hearing on Digital Asset Ecosystem


What happened?


On Tuesday, the House Financial Services Committee (HFSC) held a hearing titled The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem. The hearing focused on the payment stablecoins bill and the Digital Asset Market Structure Discussion Draft with testimony from Mr. Jeremy Allaire, the CEO of Circle, Dr. Emin Gün Sirer, the CEO of Ava Labs, Mr. Coy Garrison, Partner at Steptoe & Johnson LLP, Mr. Thomas Sexton III, the CEO of National Futures Association and Mr. Aaron Kaplan, the Founder and Co-CEO of Prometheum Inc.


Highlights of the hearing included opening remarks from Dr. Sirer, in which he stated that "the tokens and smart contracts created with blockchains should not be multi-homogenous in incompatible categories… Instead, tokens and smart contracts must be regulated based on their function and features"


When asked about the effects of regulatory uncertainty, Mr. Allaire noted that “United States is responsible for the dollar and the United States does not yet have clear regulation for payments, stablecoins, and digital dollar issuance... we need to adopt stable coin rules so that other markets are not actually regulating the dollar. "


Other key discussion points included the transition of an asset from a centralized to decentralized structure, the issue of commingling customer and firm assets as well as definitions of specific terms such as “special purpose broker-dealers”.


What does this mean?


The hearing illustrated a growing understanding of the unique nature of digital assets and the importance of establishing clear frameworks to support market innovation.


CFTC’s Judgment Against Ooki DEO

What happened?


Last Thursday, U.S. District Court Judge William Orrick entered a default judgment order for the U.S. Commodity Futures Trading Commission (CFTC) against Ooki DAO, imposing penalties and regulatory restrictions.


The CFTC accused Ooki DAO of illegally operating a decentralized exchange (DEX) platform offering unregistered digital asset derivatives contracts to U.S. citizens. The commission argued that, while DeFi protocols are decentralized and governed by code, activities conducted on these platforms can still fall under their regulatory purview.


In this case, the CFTC claimed that Ooki DAO's actions violated the Commodity Exchange Act by providing unregistered derivatives contracts, which are considered commodities under CFTC jurisdiction. Ooki DAO missed the January 10, 2023 deadline to respond to the suit, resulting in a default judgment order that will force Ooki DAO to pay $643,000 in fines and shut down its website and “remove its content from the internet.”


An issue of particular controversy was how to serve notice of a lawsuit to a DAO with no physical business entity or individual addresses for its members. In the case, Judge William Orrick held that service of process is satisfied by providing a copy of the summons and complaint through the Ooki DAO’s Help Chat Box coupled with a posting in the Ooki DAO’s Online Forum. Paramount, however, is that within the service of process context, the court noted the Ooki DAO is a “person” under the Commodity Exchange Act (“CEA”) and considered it an unincorporated association; the court noted that the definition was not limited to the service issue.


What does this mean?


The CFTC's suit against Ooki DAO marks one court’s decision in that a DAO could be held liable as a “person.” In some states, unincorporated associations are treated as a general partnership and are not given limited liability, meaning their individual members could be personally liable. However, it is important to note this decision came as the result of a default judgment (meaning no defendant appeared) and the merits of the case were never actually litigated, so the CFTC faced no opposition to their allegations throughout the suit. Regardless of the decision, the CFTC will face legal challenges if they attempt to enforce this judgment against any individual member of Ooki DAO.


As a reminder, DEF submitted an amicus brief on the question of how to serve notice and you can find that here.


British APPG Releases Report on Cryptocurrency and Fintech Innovation


What Happened?


This week, the British Crypto and Digital Assets All Party Parliamentary Group (APPG) released a report titled "Realising Government’s Vision for the UK to Become a Global Hub for Cryptocurrency & Fintech Innovation". The report discusses the UK government's vision to become a global hub for cryptocurrency and fintech innovation and the steps being taken to achieve this goal.


The report makes several key recommendations concerning the future of cryptocurrency and digital assets in the UK, mostly focusing on centralized exchanges. First, the report endorses bespoke regulation in order to attract and capitalize on the significant investment and growth opportunities in the cryptocurrency and digital assets space.


Second, with respect to a digital pound—the UK’s Central Bank Digital Currency (CBDC)—the report acknowledges that there are a number of potential benefits, such as cheaper, faster payments. At the same time, the report recommends that the government carefully consider and seek to mitigate any potential risks surrounding the development and potential introduction of a digital pound, particularly in relation to privacy and security risks. Moreover, the report urges the government to ensure that the introduction of any future digital pound does not stifle private sector innovation and preserves access to physical cash.


What Does This Mean?


The report signifies the UK government's proactive approach towards understanding and regulating the cryptocurrency and digital asset space. It acknowledges the potential of the technology and the need for a robust regulatory regime to ensure consumer and investor confidence.


The recommendations put forth in the report could shape the future of cryptocurrency and digital asset regulation in the UK. They highlight the need for a balanced approach that harnesses the potential benefits of these assets while mitigating potential risks. This could, in turn, boost investor confidence and potentially attract more investment in the UK's cryptocurrency and digital assets sector.


With regards to the development of a digital pound, the report correctly identifies the importance of addressing potential risks of a CBDC. However, the UK must also recognize that while it is possible to implement privacy mechanisms and advance financial inclusion with a CBDC, any centralized monetary system is still exposed to the discretion of its issuer.


Understandably, the UK hopes to develop the digital pound to compete with other nations’ developing CBDCs—especially authoritarian regimes such as China. However, protecting and empowering innovation in decentralized solutions—that are truly permissionless—will prove to be the more effective approach for human freedom and prosperity.


SEC's Delaying Tactics: A Blurred Roadmap for Crypto Regulation What Happened?


The U.S. Securities and Exchange Commission (SEC) has finally responded to Coinbase’s rulemaking petition, following the U.S. Court of Appeals for the Third Circuit's directive to do so. In their response, the SEC voiced opposition to the “mandamus petition,” a legal maneuver aimed at compelling a government agency to carry out its duties, proposed by Coinbase.


While the SEC did not provide a clear response, they did predict that they might be able to make a recommendation on Coinbase’s rulemaking petition within the next 120 days. This decision was not received well by Coinbase, whose Chief Legal Officer, Paul Grewal, criticized the SEC for not committing to a firm deadline & for misinterpreting the nature of their own statements and actions.


What Does It Mean?


By pushing the date of a potential recommendation by 120 days, the SEC is effectively creating room for continued ambiguity in the regulation of digital assets. In the eyes of Coinbase and other parties interested in cryptocurrency regulation, the SEC's response appears to be a deflection from their responsibility to provide clear regulatory guidelines for the sector. In his tweets, Grewal criticizes the SEC for their lack of decisive action and implies that that they may be acting in bad faith


Given the current state of affairs, the lack of clear regulation is likely to continue creating hurdles for the cryptocurrency industry. The resolution of this legal tangle will have far-reaching implications for the future of cryptocurrency regulation in the United States


DEF Submits Third Response on Proposed SEC “Exchange” Rulemaking


On Monday, we submitted our third response to the SEC on their proposed “exchange” rulemaking.


You can read our entire response here and find a high-level overview in our Twitter thread.

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