Judge Denies SEC’s Request for Quick Appeal
Last week, Judge Analisa Torres of the Southern District Court of New York denied the Securities and Exchange Commission’s (SEC) motion to certify two holdings from the court’s earlier decision for interlocutory appeal (an appeal of a non-final order issued during the course of litigation).
In an earlier decision, Judge Torres held that while the direct sales of the XRP tokens by Ripple Labs to institutional investors constituted investment contracts under SEC v. W.J. Howey (the “Howey test”), the programmatic sales on trading platforms and the other distributions did not. In applying for a certification to appeal, the SEC claimed that Judge Torres had improperly applied the Howey test to the facts in the undisputed record (facts that both parties agreed upon). Judge Torres, however, rejected this view, noting that “[t]he Court’s findings come from a direct application of Howey to the unique facts and circumstances of this case.” The court also rejected the notion that the decision would have a broad precedential impact.
Further, Judge Torres found no “substantial ground for difference of opinion” between the initial decision and the July SEC. v. Terraform Labs decision, where Judge Jed Rakoff found the offer and sale of the relevant crypto assets constituted investment contrasts in both direct sales and secondary market transactions. Judge Torres explained that unlike the Terraform court, which was required to accept all the allegations in the SEC’s complaint as true in deciding the motion to dismiss, she decided the case on a motion for summary judgment, with the benefit of a complete and extensive factual record.
What does this mean？
This decision simply means the SEC cannot appeal Judge Torres’ summary judgment decision right now, before the case goes to trial. However, the SEC can still file an appeal after the district court case is resolved
Senators Urge Swift Crypto Tax Regulation
On October 10, 2023 U.S. Senators Elizabeth Warren (D-MA), Angus King (I-ME), Richard Blumenthal (D-CT.), Bernie Sanders (I-VT), Sheldon Whitehouse (D-RI), Brian Schatz (D-HI), and Gary Peters (D-MI) sent a joint letter addressing Secretary of the Treasury, Janet Yellen, and Internal Revenue Service (IRS) Commissioner, Daniel Werfel.
The letter voices the aforementioned Senator's support for the Internal Revenue Service (IRS) and U.S. Treasury's regulation proposal, titled "Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions" — a rulemaking that would redefine a broker to include DeFi protocols and frontends and require them to report personal identifying information of users. The letter urges the agencies to rush their issuance of the rulemaking to 2024 as opposed to 2026, arguing that further delay would give the industry an “opportunity to undermine the Administration’s efforts to impose” the reporting requirements.
What does this mean?
The letter mistakenly villainizes the crypto industry, accusing it of attempting to “evade regulation.” However, this is far from the truth. The senators appear to misunderstand how DeFi functions by supporting a rulemaking that attempts to broaden the definition of a broker to create brokers where there aren’t any. As we’ve previously stated, the rulemaking displays tension by recognizing that “only” users of wallets have the keys “necessary” to effect transactions on their own behalf; meanwhile, asserting that third-parties are “responsible for effectuating transfers on behalf of” those same wallet users.
Concerning the letter’s demand to expedite the regulation, we believe that it’s critically important for the industry to give its input and provide both the Treasury and IRS with a different perspective on the matter. The purpose of public notice-and-comment on rulemakings is to fill the gaps in agencies’ knowledge and correct their misunderstandings about such novel technology. For that reason, DEF will be submitting a comment letter in the weeks ahead to address the proposal’s issues.
CFPB’s Director’s Comments on Crypto at Brookings Institution
Last week, Rohit Chopra, Director of the United States Consumer Financial Protection (CFPB), spoke at the Brookings Institution’s Event on Payments in a Digital Century. He expressed concerns about the potential consolidation of payment markets by both bank and non-bank firms issuing digital currencies, fearing it could lead to excessive data surveillance and financial censorship, thereby impacting data privacy and financial stability.
In the talk, the Director mentioned that the CFPB is exploring new guidance to both bank and nonbank firms regarding the applicability of the Electronic Fund Transfer Act (EFTA) with respect to private digital dollars and other virtual currencies. The EFTA currently applies to transfers made through ATMs, debit cards, direct deposits, and phone, and grants consumers the right to dispute transactions, provides regulatory guidance to market participants, and establishes consumer liability for unauthorized transactions.
Notably, he expressed concern with large non-bank entities issuing private money outside the banking system, suggesting that the Financial Stability Oversight Council (FSOC) should consider using its authority under the Dodd-Frank Act to designate activities related to private digital dollars, such as stablecoins, as systemically important payment, clearing, or settlement activities. The Director expressed his view that stablecoins are a rapidly growing area that regulators need to monitor for risks to the financial system.
What does this mean?
In the talk, it was clear that Director Chopra was mostly concerned with bank and nonbank entities issuing stablecoins and did not express concern with DeFi. We agree that establishing regulatory oversight of custodial stablecoin issuers is in everyone’s interest. But it is only Congress that can do so, as the Administration and FSOC (of which Chopra is a member) have publicly stated repeatedly.