Pantera Capital's annual review of crypto regulatory events: The negative news is gradually fading, and the future is promising
Written by PanteraCapital
Compiled by: Felix, PANews
In 2022, the crypto industry's dominoes fell one after another due to regulatory actions, causing a series of collapse events. And this year, the last few dominoes were also pushed down.BinanceNow, all the dominoes seem to have fallen, and most of the major events are good news.BlockchainThe industry has made meaningful and necessary progress. This article takes you through some of the major regulatory events in 2023.
Completed Enforcement Actions
NFT
The SEC recently announced its first two enforcement actions against NFT issuers under federal securities laws: Impact Theory (a California-based media and entertainment company) and Stoner Cats 2 (producers of an adult animated television series). This marks an expansion of the SEC's regulatory targets. In both cases, the SEC alleged that the NFTs sold were unregistered securities. After the charges were filed, both companies agreed to settle with the SEC, paying approximately $6.1 million (Impact Theory) and $1 million (Stoner Cats), respectively.
The SEC’s cases in both cases revolved around issuers promoting and marketing their NFTs in a way that led investors to believe they would profit based on the efforts of others, a key criterion of the Howey test used to evaluate digital assets as potential securities.
Both enforcement actions strongly suggest that the SEC may apply additional scrutiny to NFTs and that issuers selling these assets should pay close attention to how their products are designed, marketed, and promoted.
Kraken
Another major SEC settlement this year was withexchange Kraken settles with the SEC for $30 million, arguing that Kraken’s staking service was an unregistered security that met the definition of an investment contract.
Similar to the SEC’s findings in its NFT enforcement actions against Impact Theory and Stoner Cats, the SEC highlighted the way Kraken promoted its staking service, which advertised annual returns of up to 21%. Kraken can also change the yields of the staking service at its discretion and commingle its assets with customer assets.
Ooki DAO
Ooki is a case brought by the Commodity Futures Trading Commission (CFTC), which charged Ooki DAO and holdingTokenAny person or entity that operates as an unregistered broker-dealer (FCM), solicits and accepts customer orders, accepts money or property as margin, and extends credit in violation of the Commodity Exchange Act (CEA). A significant hurdle in this case is whether and how decentralized protocols can be properly served. The CFTC claimed that Ooki Dao was an entity that could be prosecuted as an "unincorporated organization under state law," not just a technology, and the court ultimately agreed.
法官做出了有利于 CFTC 的缺席判决，即 Ooki DAO 是一个非法交易平台，充当了非法的未注册 FCM，并且未能采用适当的「KYC」计划，命令 DAO 支付约 64 万美元的罚款，并停止其运营。虽然罚款可能不像其他和解那么大，但本案的主要影响是法院确定 DAO 实际上可以被视为法律实体，这引起了参与各种治理投票的TokenHolders' concerns because individualsTokenWhether the holder may also be held liable in future actions.
Pending Enforcement Actions
Coinbase
A core regulatory theme over the past year has been the SEC’s focus on some of the largest players in the crypto ecosystem.exchangeEnforcement actions taken, such as the SEC’s lawsuit against Coinbase.
SEC 对 Coinbase 的诉讼中称，该交易所一直在经营一家未注册的证券交易所、一家未注册的经纪交易商和一家未注册的清算机构。而且，与 Kraken 的案例一样，美国 SEC 声称 Coinbase 的质押服务是一种未注册的证券。Coinbase 随后提出了驳回诉讼的动议，预计将于明年 1 月做出裁决。在某种程度上，法院没有就其驳回动议做出有利于 Coinbase 的裁决，预计这场战斗将会持续很长一段时间。
It is worth noting that a few months before the SEC filed the lawsuit, Coinbase sued the SEC under the Administrative Procedure Act (APA) to force the SEC to respond to its previously filed petition for digital asset rulemaking. In essence, Coinbase is trying to force the SEC to enact regulations through litigation to explain how securities laws apply tocryptocurrency, and adopt a formal notice and comment process to allow public participation.
According to the complaint against Coinbase, the SEC needs to successfully prove that digital assets or, in the case of pledges, arrangements involving digital assets constitute investment contracts and are securities. In addition, in response to allegations of unregistered exchanges, broker-dealers, and clearing agencies, the SEC also listed several digital assets that it believes are unregistered securities, including Solana, Polygon, NEAR, and MATIC.
In this case, as with many other SEC complaints, the SEC is not just going after intermediaries. While the SEC is not suing Solana, NEAR, MATIC, or Polygon, but instead naming Coinbase in its complaint, the SEC is effectively reminding these companies that these digital assets are all operating illegally as unregistered securities in the SEC's view. Given this, expect a large number of enforcement actions in 2024.
RipplXiaobai Navigatione
Another major news driven by the SEC over the past year revolved around its legal battle with Ripple Labs, where the SEC claimed that Ripple's token XRP was a security. In July of this year, Judge Torres, the presiding judge in the case, opened a trial in the District Court for the Southern District of New York and ruled against Ripple and the SEC on multiple motions. In making his ruling, Judge Torres essentially reviewed and ruled on four different sales or issuances of Ripple's native XRP token:
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Ripple's sales of XRP to some institutional buyers through a wholly owned subsidiary are investment contracts because the expected profits are based on the efforts of others.
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Ripple’s sales of XRP conducted “programmatically” on crypto exchanges, or through the use of trading algorithms, are not investment contracts. Because the trades are “blind buy-sell transactions,” buyers have no way of knowing whether their payments go to Ripple or any other seller. Therefore, buyers in programmatic sales do not expect to profit from Ripple’s efforts, and Judge Torres concluded that XRP sold in programmatic sales are not investment contracts under the Howey test.
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Ripple distributes XRP to various employees as compensation, or funds XRP and XRP BlockchainA third party developing a new application for the ledger is not an investment contract.
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The sales of XRP made by Ripple’s CEO and Chief Legal Officer in their personal capacity on crypto exchanges were not investment contracts for the same reason that programmatic sales were not investment contracts. Given that the CEO and Chief Legal Officer did not know the identities of the sellers to whom they sold XRP. Therefore, these purchases were not based on Ripple’s expectations of profitability and therefore were not investment contracts.
While the ruling on these transactions is quite complex, the main impact on the industry is that Judge Torres’ ruling clearly states that XRP itself is not a security. According to Judge Torres’ ruling, one must look at how an asset is sold to determine whether it is a security.
Overall, Judge Torres’ ruling is considered decisively positive for the industry, as the only ruling she made in favor of the SEC was in the case of an issuer selling a digital asset directly to an institution. However, while the ruling is undoubtedly a blow to the SEC’s enforcement actions, the case is still under appeal and could potentially be overturned. For that matter, not long after Judge Torres’ Ripple ruling, a judge in the same district issued another ruling.
Southern District of New York (SDNY) Judge Rakoff has denied a motion to dismiss a U.S. SEC lawsuit alleging that Terraform Labs and its CEO Do Kwon violated securities laws through the issuance and sale of multiple crypto assets. In his ruling, Judge Rakoff explicitly disagreed with his colleague Judge Torres’ distinction between “blind” transactions by crypto asset purchasers in major offerings and crypto asset purchasers on exchanges.
Specifically, Judge Rakoff did not distinguish between primary and secondary sales, but again focused on the purchaser’s expectation of profit.
Following these two conflicting decisions and subsequent motions and appeals, it now appears that the Southern District of New York is divided on whether and when exchange trading of crypto assets constitutes an offer and sale of an investment contract. A clear answer to this question could be critical to crypto market participants.
Compound
One to note involves the Compound Labs lawsuit, but this was not filed by a regulator. Compound Labs is a DeFi protocol that issues compensation tokens called COMP. In December 2022, a class action lawsuit was filed alleging that the COMP token is an unregistered security and claiming that Compound Labs and related venture capital investors violated securities laws by soliciting plaintiffs to buy COMP tokens.
The court denied the defendants’ motion to dismiss in September 2023. While still in the early stages of litigation, this will be an important case to monitor.
Bitcoin ETF
Another topic dominating headlines and discussion is the applications for Bitcoin spot ETFs that are awaiting SEC approval from several large institutions.
For years, Grayscale has been fighting the SEC over its application to list the Grayscale Bitcoin Trust ("GBTC") on a stock exchange as an SEC-approved exchange-traded product. In June 2022, the SEC rejected Grayscale's application to launch a spot Bitcoin ETF, and Grayscale countersued the SEC, claiming that the SEC "arbitrarily and capriciously" rejected GBTC's application while approving applications for Bitcoin futures products. Grayscale won a partial victory in the Washington Circuit Court when a judge recently found that the SEC did not have sufficient basis to reject the GBTC application, which means that the SEC must now reconsider the application.
The SEC must make a decision within a certain time frame. Specifically, a decision on GBTC is expected to be made anytime between now and early January 2024, and the SEC will then make decisions on other applicants simultaneously or in short order.
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