Last month, Ethereum incubator ConsenSys sued the US Securities and Exchange Commission (SEC) for an injunction asking a federal court to stop the regulator from investigating its MetaMask offering or from declare Ether ETHUSD a security. It is the latest company to follow a growing trend of preemptive litigation against the SEC.

You’re reading State of Crypto, a newsletter from CoinDesk that examines the intersection of cryptocurrency and government. Click here to sign up for future editions.

Sue the SEC

The narrative

I think it’s fair to say that the U.S. Securities and Exchange Commission’s (SEC) investigations and enforcement actions against cryptocurrency companies have now turned into an all-out legal war, with cryptocurrency companies filing lawsuits and adopted entire approaches by the press to deal with the SEC.

Because matter

It seems increasingly unlikely that Congress will actually pass legislation that solves the cryptocurrency industry’s problems in the near term. As a result, the industry’s growing strategy of seeking court victories may be the right one, so to speak, if federal judges, appellate courts, and (I imagine) the U.S. Supreme Court begin creating case law for companies and to be used, this will be a way to ensure what the cryptocurrency industry calls regulatory clarity.

Knocking it down

Last month, Ethereum developer ConsenSys pre-emptively sued the SEC for injunctive relief. The company has asked a federal court in Texas to block the regulator from investigating the matter, from filing charges against the MetaMask wallet or MetaMask services, and from declaring ether ETHUSD a non-security. In an unredacted version of the lawsuit filed later, ConsenSys said the SEC has launched a formal investigation into whether ETH is a security (although the SEC does not appear to have reached a conclusion yet, based on the filing).

They join the DeFi Education Fund and a company called Beba, which sued the SEC earlier this month, the Blockchain Association and the Crypto Freedom Alliance of Texas, which sued earlier this week over how the SEC defines a “dealer” is a company called Lejilex, which wants to launch a cryptocurrency exchange literally called “Legit.Exchange”. Each of these lobby groups or companies has been sued on various charges. However, they share the same fundamental view: that the SEC is overstepping its bounds in how it regulates cryptocurrencies or that the fundamental question of how cryptocurrencies fit into securities laws needs a more definitive answer.

This is an increasingly popular tactic among cryptocurrency companies, which have filed for appeals in federal districts known to be less than friendly to the administrative state.

Last month, the Blockchain Association and attorney (and Massachusetts GOP Senate candidate) John Deaton also filed amicus briefs in support of Coinbase’s motion for interlocutory appeal in one of its SEC cases.

Coinbase wants an appeals court to rule on how the Howey test might apply to digital assets. Both amicus briefs broadly argue that the courts currently disagree on this question, and that a higher power must step in to at least try to get the various federal judges on the same page.

The next question is how successful these causes and arguments might be. And the real answer is who knows. Federal courts have issued several rulings regarding cryptocurrencies so far. The SEC has had some notable victories, such as those against Terraform Labs and Coinbase in early motions (and a trial), not to mention their past victories over Telegram and Kik. The industry has some victories, such as the split ruling in the SEC’s Ripple case or the purported class action against Uniswap (issued by the same judge who oversaw SEC v. Coinbase and USA v. Roman Storm).

The fact that these various causes all ask slightly different things certainly will not immediately clarify some of these questions.

Meanwhile, the SEC itself continues its various investigations. In recent weeks, Robinhood and Uniswap have both announced that they have received Wells Notices from the agency related to their cryptocurrency offerings. These notices are documents in which the SEC states that it believes it has sufficient evidence to take enforcement action, and recipients usually have the opportunity to object to enforcement action.

The 30,000-foot view would suggest that the SEC – despite all the enforcement actions it has taken over the past year – is starting to finalize other investigations and is ready to turn them over to the courts.

It’s worth pointing out that SEC Chairman Gary Gensler has been pretty clear about how he views cryptocurrencies: Most tokens are securities, he has said over and over again. He repeated this point on CNBC on Tuesday, contrasting token issuers with publicly traded companies.

“Without prejudice to any of them, many of these tokens are securities under the law of the land, as interpreted by the United States Supreme Court. So we follow that law,” he said. “And you, the investors, are not getting the required or necessary information about those assets… Where is the information about these crypto tokens similar to these seasonal earnings releases?”

Gensler did not answer a specific question about ETH during the interview.

There is some background to all these legal disputes. For one thing, as previously mentioned, Congress doesn’t appear particularly close to passing even a stablecoin bill, let alone market structure legislation.

Furthermore, we are about six months away from the US general election and seven months until the inauguration. I’m not suggesting that the SEC is running out of time before what looks like a close election, but it certainly has the whiff of a close election.

Stories you may have missed

CZ is convicted

Last week, I flew to Seattle along with Danny Nelson and several other journalists to cover the sentencing hearing of former Binance CEO Changpeng Zhao.

Recall that last November Zhao pleaded guilty to violating the Bank Secrecy Act and resigned from the exchange he founded. Binance itself has agreed to pay $4.3 billion in fines and penalties and submit to a court-appointed audit (which has yet to be named). Zhao was sentenced to four months in prison on Tuesday.

I live-tweeted the hearing, and The Verge’s Liz Lopatto live-blogged it. You can read those scripts if you want an in-depth version of what happened. The short version: Judge Richard Jones asked representatives of Zhao and the Justice Department to weigh in on the Justice Department’s request to apply enhancements to Zhao’s basic sentencing guidelines. The Justice Department argued that the guidelines’ recommendation of less than 18 months was too lenient for Zhao’s conduct.

Justice Department lawyers seemed almost unprepared for the judge’s questions. I don’t know how else to say this: The judge opened by asking about improvements, and the DOJ table had to confer briefly before taking the lectern.

When the lawyer did so, his argument was a bit forced, to put it mildly. At one point, he argued that the judge should be able to infer that Zhao was aware of wrongdoing on his platform after the judge said there was no evidence to support that claim. If this description seems harsh, I should note that at this point, my main point of comparison is with the team that prosecuted FTX’s Sam Bankman-Fried, which was a much bloodier affair (metaphorically) and featured a team of DOJ lawyers in New York clinically dismantle Bankman-Fried’s very image.

The defense’s argument was a little simpler: Zhao voluntarily appeared in the United States rather than resist extradition, voluntarily pleaded guilty, apologized, and has already begun taking steps to atone for his wrongdoings ( resigning from Binance, accepting a $50 million reward). Well).

There were many things left unsaid. Defense filings from last month had significant portions redacted, and a defense attorney alluded to a mitigating factor for Zhao’s conviction. The judge wouldn’t discuss it, so we’re all left to speculate on what exactly that mitigating factor was. It’s clear that Zhao has cooperated with at least one, and probably more, federal investigations, so there’s probably a good case to be made.

As many have pointed out, one reason for the light sentence is the fact that Zhao only pleaded guilty to one charge of violating the Bank Secrecy Act (BSA), which one lawyer I spoke to described as “a huge giveaway.” .

The Justice Department never alleged fraud, and although its sentencing memo alluded to sanctions violation concerns, the Justice Department made no charges on that front either. The time the Justice Department would have reported more serious crimes would have been last year, when it filed its charges against Zhao and Binance, rather than last month in a sentencing memorandum.

“The fact that he didn’t plead guilty to sanctions violations is a huge plus for him … it wouldn’t have happened if he wasn’t willing to show contrition,” said the lawyer, who was not authorized to speak publicly.

On the other hand, the Justice Department seemed to want to lose its argument for a sentence harsher than the guidelines. Law enforcement agencies have already begun lobbying Congress for tougher sentencing guidelines for violations of the Bank Secrecy Act, and last week’s ruling will no doubt become evidence in support of tougher guidelines.

A Justice Department spokesperson said in a statement that “this is the first time a CEO has gone to prison for a BSA violation.”

It was really interesting to see the extent to which the judge praised Zhao, even reading the crimes he pleaded guilty to. Although Zhao’s famous “better ask for forgiveness” phrase was a problem for the judge, in the end, Judge Jones said he believed that Zhao had worked hard to build Binance and had demonstrated enough remorse and good character to sentence him to a lower sentence than the Office of Probation and Pretrial Services. recommended (five months).

At a future date – which has not yet been determined – Zhao will report to federal prison for four months.

And then he was done with the whole episode.

This week

Monday

Tuesday

Friday

Somewhere else:

If you have any thoughts or questions about what I should discuss next week, or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

You can also join the group conversation on Telegram.

I’ll see you next week!

Fuente