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Edition No. 1 - LexNews+ Weekly
SDNY rules in favor of XRP against the SEC; Coinbase v SEC; AZUKI DAO; Lummis-Gillibrand round two; Brazilian CBDC controversy
Hi anon :)
Welcome to the first edition of our new weekly edition of LexNews+ (formerly LexDAOism). This letter is meant to provide LexDAO members and subscribers easy-to-digest summaries of the biggest stories in cryptolaw each week, as well as internal updates of LexDAO operations. We’re excited to continue to expand the horizon of LexDAO’s impact through this medium, and to continue to build out the profession of legal engineering. Let’s get started!
Authors: Kyler Wandler, Nick Corso, TXBlockhainAttorney
1. Headlines (The top stories in cryptolaw this week)
2. Bird Watching (Tweet, tweet!)
4. This week in LexDAO (events, publications, and more!)
5. Closing Statements
Five things you might have missed this week:
Are we back? It feels like we’re back.
In a landmark decision set to reverberate through the crypto landscape, Judge Analisa Torres has determined that Ripple's XRP sales on public cryptocurrency exchanges were not securities under the law, as they didn't involve a reasonable expectation of profit tied to Ripple's efforts. Further, the judge ruled that XRP sales on cryptocurrency platforms by Ripple CEO Brad Garlinghouse and co-founder Chris Larsen, among other distributions, did not involve securities.
This decision potentially bolsters the position of other crypto firms grappling with the SEC over the regulatory classification of their products. However, it wasn't an entirely clean sweep for Ripple; the court found that the firm's $728.9 million XRP sales to hedge funds and other sophisticated investors amounted to unregistered sales of securities. This hinged on Ripple's marketing efforts towards institutional investors, which clearly underscored a speculative value proposition for XRP.
In reaction to the ruling, Coinbase, the largest U.S. crypto exchange, indicated it would once again permit XRP trading on its platform. Ripple's CEO, Brad Garlinghouse, lauded the judgment as a "huge win" not just for Ripple, but for the broader U.S. crypto industry.
The case has intensified calls for legislative clarity regarding the status of digital assets. Gary DeWaal, an attorney at Katten Muchin Rosenman, suggested that the ruling could be advantageous for Coinbase in its own ongoing case with the SEC. Similarly, House of Representatives Majority Whip Tom Emmer advocated for a law clarifying that a token is distinct from an investment contract it may or may not be part of, highlighting the mounting pressure on lawmakers to provide clear rules for tokens.
Ripple Ruling Deals a Blow to SEC’s Effort to Regulate Crypto
On July 13, the U.S. Securities and Exchange Commission (SEC) and crypto exchange Coinbase will hold a pre-motion hearing, offering insight into the likely trajectory of the litigation and its potential ramifications for the broader crypto industry. Initially slated for August, Coinbase requested this hearing to seek the dismissal of the complaint filed by the SEC in June.
Mark Kornfeld, a securities and regulatory attorney, anticipates Coinbase will try to argue for an early dismissal based on various grounds, notably that the tokens are not securities under the Howey test, implying that the SEC is overstepping its jurisdictional authority.
However, the SEC's response to the motion strongly criticized Coinbase, accusing the exchange of willfully ignoring decades of controlling law under Howey to invent its own criteria for what constitutes an investment contract.
Despite Coinbase referring to its 2021 initial public offering in its motion, corporate and securities lawyer Roland Chase highlights that disclosure-based federal securities laws may not guarantee Coinbase's victory in court. The SEC initially cleared Coinbase to go public based on the exchange's commitment to a rigorous legal analysis of each asset. Now, however, the SEC believes that Coinbase is not only trading securities on its platform but also offering its own unregistered securities.
Given the absence of a consensus, the litigation could drag on for years, as observed in the ongoing Ripple case. In light of the new ruling in favor of Ripple, however, there's increasing pressure for clearer legislative guidelines for digital assets, which could shape the outcome of similar lawsuits, including the one between the SEC and Coinbase. Ripple's recent partial victory, with XRP sales on public exchanges ruled not to be securities, might be a precedent Coinbase can leverage in its own defense.
"We’ve read Judge Torres’ thoughtful decision. We’ve carefully reviewed our analysis. It’s time to relist."
From way out of left field…
The recent Azuki NFT drop “Elementals” was plagued by technical issues and even criticisms of duplicated work, ultimately causing a fallout which saw crashing floor prices of the original Azuki NFT collection as well as the affiliated Beanz NFTs. Since then, the mysterious AzukiDAO has emerged proposing legal action against Zagabond, founder of the Azuki brand, whose real name is Alex Xu. Purportedly compromised of Azuki holders, AzukiDAO alleges Zagabond has rugged multiple projects and is looking to claw back $39 million worth of ETH. AzukiDAO expressed its intentions to obtain counsel and file suit in a recent discord message.
However, questions regarding AzukiDAO’s origins and authenticity have surfaced—specifically, whether AzukiDAO is indeed comprised of Azuki holders, as it claims. Some are skeptical due to data from Etherscan showing the contract for the BEAN token being used to vote on the proposal was minted only earlier this month. Moreover, the Twitter page was likewise just recently created, and the discord itself only has about 120 members. Predictably, and to his own benefit, Zagabond claims this DAO is not known in the Azuki community and is likely illegitimate. To make the origins of this AzukiDAO even murkier, a representative for the organization said members’ personal account details will not be disclosed.
It remains unclear what will come of this effort. Generally for a claim to even be possible AzukiDAO members will need to show they suffered harm and prove standing to bring suit, which will likely entail proving they are indeed holders of Azuki NFTs and not a random collective looking to profit off alleged “rug pulls.”
Senator Whips Up Blockchain Protection Proposal
A blockchain developer has found code in Brazil's CBDC pilot that would potentially allow Brazilian authorities to freeze or otherwise manipulate citizen funds. The vulnerability was discovered by Pedro Magalhães, who reverse-engineered the source code of the “Digital Real” pilot.
Magalhães said that the code could be used for legitimate purposes, such as secured loans and DeFi operations. However, he also said that the code lacks specificity about who would have the power to freeze funds and under what circumstances.
This has raised concerns among some in the cryptocurrency community, who fear that a CBDC could infringe on their financial freedom and privacy. Magalhães said that while there are legitimate concerns about CBDCs, they also offer some potential benefits, such as making taxes more easily traceable. The pilot is reportedly running on Hyperledger Besu, a privately operated Ethereum Virtual Machine (EVM)-compatible blockchain.
The Brazilian central bank has not yet commented on the developer's findings. The Digital Real is still in the pilot phase, and it is not yet clear when or if it will be rolled out to the public.
If at first you don’t succeed…
U.S. Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) will once again attempt to bring their bipartisan Responsible Financial Innovation Act to the hill, hoping to provide some semblance of cohesion to U.S. cryptocurrency regulations. Many in the industry have viewed this bipartisan effort much more favorably than competing proposals and hoped it would bring an end to the Securities and Exchange Commission’s (SEC) practice of regulation by enforcement. Discussions on the bill are expected to resume this week.
Though the legislation’s progress has been impeded by such catastrophic crypto events as the November 2022 collapse of FTX, the authors nevertheless continue to advocate for what Lummis refers to as the most exhaustive cryptocurrency regulatory proposal out there—providing both consumer protections and clarity on the jurisdictional turf war over digital assets between the SEC and the Commodity Futures Trading Commission (CFTC).
As a member of the influential Senate Banking Committee, Lummis is well positioned to push the sweeping piece of legislation. But with several crypto skeptics on the committee as well, proponents will need to muster all the influence they have to see this bill through the entire legislative process.
This and other such proposals may enjoy better odds in the Republican-led House, and if the Lummis-Gillibrand bill does indeed move it would likely undergo substantial revisions from that which Lummis and Gillibrand are currently proposing.
Regardless, considering the chaotic state of the regulatory status quo, there should be some sense of urgency in Congress to reach consensus and bring clarity to a young industry with ample promise for the future.
Too tired to read, anon? We feel that. Try these instead:
LexDAO weekly loadout:
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