LexNews+ Weekly
El Salvador votes for BTC; US State Reps create bill to repeal stifling SEC SAB121; Updates on the Genesis and Ripple proceedings; and more. Here's what happened this week in crypto law.
Sections:
1. Headlines (The top stories in cryptolaw this week)
2. Podcasts
3. LexDAO weekly
4. Closing Statements
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Headlines
1. Recent developments in Genesis bankruptcy: defunct lender seeks to offload $1.4B in GBTC
Haroldo
Bankrupt crypto lender Genesis is potentially untangling two of its legal challenges in the coming weeks. Genesis has filed motions to seek approval from the bankruptcy court in the Southern District of New York, addressing both the settlement it reached with the Securities and Exchange Commission (SEC) and the proposed sale of trusts assets to settle outstanding debts as part of the bankruptcy proceedings.
On January 12, 2023, the SEC sued both Genesis and Gemini, accusing them of conducting an unregistered securities offering through the Gemini Earn program. Genesis has recently reached a settlement with the SEC on its civil suit, which, if approved by the bankruptcy court, will formalize the SEC’s claim against Genesis as a $21 million unsecured claim, subordinate to other priority and general unsecured claims and allowed administrative expenses.
On January 2, 2024, Genesis sought the bankruptcy court's approval for the sale of $1.6 billion in trust assets. This package includes nearly 36 million shares of Grayscale Bitcoin Trust (GBTC), valued at approximately $1.4 billion, which would be sold to meet creditor obligations. Genesis also requested authorization to reimburse its creditors in Bitcoin rather than cash. The plan involves using the cash received from the sale of GBTC shares to buy Bitcoin that it will distribute to creditors.
Although the untangling of all the legal issues surrounding Genesis has been and will continue to take time, these recent motions, if approved, represent significant strides in the resolution of the embattled crypto lender’s legal challenges.
(see also: for more general information: blockworks.co; for an exploration of how such a sale may affect bitcoin and market volatility: DLnews.com)
2. Representatives introduce bill to repeal stifling SEC SAB121
Kyler
In a striking move against the U.S. Securities and Exchange Commission (SEC), U.S. lawmakers have initiated a campaign to overturn a contentious accounting policy that places stringent restrictions on companies holding cryptocurrency assets for their customers. The policy in question, Staff Accounting Bulletin No. 121 (SAB 121), introduced by the SEC in 2022, requires firms to record customer-held cryptocurrencies on their own balance sheets. This directive has sparked significant backlash from the banking sector and digital asset companies, fearing the imposition of heavy capital reserves to mitigate associated risks.
Sen. Cynthia Lummis (R-Wyo.), alongside Reps. Wiley Nickel (D-N.C.) and Mike Flood (R-Neb.), have spearheaded this legislative pushback, introducing concurrent resolutions in both the Senate and House to nullify the SEC's bulletin, arguing it oversteps the regulatory guidance traditionally offered by federal agencies. Their effort hinges on the Congressional Review Act, aiming to nullify SAB 121 and its implications for the crypto custody landscape.
The lawmakers' criticism centers on the SEC's failure to consult with other prudential regulators before issuing SAB 121 and bypassing the customary notice-and-comment procedure. Rep. Flood highlighted the importance of congressional oversight in regulatory matters, stating,
"In the face of overreach by a regulator, it is the role of Congress to serve as a check."
This action has garnered support from various crypto lobbying groups, including the Chamber of Digital Commerce. Its CEO, Perianne Boring, articulated the detrimental effects of SAB 121 on the industry, noting that the requirement for custodians to maintain parity between held cryptocurrencies and similar assets on their balance sheets has significantly deterred institutions from offering digital asset custody services.
As the digital asset sector watches closely, this move by U.S. lawmakers represents a significant confrontation with the SEC, underlining the ongoing debate over the appropriate level of regulatory oversight in the rapidly evolving cryptocurrency market. The SEC has yet to respond to the mounting criticism (classic Gary), leaving the outcome of this legislative challenge and its impact on the future of crypto custody in the balance.
3. Continuation of SEC vs. Ripple Proceedings - Navigating the stormy seas of crypto regulation
Jordan
In what seems to be another win for the government against crypto institutions and investors, the SEC has won a motion to compel Ripple Labs ($XRP) to produce its 2022/2023 financial statements. If you don’t know, Ripple Labs is a San-Francisco-based company developing cross-border payment solutions on a blockchain called the “XRP Ledger” and the ripple which started this storm is the allegation that the crypto company “engaged in the unlawful offer and sales of securities in violation” of the Securities Act when it sold its XRP tokens.
The SEC filed its lawsuit against Ripple in 2020 in the state of New York, and Ripple stock has been going up and down ever since. Last summer, both parties agreed that certain “remedies related discovery” was appropriate, but now Ripple feels that the SEC is going too far in their requests.
The associated presses of the crypto community highlighted the SEC’s requests in discovery:
Financial statements from the years 2022 and 2023,
Post-complaint contracts governing XRP sales to institutional investors
Respond to an interrogatory regarding the proceeds generated in post-complaint XRP sales.
Ripple opposed discovery of the financial statements, claiming that these documents are not only “highly confidential”, but that the court can surely determine an “appropriate penalty” without the financial statements. Ripple lost that argument. The court explained that “the extent of a defendant’s wealth is a relevant consideration,” but added that it is in fact the District Judge, and not this court, which will set an appropriate remedy based on whatever considerations are allowed and within reason.
While Ripple can hold the hope that the District Judge does not inflate any damages because of its financial statements, Remedies Law is not a cohesive nor organized body of law, but a dangerous jungle where facts, numbers, and feelings can be thrown together. Ripple may come out alive, but different from when it originally entered, and that will be the new world we all see together.
The world is watching and we are waiting to see what will unfold. Will the punishments be greater if financial statements show gross profits? Should sales be low, will the verdict reflect a smaller sum to be paid by the DeFi defendant?
Ripple requested an extension yesterday, February 6th, for the deadline to respond to the motion to compel discovery. Remedy-related briefs are due by April 12th.
4. El Salvador Stands Firm on Bitcoin, Defying IMF's Renewed Call to Drop BTC as Legal Tender
Eric Gottlieb
On February 4th, El Salvador conducted its national elections, resulting in the re-election of President Nayib Bukele by a significant margin. This victory underscores the Salvadoran populace's endorsement of Bukele's policies, notably the adoption of Bitcoin as legal tender.The continuation of Bukele's presidency will continue to see support for cryptocurrency initiatives. This includes the prospective issuance of bitcoin-backed bonds, anticipated to commence in the first quarter of 2024.
The International Monetary Fund (IMF), however, has voiced apprehensions regarding the adoption of Bitcoin as legal tender. Their concerns are primarily focused on the need for stringent regulation and oversight within this nascent financial ecosystem built on cryptocurrency. The IMF's unease stems from perceived risks and the potential costs associated with implementing Bitcoin as a part of the national economy.Despite issuing multiple warnings and reports since November 2021, the IMF also acknowledges the potential benefits of digital currencies in enhancing financial inclusion. The Chivo e-wallet, for instance, is recognized as a tool that could extend inclusion to financial services.
El Salvador's commitment to Bitcoin, under President Bukele's leadership, will be an experiment in national fiscal policy. While this move has attracted international scrutiny and criticism, it also positions El Salvador as a test case for the integration of cryptocurrencies into a sovereign economy.
President's Bukele's stance indicates a belief that digital currencies can foster economic growth in El Salvador. As El Salvador advances on this path, the global financial community watches closely, awaiting the outcomes of this unprecedented venture into uncharted fiscal policy waters.
5. Prometheum sets sights to offer ether custodial services
Kyler
Prometheum Inc., a firm that has loudly positioned itself within the crypto securities sector under the banner of SEC compliance, has recently announced its plan to initiate a custody service for Ethereum's ether (ETH) as its inaugural product offering. Prometheum remains at the center of ongoing debates concerning the regulation and classification of digital assets in the U.S., and also remains the only U.S.-registered crypto securities platform, a status that has invited both scrutiny and criticism from various corners of the crypto community, while drawing the support of traditional finance stalwarts and anti-accelerationists.
The company's co-CEOs, Aaron and Benjamin Kaplan, known more for their questionable origins than their legal or technical prowess, have outlined plans to expand beyond ETH custody to include other tokens and aim to launch trading operations by the second quarter of 2024. However, this trajectory has raised eyebrows, given Prometheum's stance on digital assets, particularly its efforts to have them recognized as securities under the traditional Howey Test. This approach has been viewed by many as contradictory to the ethos of decentralization that underpins much of the crypto world. Critics argue that Prometheum's regulatory ambitions might stifle innovation within the American tech landscape, rather than nurture it, and some have even gone so far as to question the motives of such positioning, which is by all accounts antithetical to the ethos of decentralization.
As Prometheum forges ahead with its plans, its role in the evolving narrative of crypto regulation remains contentious. We will continue to monitor the company not just for their potential impact on the regulatory environment, but also for the broader implications for the future of crypto and blockchain innovation.
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