The Breakdown - Crypto Goes On Offense as the Legal Tide Begins to Turn

Episode Date: July 1, 2023

The crypto industry is officially bringing the fight to regulators. Coinbase has filed a motion to dismiss the SEC's lawsuit against them, while the Blockchain Association is arguing that SEC Chair Gary Gensler should recuse himself from all crypto enforcement actions.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Saturday, July 1st, and today we are talking about the legal tide turning. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit. ly slash breakdown pod. Hello friends, welcome back to The Breakdown. This is a perfectly appropriate show for July month, the beginning of a new month,

and really what feels like to me, the beginning of a different feeling time in the crypto industry. One of the things that has become clear over the last year, year and a half is that the crypto industry was going to have to fight a number of different battles in the court arena, that it was unlikely that we would get the clarity that we need around regulations and policies without fighting some real, honest-to-god legal battles. And there are a number of examples of those legal battles, and generally the crypto industry going on the offensive that are starting to appear. Let's start today with Coinbase. Coinbase has filed its response to the SEC lawsuit,

rejecting the regulator's jurisdiction. The document filed on Thursday claims that crypto tokens are not investment contracts and therefore not securities, meaning the SEC has no standing to bring its lawsuit. Essentially, the argument goes that when sold on the secondary market, tokens do not represent any contractual agreement with their original issuer, so are not subject to securities law. This argument was also a major part of the ripple case and goes to the heart of the legal logic behind the Supreme Court's Howey test. Coinbase wrote in its filing, quote, because no such obligations are carried in the transactions over Coinbase's secondary market exchange, and because the value that Coinbase purchasers

received through these transactions inheres in the things bought and traded, rather than in the businesses that generated them, the transactions are not securities transactions. Coinbase makes the point that the entire SEC strategy seems like an overreach exceeding their authority. Quote, in the past year, in particular, the SEC has dramatically expanded its definition of investment contract, and therefore its own authority to regulate digital assets. It is done so by decree, arbitrarily, and without congressional mandate. Now, in a separate document, Coinbase has filed a motion to dismiss the case. Chief Legal Officer Paul Grewell tweeted,

We welcome dialogue anytime with any regulator, including the SEC, and believe new legislation and rulemaking is the right path forward. But the claims in this case go far beyond existing law and should be dismissed. Coinbase notes that they have been consistently asking for regulation, allowing them to come into compliance with a set of functional rules. Defiling states that, quote, even were the SEC correct that the assets and services it identifies are within the scope of its existing regulatory authority. This action must be dismissed on the independent grounds that it

violates Coinbase's due process rights and constitutes an extraordinary abuse of process. For years, Coinbase has voluntarily submitted to regulation by multiple overlapping regulatory bodies, has adhered to the public and limited formal guidance from the SEC, senior SEC staff, and the courts about the applications of securities law to its industry, and has begged the SEC for guidance about how it thinks the federal securities laws map onto the digital asset industry, as the SEC's actions reflected in escalating but undisclosed change in its own view of its authority. Coinbase also claims that the SEC's actions run afoul of the major questions doctrine. This legal theory, which has risen in prominence recently,

proposes that policy decisions, which have a major impact on the U.S. economy, such as the legal status of the crypto industry, must be left to elected legislators rather than appointed regulators. Coinbase has requested that a seven-week time frame be laid out for legal file. and a hearing for its motion to dismiss. Lawyer Jeremy Hogan writes, Coinbase filed its 177-page response to the SEC lawsuit. What jumped out to me is how Coinbase uses information and experience from the Ripple case

and also throws in new stuff like the major questions doctrine. Autism Capital wrote new, Coinbase filed its 177-page answer to the SEC's lawsuit, claiming that everything including Brian Armstrong's firstborn child is a security. Coinbase argues that the SEC is overstepping and that the tokens they list are not securities. We give Brian Armstrong and Coinbase at all tremendous credit for standing their ground and fighting back. Brad Nickle host at Mission Defi writes, In all my years of reading legal documents, the pros in this Coinbase filing for dismissal is a thing of beauty.

Coinbase is not messing around. They say, these are not securities from the inception. They do not meet the standard of an investment contract. Secondary market definitely not a security. This is an illegal move by the SEC. Gensor is a hypocrite and said in 2021 he doesn't have the authority unless Congress acts. Regulation by enforcement does not give them the authority. Major questions doctrine means the SEC must get in its lane and stop trying to create law, which is the job of Congress. Much more goodness in here, but everyone can and should read it. Now, another big topic of conversation is the heavy hitters that Coinbase has brought to the party.

Scott Johnson, former finance lawyer at Davis Polk writes, Coinbase gets the biggest guns when their back is against the wall, two band-one firms in Wachell Lipton, Rosen and Katz, and Sullivan Cromwell, with nearly a dozen signed partners. For the outsider, elite of the elite. Now, a lot of the discussion on Twitter is about this major questions doctrine. Johnny Deaton, founder of Cryptolaw.us, says, I believe Coinbase's motion to dismiss, based on the major questions doctrine, has real teeth.

I'm not saying that it will be granted for sure. I'm just saying it's not your garden variety motion to dismiss, where denial can easily be predicted. The motion has teeth because of the following. One, Congress is initiating legislation, demonstrating its intent to legislate this major questions issue. Two, the Hinman emails discuss this regulatory gap and a greater confusion to the market. Three, Gensler's original acknowledgement that there is no existing regulatory framework for digital assets. Four, the fact that there isn't a single case in history that has found a secondary sale of an

investment contract to also be an investment contract. Five, there isn't a single case in history where the courts have found an investment contract where there exists no privity between the issuer and promoter and the buyer. Six, the Supreme Court's decision in West Virginia versus EPA. crypto lawyer at Metaverse lawyer writes, What is the major questions doctrine and why is it important? This is a relatively new U.S. Supreme Court legal doctrine, which says that Congress does not delegate major questions of economic and political significance

to be decided by executive agencies like the SEC. In other words, this legal doctrine is designed specifically to limit federal agency's power and reach. It holds that Congress should be the one to decide how and when to expand an executive agency's power, not the executive agency like the SEC itself. The defense is interesting because legislation has recently been introduced that would create law on how digital assets are regulated and define the SEC's regulatory authority. Coinbase argues Congress has thus demonstrated its clear intent to decide these quote-unquote major questions. Whether or not the major questions doctrine leads to a dismissal, it's sure

to be a vital issue throughout the litigation, including very possibly an issue which will be brought on appeal someday to the Supreme Court. Now, the other big piece of the legal tide turning, On Thursday, industry lobbying firm Blockchain Association penned a comprehensive paper detailing why SEC Chairman Gary Gensler must recuse himself from digital asset enforcement decisions. The paper argues that the Gensler SEC has refused to create rules and provide guidance that would, quote, allow investors, entrepreneurs, and the public to know whether the securities laws apply to their products or services. The main issue, though, and the reason the blockchain association is calling for Gensler to recuse himself from crypto enforcement decisions is that he has very loudly and very publicly

prejudged the entire industry. The paper states that, quote, during his tenure at the SEC, Chair Gensler has repeatedly and forcefully communicated that he has already prejudged each and every case that may come before him, asserting that all digital assets except for Bitcoin are securities. Chair Gensler's vote is tainted. His refusal to engage with the facts and circumstances of each case undermines the Wells process and deprives enforcement targets of the due process rights to which they are entitled. Now, the Wells process, as a reminder, affords firms under SEC investigation, the opportunity to state their case to the commissioners before any enforcement action is decided upon. The argument is that Gensler's public position indicates a lack of good faith engagement with this

process. Now, this issue has been raised previously in both the Ripple and LBRY cases. In February during an interview with New York Magazine, Genzer said that, quote, everything other than Bitcoin is a security. He has since repeated that catch cry often. Stuart Alderati, Ripple's chief legal officer, Gensler's personal opinions could, quote, impermissibly taint future legal proceedings. Now, Blockchain Association Chief Policy Officer Jake Chervinsky had a fire thread about the announcement of this action. It reads, SEC Chair Gary Gensler has wrongly prejudiced that all digital assets are securities. As a result, federal law requires that he recuse himself from all enforcement decisions related to digital assets.

Every SEC enforcement action must follow the Wells process. In that process, the SEC commissioners are meant to act as neutral arbiters. impartially weighing the evidence and arguments presented by SEC staff, the prosecutors, and the enforcement target, the defendant. When it comes to digital assets, Chair Gensler is far from a neutral arbiter. Since his appointment, he has repeatedly stated his view that all digital assets other than Bitcoin are securities. End of story. We list many of these statements in our paper. Chair Gensler is wrong. It is well settled that determining if a particular transaction falls within the scope of the securities laws

requires careful analysis of the facts and circumstances surrounding that transaction. Chair Gensler refuses to engage in that analysis. When an SEC commissioner, quote, has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it, the law demands recusal. Chair Gensler has clearly prejudged the facts in law in every case involving digital assets. He must recuse himself. Without recusal, his bias taints the entire enforcement action. Now, lest you think it's just the crypto industry who is upset with the SEC,

a trio of House committee chairs have taken the SEC to task for failing to provide detail about off-channel communications and record-keeping obligations. In a joint letter penned to Chair Gensler, the Republican leaders said the SEC had failed to adequately respond to a previous inquiry in November. The lawmakers wrote that, quote, evidence uncovered during Freedom of Information Act litigation, suggests the SEC is failing to identify and produce records of official business conducted on non-email or off-channel platforms, such as Signal, WhatsApp, Teams, and Z.

Zoom. Now, the important thing to note here is that SEC officials are required to keep records of official business and accurately diarize meetings where policy is discussed to allow for appropriate oversight of the agency. What makes this such an infuriating topic for those who are frustrated with the SEC is that off-channel communications have been a hot topic for the Gensler SEC, with the agency handing out over $1 billion in fine since 2021 to Wall Street firms for allowing the practice within their institutions. Late last year, however, the Wall Street Journal published a report accusing the SEC of having similar shoddy practices, stating that, quote, government officials routinely engage in the same sort of record-keeping shenanigans. The letter from

the congressman stated that these allegations raise, quote, troubling questions about the SEC's compliance with applicable federal laws, as well as, quote, disturbing questions regarding Gensler's commitment to holding the SEC accountable to the same standards, he seeks to impose on the entities the SEC regulates. House Financial Services Committee Chairman Patrick McHenry said in a tweet that he joined his colleagues in, quote, sending a letter to Gary Gensler slamming his SEC for failure to comply with federal recordkeeping law and his inadequate response to a previous inquiry on this matter. The SEC needs to play by the rules. Now, all of this has contributed a lot of optimism to the space.

Van Spencer, the co-founder at Framework Ventures wrote, The extent to which crypto lawyers and crypto policy people have shown up for the industry in this bare market is something to behold. I expect multiple meaningful court victories in the next three to six months that set the industry on a new trajectory. Jacob Franik from Alliance Dow said, Starting to feel like guns are bit off more than he can chew, proud of the industry for not backing down to a bully. And maybe the simplest but most vibe-capturing tweet of all came from Masari's CEO Ryan Selkis who wrote,

We're going to effing win. That is it for today's breakdown. Thank you as always for watching, and I hope you are heading off to a wonderful pre-holiday weekend. Until tomorrow, be safe and take care of each other. Peace.