Ethereum
SEC Regulations, Ethereum 2.0 and Ripple Wins
Over the past few weeks, the Web3 legal space has seen many litigations and investigations come to an end, while others are just beginning. Terraform Labs is looking to settle its dispute with the SEC and focus exclusively on its ongoing bankruptcy proceedings, and the SEC has closed the door on its “Ethereum 2.0” investigation (for now). While Ripple has been able to defeat most of the private actions filed against it, some issues remain to be resolved, and the Kraken vs. SEC litigation is poised for a busy year of discovery.
These developments and some other brief notes are discussed below.
Terraform Labs and Founder Settle with SEC: June 12, 2024
Background: Terraform Labs has agreed to drop its appeal and damages hearings after a jury found that the company and its founder, Do Kwon, responsible for securities fraud in April of this year. Instead, the company and the founder asked the Court to approve a settlement approximately $5 billion in fines, interest and civil penalties. Do Kwon is personally responsible for $204 million in penalties, so I guess his size is not size no more either.
Analysis: The SEC gets virtually everything it wants. requested in his memorandum on damages so that’s about all you can expect from a white flag and from waving a white flag. Terraform Labs already filed for bankruptcy in January of this year with assets estimated at less than $500 million and the same amount of outstanding liabilities. The funds owed to the SEC under this settlement will constitute an unsecured claim in the bankruptcy case, and the SEC will have to seek its share of what is left after Terraform Labs’ assets are used to pay secured creditors, administrative expenses and legal fees after the petition. So Terraform likely understood that the difference between their proposal of $3.5 million and the SEC’s of $5.3 billion was close to zero since the company would not be able to pay a significant portion of either of these fine options. Apparently, Terraform Labs has handed control over to the “community.” Following the announcement of the settlement, Ripple and the SECOND they traded blows over whether it should change the damages analysis in their case.
SEC Drops Investigation into Ethereum 2.0: June 18, 2024
Background: The SEC sent a letter to Consensys Software stating that the Commission staff does not intend to recommend the application action against Consensys relating to the SEC investigation The investigation was conducted into what the SEC calls “Ethereum 2.0.” The investigation appears to be related to the Ethereum network’s shift from validating transactions that occur on the network from “proof of work” to using “proof of stake” for these validation functions. This change in validation methodology prompted the SEC to revisit the then-Enforcement Director’s statement in 2018 that proof-of-work Ether was not a security. The June 7 letter to which the SEC refers is available here.
Analysis:Is it a coincidence that this decision comes a week after the Head of the Crypto Assets and Cybersecurity Unit of the SEC Enforcement Division announce his departure? It is currently unclear whether this decision is actually the SEC’s decision not to investigate Ethereum 2.0 or whether it is simply a temporary tactical strategy to possibly bring up the issue. Consensys Trial Underway in Texas. Such a strategy would be similar to the SEC’s attempt to debunk Coinbase’s regulatory application by stating that it was “under review” despite ample evidence to the contrary. It will also be interesting to see whether Consensys and Lejilex’s challenges to separate administrative proceedings before the SEC have the same success as a recent decision in this same federal district challenge an action of a separate administrative body.
Ripple Labs Mostly Beats Securities Class Action, But Problems Remain: June 20, 2024
Background: Ripple Labs has won most of its decisions seeking summary judgment in securities class action litigation which was filed by various individuals shortly after the SEC filed suit against the $XRP developer. The Court held that the plaintiffs’ federal securities claims were barred by the applicable statute of repose and that the state law claims also could not proceed because the named plaintiffs lacked the necessary contractual relationship with Ripple. The Court, however, allowed individual complaints for misleading statements continue the trial.
Analysis:While this is a significant victory for Ripple, the order itself contains suboptimal language on the Howey question for the remaining claims and does not prevent Ripple from going to trial on the remaining claim. The Court found that the plaintiffs had sufficiently stated a claim that the $XRP tokens themselves are potentially securities that could give rise to a claim for misrepresentation in connection with a security, even if the plaintiffs purchased the tokens on secondary markets.
Kraken’s Motion to Dismiss SEC Case Likely to Be Dismissed After Hearing: June 20, 2024
Background: On June 20, 2024, the court overseeing the SEC’s lawsuit against Payward Inc. (d/b/a, Kraken) telegraphed its intention to deny Kraken’s motion to dismiss during oral pleadings on movement. The Court was not particularly perturbed by the major question doctrine, rejecting the parties’ offers to present oral arguments on this issue. Although Judge Orrick heard arguments on many remaining issues, he said at the start of the hearing that he was inclined to deny the motion to dismiss and follow the order of Judge Failla in the agency’s lawsuit against Coinbase, a breakdown of which the Polsinelli team provided in our Bi-weekly update April 15, 2024.
Analysis:Kraken’s lawyers tried to distinguish between the binding case law that Judge Failla was bound by in the Second Circuit and the Kraken case in the Ninth Circuit, but that did not appear to sway Judge Orrick during the hearing as they focused on scheduling issues after oral argument concluded (giving at least some indication that the Court expects the case to proceed to discovery).
In short :
PleasrDAO sues Martin Shkreli: PleaseDAO is sue Martin Shkreli (AKA, “Pharma Bro”) regarding the Wu Tang was never released to the public album purchased by the DAO during the confiscation and sale of the latter’s assets, imposed by the Ministry of Justice. This comes after the DAO hosted the album’s first ever listening party. Martin Shkreli also claimed to be behind the “meme-coin” $DJT. with the alleged support of Barron Trump.
Crypto Campaign Funding Continues to Grow: Fairshake, the pro-crypto super PAC, now has total funding of $169 millionwith over $100 million still in its war chest, after Jump Crypto added another $10 million to the pot.
Another Major Departure from SEC’s Crypto Enforcement Unit:David Hirsh, the head of the SEC’s Crypto Asset and Cyber Unit within the Division of Enforcement leaves the agency. This follows the departure of Stuart Charge, who has been involved in numerous cases of theft of the agency’s digital assets.
Ether ETFs Expected Approval This Summer: Gary Gensler said he expects Ether ETF S-1 filings for issuers should be approved by this summer. Despite this, there is always seems to be behind in activity in these different S-1 applications.
District Court Serves Subpoena Against ‘Meme-Coin’ Creator: A judge of the U.S. District Court for the Southern District of Florida agreed to execute a subpoena issued against the issuer of the coin “Let’s Go Brandon” (“LGBCoin”). The creator requested a stay of execution of the order.