Author: Ethan Brady

Today, The Chamber of Digital Commerce expressed concerns regarding the Treasury’s recent Notice of Proposed Rulemaking on digital asset reporting requirements. 

While The Chamber acknowledges Treasury’s intent to ensure fiscal responsibility and maintain oversight, it is paramount that regulation in the digital asset space is crafted with precision, foresight, and a deep understanding of the technology and its implications.  

The recent proposal risks stifling innovation, adding undue burdens on businesses, and inadvertently pushing digital asset endeavors outside of the United States. 

“We look forward to providing comments and feedback to Treasury and the IRS,” said Cody Carbone, Vice President of Policy. “While it’s imperative for crypto traders to adhere to tax regulations, it’s equally crucial that guidance for crypto users and platforms aligns with existing tax norms, ensuring they aren’t unfairly targeted.” 

The diverse nature of the digital asset ecosystem is not analogous to traditional financial systems. By imposing a one-size-fits-all approach, we risk oversimplifying a complex landscape, leading to unintended consequences and potential harm to businesses, innovators, and consumers alike. 

In comments ahead of the October deadline, the Chamber will urge the Treasury Department and the IRS to consider the broader implications of this proposed rule. The Chamber of Digital Commerce, along with its members, are eager to engage in a constructive dialogue to ensure that any final directives reflect the nuances of the digital asset ecosystem.  

Today, The Chamber of Digital Commerce sent a Letter to leaders of the House Financial Services and Agriculture Committees responding to a letter from Better Markets published July 11 expressing concerns with draft provisions of the Financial Innovation and Technology (FIT) for the 21st Century Act. 

We believe in the importance of a robust and adaptable regulatory framework that reflects the unique characteristics of digital assets. While we respect the perspectives offered in the Letter, The Chamber believes it’s important to use its voice as an industry representative to address certain assumptions, interpretations, and falsehoods related to digital asset regulation that warrant a more nuanced understanding and correction of the record. 

Key Points: 

CFTC’s Updated Toolkit 

Better Markets’ assertion that the ‘CFTC Lacks the Necessary Investor Protection Mandate’ to regulate crypto overlooks the CFTC’s extensive role in ensuring market integrity and consumer protection, underscoring its achievements in safeguarding participants from deceptive trading practices while fostering a transparent and stable market. 

The Addition of Innovation to the SEC’s Mission 

Better Markets’ concerns about incorporating “innovation” into the SEC’s mandate risk overlooking the evolving landscape of financial markets. Embracing “innovation” doesn’t undermine the SEC’s core duties but rather equips it to effectively assess and regulate emerging technologies, ensuring a proactive, adaptive regulatory approach that balances traditional mandates with the benefits of technological advancements. 

Wash Trading Manipulation 

Better Markets’ claim about rampant manipulative wash trading in crypto markets selectively ignores that the FIT for the 21st Century Act explicitly prohibits such practices, a point emphasized by Congressman French Hill during the bill’s markup.  

Provisional Safe Harbor Concerns 

The FIT for the 21st Century Act’s ‘provisional safe harbor’ does not grant malpractice immunity in the crypto space as claimed by Better Markets. Instead, the Act ensures entities remain accountable, with the goal of balancing crypto innovation and robust investor protection. 

Magnitude of Consumer Losses 

The FIT for the 21st Century Act aims to establish a comprehensive regulatory framework for the crypto industry, enhancing transparency, accountability, and investor protection, countering Better Markets’ claim that only the SEC can effectively safeguard consumers in evolving financial landscapes. 

The CFTC’s Unfunded Mandate 

Although addressed after Better Markets’ letter was published, the FIT for the 21st Century Act addresses concerns that the CFTC is underfunded by proposing a $120 million allocation, ensuring it effectively regulates the crypto industry without compromising its existing functions.  

**Chamber experts are available for comment. Contact press@digitalchamber.org to schedule an interview.**

Today, The Chamber of Digital Commerce has responded to the Treasury Department’s Illicit Finance Risk Assessment on Decentralized Finance (DeFi).

In our response, The Chamber provides comprehensive insight into DeFi, defines decentralization, and illuminates the risks tied to it, laying a groundwork for providing clarity to the role and potential of DeFi in modernizing the financial system.

“We would like to thank The Treasury for their collaborative efforts in this endeavor. DeFi is a complicated and technical field, and the Treasury is making the right move by asking for help from real industry experts,” said Cody Carbone, Vice President of Policy. “We are excited to continue this conversation and advocating for the industry and our members.”

The Chamber’s comments are a product of our diverse membership, and we are going to continue to lead the conversation.

**Chamber experts are available for comment. Contact press@digitalchamber.org to schedule an interview.**

The Chamber of Digital Commerce today filed an amicus brief in SEC v. Coinbase, requesting that the Court dismiss the case and put an end to the SEC’s most recent attempt to regulate the digital asset industry despite the lack of delegated legislative authority.  

The Chamber argues the SEC’s continued aggressive enforcement posture towards digital asset companies, such as Coinbase, is inappropriately stifling innovation across the trillion-dollar U.S. digital asset industry – clearly a violation of the major questions doctrine.  The SEC’s action against Coinbase is particularly problematic in light of the fact that both chambers of Congress are considering legislation that would specify and constrain the SEC’s regulatory authority over digital assets. As legislative debates continue, Congress has clearly not conferred the authority to the SEC to regulate all digital assets as securities. Enforcement actions that suggest otherwise raise constitutional concerns regarding separation of powers and due process, putting the digital assets industry and its stakeholders at risk.  

“This case is yet another example of the SEC acting outside of its legislative mandate and regulating by enforcement. We’ve called on the SEC to issue guidance for digital asset issuers and exchanges repeatedly since 2016 and still no progress has been made to provide the industry with clear rules of the road. We must halt the SEC’s targeting of members of the digital asset industry on a one off, unexpected basis,” said Perianne Boring, Founder and CEO of The Chamber of Digital Commerce. “We are hopeful that the Court will consider the arguments laid out in our brief, and we will continue to fight against the SEC’s  overreach.”  

Joseph Evans, Co-Chair of the FinTech & Blockchain Practice and Head of Crypto Litigation and Regulatory Defense at McDermott, Will & Emery said, “The SEC has failed the digital asset industry by refusing to work cooperatively through the provision of prospective guidance. Rather, the SEC’s regulation-by-enforcement campaign disserves the millions of law-abiding individuals that use digital assets and the professionals that work in the industry.” 

**Chamber experts are available for comment. Contact press@digitalchamber.org to schedule an interview** 

How the ruling applies the legal precedent set forth in The Chamber’s brief

August 1, 2023 – The Chamber of Digital Commerce & Sidley Austin LLP

On July 13th, the U.S. District Court of the Southern District of New York provided a split decision on cross-motions for summary judgment in the matter of SEC v. Ripple Labs, Inc. et al. The question before the court was whether Ripple and its executives’ distribution of XRP tokens constituted sales of securities in violation of U.S. securities laws and what law applies to such distributions. 

The court analyzed the XRP token distributions in three categories described below. For each category, the court examined the relevant undisputed facts and applied the Howey Test, a multi-factor legal test, to determine whether a distribution of tokens is an offer and sale of “investment contracts” and, therefore, securities. This case is the first time that a Court has applied a separate Howey analysis to different types of distributions of the same token with different rulings for each distribution. The court’s ruling for each distribution is as follows:

1. Institutional Sales: The Court ruled that the Howey test is satisfied and Ripple’s direct sales of XRP to “certain counterparties (primarily institutional buyers, hedge funds, ODL customers) pursuant to written contracts” constituted securities transactions. SEC win.
   
   
2. Programmatic Sales: The Court ruled that Ripple and executives’ sales of XRP through the use of trading algorithms, such as on digital asset exchanges, with blind bid/ask transactions were not securities transactions because the purchasers had no expectation of “profits…from the efforts of others”, including Ripple or its executives. Ripple and executives win.
   
   
3. Other Distributions: The Court ruled that Ripple providing XRP to employees and to other third parties through initiatives were not securities transactions because there was no “investment of money”. Ripple win.

The Chamber has provided a detailed analysis of the case below, including a look ahead as to what may come next. Although this decision is a great first step, The Chamber is eager to collaborate with Congress on legislation to strengthen and clarify these points. 

The Chamber’s View

We were pleased to see that the Court’s interpretation of the issues surrounding the legal classification of digital assets is aligned with the arguments outlined in The Chamber’s amicus brief.

“This case is a big milestone in the process of setting clear and consistent sets of rules for our industry, and we are also encouraged by the legislation also in play,” said Perianne Boring, CEO and Founder of The Chamber of Digital Commerce. “The digital asset industry deserves a level playing field and we will continue to advocate for sound policy that promotes U.S. leadership in the digital economy.”

Judge Torres’ ruling establishes an important legal decision by properly distinguishing between an investment contract and the underlying asset. 

In our brief, we argued that the subject of an investment contract (i.e. a digital asset) is separate from the investment contract itself. Therefore, the subject of an investment contract is not inherently a security and should not be treated as such for regulatory purposes. Our amicus brief also asserted that “care needs to be taken not to conflate a digital asset with the circumstances of its initial offering”, and this viewpoint is mirrored in the Court’s decision where Judge Torres states that, “XRP, as a digital token, is not in and of itself a contract, transaction, or scheme that embodies the Howey requirements of an investment contract.”

Citing a variety of cases referenced in our brief where different tangible and intangible assets served as the subject of an investment contract, including orange groves, whiskey casks, payphones, and condominiums, Judge Torres states that “in each of these cases, the subject of the investment contract was a standalone commodity, which was not itself inherently an investment contract.”

The Court expressly declined to opine on whether secondary market transactions in XRP constituted investment contracts, as that question was not properly before the Court.

However, the court found that purchasers who bought XRP from digital asset exchanges “stood in the same shoes as a secondary market purchaser” and were not offered or sold investment contracts.

The Court stated that, while such purchasers may have purchased XRP with an expectation of profit, “they did not derive that expectation from Ripple’s efforts (as opposed to other factors, such as general cryptocurrency market trends)—particularly because none of the [buyers on digital asset exchanges] were aware that they were buying XRP from Ripple.”  This line of reasoning may also be informative, but not binding, on the application of the Howey test in secondary transactions of digital assets in future or ongoing SEC litigation.

“The Court adopted key themes from The Chamber’s Amicus Brief by setting clear legal precedent that a digital asset, like other tangible and intangible assets that is the subject of an investment contract, is separate and apart from the investment contract itself, and does not embody an investment contract.  The Court, while not explicitly opining on the secondary resales of digital assets, indicated that some digital asset sales might not satisfy Howey’s “expectations of profits” criterion. The Court even cited the Judge’s opinion in SEC v. Telegram where The Chamber played a critical role as amicus curie,” said Lilya Tessler, Partner and head of Sidley Austin LLP’s Fintech and Blockchain group and representing The Chamber as amicus curie in SEC v. Ripple and SEC v. Telegram.

The Court applied the Howey test to three applicable scenarios:

1) Institutional Sales, 2) Programmatic Sales, and 3) Other Distributions.

Institutional Sales: For the Institutional Sales, which involved direct sales to primarily institutional buyers pursuant to written contracts, Judge Torres held all factors under the Howey Test were satisfied. The court concluded that purchasers invested money by buying XRP directly from Ripple and that there was a common enterprise because purchasers’ funds were used to finance Ripple’s operations and each purchaser received the same fungible XRP. Additionally, the court held that investors had an expectation of profit based on the efforts of Ripple given Ripple’s marketing efforts and public statements about developing use cases and improving the market for XRP. The court therefore found the undisputed facts demonstrated that the nature of the institutional sales of XRP were understood by the parties to be “an investment in Ripple’s efforts,” and thus a security.

Programmatic Sales: For Ripple and its executives’ programmatic sales, which were sales conducted using trading algorithms on digital asset exchanges, the court concluded that the third prong of the Howey test was not satisfied, stating:

“Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP… Programmatic Buyers could not reasonably expect the same.”

Here, the Court’s ruling indicates that the third prong of the Howey test, which examines whether a buyer is led to expect profits predominately from the efforts of a promoter or a third party, was not satisfied because these sales were “blind” and purchasers had no knowledge if their payments went to Ripple, or any other seller of XRP. The court held that this meant the programmatic buyers of XRP tokens were not purchasing them with the expectation that they would profit from the efforts of Ripple or other third parties because they did not intentionally “invest their money in Ripple” and because they did not receive the marketing materials and direct representations that the Institutional Buyers received. Therefore, considering the economic reality of the circumstances of the Programmatic Sales, the court found there was no offer and sale of investment contracts.  Because the court found that the third Howey prong was not satisfied, the opinion did not analyze whether the first or second Howey prongs were satisfied in this distribution.

Other distributions:  The court held that other distributions of XRP, such as in connection with employee compensation or Ripple’s Xpring initiative to develop new applications for XRP and the XRP ledger, failed to satisfy the first prong of Howey, that requires an “investment of money” as part of the transaction or scheme. Judge Torres mentions “the record shows that recipients of the Other Distributions did not pay money or “some tangible and definable consideration” to Ripple. The Court did not analyze whether the second or third prongs of the Howey test were satisfied for other distributions as the first prong failed to satisfy the test.

What’s Next?

SEC staff has indicated that they are recommending to the Commission that it appeal the decision. Nevertheless, the decision in this case led to major crypto exchanges reintroducing trading of XRP.

While this ruling represents a clear step forward for the industry by providing the applicable law and distinguishing an investment contract from digital assets themselves, The Chamber believes that regulatory clarity still must be achieved through comprehensive and effective legislation. The gears of Congress are encouragingly in motion with several blockchain and digital asset regulatory bills moving before the House and Senate. We are hopeful these bills will continue to move through the legislative process, but chances of enactment remain slim due to constraints of the legislative calendar and lingering partisan opposition to passing digital asset legislation.

The Chamber will continue to advocate for legislation that creates a clear and comprehensive legal framework for these technologies. Just as in our SEC vs. Ripple Brief, we will continue to work toward a clear route for firms to launch digital asset products, prioritizing both investor protection and innovation.

1️⃣ Welcome to the Future! 🤖🔗: The dynamic duo of Blockchain and AI is here! Each powerful in its own right, together, they could turbocharge the digital revolution. Expect advancements in AI powered by the unshakeable security of blockchain. Let’s dive in!

2️⃣ The Fort Knox of Data Security 🔐: AI craves data. The more, the merrier!🍴 But, where there’s data, there are threats. Enter Blockchain – a virtual Fort Knox protecting data from tampering, fraud, or loss. Once it’s in, it’s IN, making blockchain a trusty gatekeeper for our precious data.

3️⃣ Your Data, Your Rules 👑: Blockchain gives YOU the power to control your data!🎛️ The “Data as a Human Right” model takes center stage, boosting your confidence and encouraging participation. Goodbye, data misuse, hello data democracy!

4️⃣ Transparent & Trustworthy AI 🔍: Thanks to blockchain, AI decisions become an open book. Every action, every decision, traced, and tracked. Particularly for high-stakes sectors like healthcare and finance, blockchain assures that AI decisions are explainable and verifiable.

5️⃣ Decentralized Intelligence – Power to the People 💪: Blockchain champions decentralized marketplaces for AI models, breaking the monopoly of tech giants. Share, sell, and innovate – it’s an open playground for developers and smaller players. Power to the people!

6️⃣ AI DAOs – Revolutionizing Management 🔄: Imagine self-governing, smart contract-based organizations. That’s AI DAOs for you, enabled by blockchain. Say hello to a new era of AI applications, collectively owned and managed by their users.

7️⃣ To Infinity and Beyond! 🚀: Blockchain and AI, an unbeatable team, usher us into a new era of secure, democratic, and user-centric applications. The road ahead might be challenging, but the journey is rich with promise and filled with exciting possibilities!

🎯Why it’s Important 🎯: The fusion of Blockchain and AI signals a dramatic shift in how we interact with technology. Enhanced data security means safer environments for data-intensive applications, leading to better, more accurate AI models. Greater control over personal data promotes ethical AI development and ensures user privacy. Finally, the decentralization of AI development democratizes the field, fostering innovation and broadening participation. Together, Blockchain and AI are setting the stage for a future where technology is more secure, more democratic, and more innovative. 

Get ready to witness history in the making!

Only July 27, Senators Warren (D-MA) and Marshall (R-KS), alongside Senators Manchin (D-WV) and Graham (R-SC) re-introduced the Digital Asset Anti-Money Laundering Act. This proposal aims to eradicate digital asset innovation from the United States at the expense of market security by imposing impractical and unworkable compliance burdens on industry participants. We have met with nearly all members of the Senate Banking Committee on this proposal and it is unlikely to pass the Senate. However, it will receive significant media attention, possibly a markup in the Senate Banking Committee, and could attract additional co-sponsors. For those reasons, we strongly encourage all consumers interested in preserving and improving the health and viability of the digital asset ecosystem to call their Senators to voice opposition to this bill. 

The legislation would classify certain industry participants, including individual miners and validators, as financial institutions subject to the Bank Secrecy Act compliance regime. Treating these entities commensurate with the largest banks, hedge funds, and money transmitters would weigh them down with unnecessary compliance, stifle innovation, hinder industry growth, and force activity offshore to jurisdictions with less adequate security and oversight. 

For example, digital asset validators and miners do not typically engage in activities that qualify them as financial institutions under the Financial Crimes Enforcement Network’s (FinCEN) definition. FinCEN’s regulations are designed to cover entities that engage in traditional financial activities, such as accepting deposits, issuing loans, or engaging in other types of lending or financial intermediation. Digital asset validators and miners are generally involved in the technical operation of blockchain networks and do not provide financial services to customers. Blockchains are the software rails on which transactions, financial and otherwise, operate–but we do not subject software providers of banking infrastructure to the same regulations as banks.  

Registering as a financial institution would impose significant compliance costs and hinder or preclude participation in the digital asset ecosystem. Covered entities may be forced to depart the U.S., resulting in a brain drain of talented developers and technical experts critical to continued digital asset ecosystem development. This is already occurring: in 2017 the U.S. led all other nations with a 40% share of global blockchain developer roles; that share has dwindled to 29% today and is projected to decrease by an average of 2% annually–and in an industry expanding at a torrid pace, meaning we are holding a diminishing share of a growing pie. 

Instead of requiring digital asset validators and miners to register as financial institutions, regulators should focus on developing a regulatory framework that is tailored to digital assets’ unique characteristics and balances the imperative for consumer protection with the benefits of innovation and growth. 

As such, we oppose this legislation and urge Congress to reconsider its approach to regulating the digital asset industry. There is an outcome to this subject that balances consumer protection and allows for innovation to flourish. We hope policymakers choose to work collaboratively with industry to develop sensible, nuanced regulations before our allies and adversaries exploit our indecision, to the long-term detriment of our economic competitiveness and consumer choice. 

July 27, 2023 – The Chamber of Digital Commerce is thrilled to see that the House Agriculture Committee led by Chairman GT Thompson passed H.R. 4763, The Financial Innovation and Technology for the 21^st Century Act, for consideration on the House floor. 

This Act establishes a digital asset market structure framework appropriate for the unique characteristics of digital assets. This functional framework will provide clear rules of the road for market participants as well as protect investors and consumers. 

“Congratulations to Chairman Thompson, Rep. Hill and Rep. Johnson on their hard work on this bill and their bipartisan efforts,” said Cody Carbone, Vice President of Policy at The Chamber. “This bill is a massive step forward for the digital asset industry and we look forward to making sure this bill continues to stay true to its intension and benefit the digital asset industry.” 

After being marked up by both the House Agriculture and Financial Services committees, and with overwhelming bipartisan support, the bill will now be moved to the House floor for full consideration. 

**Chamber experts are available for comment. Contact press@digitalchamber.org to schedule an interview.** 

July 26, 2023 – The Chamber of Digital Commerce is pleased to see that H.R. 4763, “The Financial Innovation and Technology for the 21^st Century Act” has passed markup and is on its way to the House floor. 

The Act establishes a digital asset market structure framework appropriate for the unique characteristics of digital assets. This functional framework will provide clear rules of the road for market participants and protect investors and consumers. 

During markup, Chairman McHenry pointed out that this bill has been the work of bipartisan efforts across weeks, and The Chamber is proud to have been part of those discussions. 

Critics of the Act said that it will cause more confusion in the digital asset world, but with its layout of a regulatory framework, it provides clarity so that investors and consumers are protected. 

“This Act provides a way forward for the digital asset industry that has previously not been available,” said Cody Carbone, Vice President of Policy at The Chamber. “We applaud Chairman McHenry, Congressman Thompson, Congressman Hill, and Congressman Johnson for their leadership to bring clarity to the digital asset industry.” 

**Chamber experts are available for comment. Contact press@digitalchamber.org to schedule an interview.** 

July 25, 2023 – The Chamber of Digital Commerce is delighted to express its robust support for the bipartisan ‘Blockchain Regulatory Certainty Act‘. We are eager to see this pivotal legislation advance through the House Financial Services Committee and move closer to enactment. 

This Act represents a significant stride in providing regulatory clarity for blockchain developers, service providers, and digital asset miners. By ensuring that these entities are not treated as money transmitters or financial institutions, the Act provides a safe harbor that encourages innovation while maintaining the integrity of the digital asset ecosystem. 

“We believe this Act will stimulate growth and innovation in the blockchain industry by reducing unnecessary regulatory burdens. We look forward to working with Congress to ensure the successful implementation of this legislation,” said Cody Carbone, Vice President of Policy at The Chamber. 

The Chamber commends Congressman Emmer (R-MN) and Congressman Soto (D-FL) for their leadership and the members of the House Financial Services Committee for their foresight and commitment to supporting the blockchain industry. We are confident that the ‘Blockchain Regulatory Certainty Act’ will play a pivotal role in shaping a positive regulatory environment for blockchain technology in the United States. 

Summary of the Blockchain Regulatory Certainty Act 

The Blockchain Regulatory Certainty Act provides a safe harbor for non-controlling blockchain developers and providers of blockchain services. It ensures that these entities are not treated as money transmitters or financial institutions unless they control digital assets in the regular course of business. The Act aims to foster innovation in the blockchain industry by reducing regulatory burdens while maintaining necessary safeguards for the digital asset ecosystem.