Category: Token Alliance

The Chamber of Digital Commerce, representing the world’s leading innovation in digital assets and blockchain technology, has been closely monitoring the Securities and Exchange Commission’s (SEC) recent enforcement action against Kraken. This development is particularly concerning as it represents another instance of the SEC’s aggressive regulatory approach towards the digital asset industry. 

We have consistently emphasized the importance of a balanced and clear regulatory framework that not only protects consumers but also fosters an environment conducive to innovation. The ongoing situation with Kraken further underscores the urgency for Congress to provide legislative clarity that thwarts the overreach and unjust tactics of the SEC.  

“The time is now for Congress to step up and do their job of actually legislating, so entrepreneurs can innovate and continue to make America a premier destination for emerging technologies,” said Cody Carbone, Vice President of Policy. “The pattern of SEC overreach in the digital asset world is unacceptable.” 

We will be monitoring this action closely. The Chamber of Digital Commerce remains committed to advocating for a regulatory landscape that is fair, transparent, and conducive to innovation.  

Oct. 18, 2023 – The Chamber of Digital Commerce, the world’s leading digital asset and blockchain trade association, has submitted an Amicus Brief in the ongoing case between the Securities and Exchange Commission (SEC) and Binance.US. Our brief aims to assist the Court in critically evaluating the legal merits of the SEC’s allegations while advocating for a more transparent regulatory approach challenging the SEC’s aggressive tactics which lack clear legislative authority.

“This Amicus Brief is part of our continued legal efforts advocating for a balanced and clear regulatory framework that both protects consumers and fosters innovation,” said Perianne Boring, Founder and CEO of The Chamber of Digital Commerce. “We are optimistic that the Court will consider the arguments laid out in our brief and we will continue to fight against the SEC’s overreaching and unjust tactics.”

The Chamber’s brief argues that the SEC’s confrontational approach towards digital asset entities like Binance.US is stifling innovation in the U.S. and that the Commission has stretched the bounds of U.S. security laws to fit the anti-digital asset agenda of the Chair. With such a prominent level of Congressional interest in digital asset regulation, The Chamber also contends the SEC’s current actions imply an overreach of its authority, raising constitutional questions about separation of powers and due process.

“The SEC’s case against Binance.US is the latest in a recent line of SEC actions that misapply settled securities-law precedents in an effort to reach digital assets that do not qualify as securities subject to SEC jurisdiction under any existing law or regulation,” said Steven Gatti, Partner, Clifford Chance LLP. “While the Chamber of Digital Commerce supports sensible regulation of digital assets, any legal or regulatory framework should be thoughtfully crafted by Congress and implemented by financial regulators via regular notice-and-comment rulemaking. The SEC’s regulation-by-enforcement approach deprives market participants of regulatory certainty, which hampers innovation and drives digital-assets businesses offshore, harming US consumers and workers.”

The Chamber argues the SEC should employ more traditional administrative tools, including public rulemaking processes, allowing for the establishment of clear and reasonable regulatory guidelines. The Chamber emphasizes that such an approach would be more transparent and collaborative, fostering an environment where both regulatory bodies and market participants can operate with greater certainty.

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.

July 14, 2023 – The Chamber of Digital Commerce is pleased that there has been a ruling in SEC v. Ripple, applying the legal precedent set forth in the Chamber’s brief. 

This ruling comes after years of litigation, including The Chamber’s amicus brief filed in September 2022. In the amicus brief, The Chamber lays out the applicable legal precedent for initial offerings of digital assets and makes the court aware that no federal law (or regulation) governs the legal characterization of a digital asset recorded on a blockchain.  The Chamber also urges the court to clarify that the law applicable to an investment contract is separate and distinct from the law applicable to the subject of that investment contract. 

“The Court echoed key themes from the Digital Chamber’s amicus brief by unequivocally stating that a digital asset, like other tangible and intangible assets that may be the subject of an investment contract, is separate and apart from the investment contract itself, and does not embody an investment contract. While the Court did not directly render an opinion on secondary resales of digital assets, the opinion provides that certain sales of digital assets may not meet the ‘expectations of profits’ prong of Howey. The Court even cited the Judge’s opinion in SEC v. Telegram where the Digital Chamber played a critical role as amicus curie,” said Lilya Tessler, Partner and head of Sidley Austin LLP’s FinTech and Blockchain group. Lilya Tessler represented the Digital Chamber in filing the amicus brief in SEC v. Ripple and SEC v. Telegram. 

This ruling is a promising move as the digital asset industry is navigating in a lack of regulatory and legal clarity. Although this decision is a great first step, The Chamber looks forward to working with Congress in developing legislation that will help to reinforce and further define the points made in this ruling. 

 “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.” 

** Chamber experts are available for comment. Email press@digitalchamber.org to schedule time to speak with our team. ** 

The U.S. Securities and Exchange Commission (SEC) recently reopened its proposal to expand the statutory definition of “exchange” to specifically encompass trading systems that trade crypto assets, including decentralized trading platforms.  As the leading voice for the digital asset and blockchain industry, the Chamber of Digital Commerce submitted a comment letter in response to questions raised in the reopening release. Our goal is to ensure that any final rules the SEC adopts specifically account for the unique attributes of blockchain technology and digital assets.

In our comment letter, we highlight the fact that the reopening release continues the SEC’s ill-fated attempt to regulate the activities of a disparate and dynamic group of persons from around the world utilizing open-source software, known as “automated market maker” (“AMM”) smart contracts, as a single securities intermediary.  The SEC’s proposed approach to include AMM software within the scope of these regulations without further consideration will deter innovation and disrupt the development and adoption of these technologies.

Our letter also points out that the Commission should identify specific crypto assets that it believes are securities as one component of any of AMM software regulation. This would allow users of these systems that engage in transactions in crypto assets to better understand when such transactions might trigger obligations under U.S. securities laws.  The vague language the SEC proposed could create uncertainty and confusion for industry participants, from software developers to DeFi protocol users.

The SEC’s economic cost analysis set out in the reopening release elicited many questions from a broad range of industry stakeholders. Indeed, the SEC itself acknowledges the possibility of decreased innovation due to uncertainty and compliance costs. We believe that the Commission’s economic assessment of the impact of the proposed rules on crypto trading platforms, and particularly on decentralized trading platforms, is clearly not based on accurate or reliable data and woefully underestimates the actual economic cost that the proposed rules would have on decentralized trading systems. In our view and the view of many others, a comprehensive and accurate economic analysis is a fundamental obligation for every SEC rule-making process and the SEC should be prohibited from adopting rules in cases where it fails to meet that burden.

The Chamber’s comment letter reflects our foundational desire for regulatory certainty and clear compliance standards that are appropriate for the nature of digital assets and blockchain technology, their benefits to users, and the potential risks they may present.  We believe in striking a delicate balance between prudent regulation and fostering innovation. The Chamber remains hopeful for further amendments to the proposed rules that encourage both consumer protection and technological progress, creating a sustainable roadmap for our industry.

The Chamber of Digital Commerce filed an amicus brief in Wahi asserting that the SEC has failed to give sufficient guidance on which digital asset transactions should be deemed ‘securities transactions,’ and that this SEC litigation is a misguided exercise in regulation by enforcement, which could significantly harm sectors of the digital asset industry and the investing public itself. We also noted that the SEC’s efforts are occurring at a time when the agency’s authority to regulate digital assets is being questioned by Congress.

While we appreciate that the SEC has agreed to abandon this dispute without any admission by the Wahi defendants that the digital assets themselves are securities under U.S. law, the crucial matters the Chamber raised in its amicus filing remain unresolved. Our industry requires certainty and clarity in the regulatory space, rather than enforcement actions that further undercut confidence and raise more questions among innovators and investors.