Tag: blockchain

The Digital Chamber (TDC) has submitted a motion for leave to file an amicus brief in LEJILEX;CRYPTO FREEDOM ALLIANCE OF TEXAS V. SEC, in support of Plaintiffs’ Motion for Summary Judgment.

What did the Plaintiffs allege?

In the complaint, plaintiffs allege that they brought the action to seek declaratory and injunctive relief to:

• Prevent the SEC from unlawfully charging them and their members with violating the US securities laws based on the SEC’s “fundamentally mistaken view” of its regulatory power.
• End the SEC’s efforts to unlawfully extend its regulatory authority to cover nearly all digital assets.

LEJILEX’s Position

LEJILEX is requesting judicial relief to ensure it does not need to register with the SEC as a securities exchange, broker, or clearing agency. According to the complaint, LEJILEX faces a genuine threat that when its Legit.Exchange launches, the SEC will bring an enforcement action claiming that LEJILEX is operating an unregistered securities exchange, broker, or clearing agency. LEJILEX argues that it is impossible to register in these capacities because the SEC has not established any regulations providing for the registrations of digital asset platforms like Legit.Exchange.

What does our brief argue?

In our brief, The Digital Chamber highlights the fact that we have long called for the SEC to work cooperatively with the digital assets industry, other federal agencies, and Congress to develop rules that provide industry participants with fair notice of what the law requires and how they can comply. Rather than do so, however, the SEC has pursued regulation of essentially the entire crypto industry through enforcement actions, based on a dubious, far-reaching, and ahistorical interpretation of the statutory terms “security” and “investment contract” in an unprecedented effort to greatly expand its regulatory power under the securities laws.

The brief also examines how the SEC’s lack of clarity and contradictory stances, including regarding which digital assets are securities and within the SEC’s purview and which are commodities and within the CFTC’s purview, injure the digital asset industry and have caused both business and innovation to move offshore. It also sets out why the US securities laws are a poor fit for decentralized blockchains and how the numerous crypto companies that have sought registration or exclusions have faced SEC enforcement actions.

The brief also discusses that, while Congress is actively working on legislation to regulate the digital asset industry and blockchain technology, the SEC has usurped the Legislative Branch’s prerogative to regulate this new technology and industry in a responsible way that fosters innovation in the United States.

“By submitting this motion, we are taking a stand before the SEC’s anticipated overreach occurs. Our goal is to ensure that the SEC does not unlawfully expand its regulatory authority over the entire digital asset industry,” said Perianne Boring, Founder and CEO of The Digital Chamber. “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.”

TDC is represented in this matter by Baker Hostetler. We appreciate the contributions to this initiative by the Baker Hostetler team and other members of The Digital Chamber.

Read the full amicus brief here. TDC experts are available for comment, please contact: press@digitalchamber.org 

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The Digital Chamber (TDC) has filed an amicus brief in the case of Custodia Bank, Inc. v. Federal Reserve Board of Governors, No. 24-8024, currently before the United States Court of Appeals for the Tenth Circuit. This case challenges the decision by the Federal Reserve Bank of Kansas City (FRBKC) to deny Custodia Bank’s application for a Federal Reserve master account. 

Why TDC Filed This Brief 

We filed this amicus brief to advocate for the fair treatment of state-chartered financial institutions, particularly those integrating digital assets with traditional banking systems. The decision to deny Custodia Bank a Federal Reserve master account threatens the innovative financial frameworks established by states like Wyoming. By filing this brief, we’re aiming to protect the burgeoning blockchain industry from regulatory overreach and ensure that lawful businesses are not unfairly penalized based on their involvement with cryptocurrency. 

Key Points of the Case 

1. Federalism and State Innovation: The denial by FRBKC undermines the dual banking system that allows states like Wyoming to charter innovative financial institutions such as special purpose depository institutions (SPDIs). Wyoming’s regulatory framework for SPDIs was designed to bridge the gap between digital assets and traditional financial systems, and was developed with significant input from various stakeholders, including FRBKC. This case threatens to nullify state efforts to innovate and regulate effectively within their jurisdictions. 

2. Constitutional Concerns: The district court’s interpretation raises serious constitutional issues, particularly concerning Article II. By allowing Federal Reserve Bank presidents unfettered discretion to deny master accounts, the decision undermines the constitutional framework for appointing and overseeing federal officials with significant authority. This challenges the principles of political accountability and democratic checks and balances enshrined in the Constitution. 

3. Impact on the Blockchain Industry: The decision to deny state-chartered banks access to the national banking system based solely on their involvement with cryptocurrency sets a troubling precedent. It poses a direct threat to the sustained growth of the blockchain industry by potentially allowing federal regulators to stifle industries they disfavor, regardless of their compliance with legal standards. 

Our Arguments 

Our brief emphasizes: 

• The necessity for clear statutory interpretation that respects the mandatory language of 12 U.S.C. §248a(c)(2), which requires Federal Reserve services to be available to nonmember depository institutions. 
• The importance of maintaining the balance of state and federal authority in banking regulation, which fosters innovation and consumer benefits.
• The constitutional requirement for political accountability in the exercise of significant discretionary power by federal officials. 

Next Steps 

We strongly believe that this case has profound implications for the digital asset and blockchain industry. Our amicus brief argues for the reversal of the district court’s decision to protect the rights of state-chartered banks and uphold fair access to essential banking services. 

Stay Informed 

We encourage all members to read the full amicus brief to understand the detailed arguments and potential impact of this case. You can access the brief here.

Acknowledgments 

We extend our heartfelt thanks to the law firm Clement & Murphy for their exceptional leadership in drafting this brief. We also thank our members who contributed their expertise and insights during the drafting process. Additionally, we appreciate the Global Blockchain Business Council for joining us in this crucial effort to ensure that innovation can thrive within the U.S. banking system and that the cryptocurrency industry is protected from unjust discrimination.  

Together, we are committed to fostering a regulatory environment that supports growth and innovation in the digital asset space. 

For more information, please contact: press@digitalchamber.org 

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The Digital Chamber (TDC) welcomes the IRS’s release of final regulations on digital asset reporting requirements. We are encouraged by the IRS’s responsiveness to public comments and their adoption of a phased implementation approach, which demonstrates a commitment to balancing regulatory needs with industry concerns. 

We applaud several key improvements in the final regulations: 

1. Custodial Focus: The IRS has wisely narrowed the initial focus to custodial brokers, allowing more time to address the complexities of non-custodial and decentralized platforms. 

2. Stablecoins: We appreciate the introduction of a $10,000 annual de minimis threshold for qualifying stablecoin sales and the option for aggregate reporting above this threshold. This approach significantly reduces unnecessary reporting burdens for many users. 

3. NFTs: The adoption of a $600 annual de minimis threshold for NFT sales and the option for aggregate reporting above this amount shows recognition of the unique nature of these assets. This aligns more closely with our recommendation for a nuanced approach to NFT reporting. 

4. Transaction Reporting: We are pleased that brokers will not be required to report wallet addresses and transaction IDs to the IRS, addressing some of our privacy concerns. 

While these changes represent significant progress, we believe there are still areas for further refinement: 

1. Digital Asset Middlemen: The definition remains broad, and we continue to advocate for a narrower focus on entities directly facilitating digital asset sales and exchanges. 

2. Future Guidance: As the IRS develops rules for non-custodial and decentralized platforms, we urge continued engagement with industry stakeholders to ensure practical and innovation-friendly approaches. 

TDC remains committed to working collaboratively with regulators to develop balanced approaches that promote tax compliance while fostering growth and innovation in the digital asset ecosystem. We look forward to ongoing dialogue as these regulations are implemented and future guidance is developed. 

For reference, please see TDC’s comments to the proposed rules from November 2023.  

For more information, please contact: press@digitalchamber.org 

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The Digital Chamber (TDC) strongly opposes the SEC’s latest lawsuit against Consensys, the creator of the MetaMask crypto wallet. This action, targeting DEX routing and staking services, is another troubling example of the SEC’s overreach. 
 
DeFi platforms like MetaMask’s Swaps and Staking democratize finance, providing greater autonomy, efficiency, and access to financial services. They empower the unbanked and underbanked, promoting financial inclusion and accessibility. The SEC’s claim against Consensys misinterprets the technology and stifles progress that could benefit millions.
 
The SEC’s repeated enforcement actions, without clear rules, violate their investor protection mandate and create market uncertainty. With the recent end of Chevron deference, this regulatory ambiguity should not stand. 
 
We stand with Consensys and the wider community in advocating for fair regulation that fosters innovation, protects investors, and promotes financial inclusion. Enough is enough—it’s time for the SEC to stop attacking the digital asset industry and embrace the future of finance.

Press Release 

FOR IMMEDIATE RELEASE 

Washington, D.C. – [6/28/24] – Today marks a significant turning point in the regulatory landscape with the Supreme Court’s decision to strike down Chevron Deference. Chevron Deference allowed federal agencies considerable leeway in interpreting ambiguous statutes, it being overturned today establishes a new era of regulatory clarity and judicial oversight. 

The Digital Chamber (TDC) welcomes this decision as a monumental step toward fair and transparent regulation in the digital assets space. For years, the industry has grappled with inconsistent and overly broad interpretations by the Securities and Exchange Commission (SEC) as Congress debates the regulatory treatment of digital assets. The removal of Chevron Deference paves the way for a more balanced and judicially scrutinized approach to regulation. 

“This decision is a game-changer for the crypto industry,” said Cody Carbone, TDC Chief Policy Officer. “It promises a future where regulations are more predictable and grounded in clear legislative intent, rather than shifting interpretations by regulatory agencies and unelected policy leaders.” 

TDC is committed to providing resources and guidance to our members on navigating this new regulatory environment and working with Congress to create legislative clarity.  

We urge all stakeholders in the digital asset ecosystem to stay informed and engaged as we enter this new phase of regulatory oversight. 

For more information, please contact: press@digitalchamber.org 

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The Digital Chamber recently submitted crucial feedback on the IRS draft Form 1099-DA. The proposed Form 1099-DA for digital asset transactions, is designed for taxpayers to report gains and losses from digital assets. The current proposal requests excessive and potentially intrusive information. There must be a clear and streamlined reporting process to reduce audit risks.

What is happening:

1. The Current Draft Form 1099-DA: The Draft Form 1099-DA requests excessive information beyond what is necessary for tax reporting, including fields like sale transaction IDs and digital asset addresses, which raises privacy concerns.
2. Administrative Burdens: The current draft imposes administrative burdens on taxpayers and digital asset brokers, particularly smaller firms and startups, who must update systems to accommodate the new reporting requirements.
3. Recommendations for Final Form: The Digital Chamber has submitted recommendations to the Internal Revenue Service (IRS) to streamline the final version of Form 1099-DA by including only essential information needed for tax reporting purposes, with additional details retained by brokers for potential examination needs.

Why it is important:

1. Balancing Reporting Burdens: Streamlining the form helps digital asset brokers by reducing unnecessary reporting tasks and privacy concerns. It also makes sure that regulatory requirements are practical and cost-effective.
2. Accuracy and Audit Readiness: Accurate reporting and specifying different tax treatments for items like non-fungible tokens (NFTs) or Qualified Opportunity Fund interests on the final form can reduce audit issues and help the IRS maintain efficient processes.

The Digital Chamber’s Action:

1. The Digital Chamber is pushing the IRS to provide detailed instructions to ensure accurate reporting. The form should account for different tax treatments for assets like NFTs. It’s necessary to get this right to avoid audit issues.
2. TDC is working with the IRS and Treasury to shape fair rules that support both innovation and compliance.

View the full Comment Letter here.

For media inquiries, please contact press@digitalchamber.org. 

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The Digital Chamber, in partnership with Willkie Farr & Gallagher LLP, has released a joint white paper detailing why Filecoin (FIL) should not be regulated as an “investment contract” under U.S. federal securities laws. This comprehensive analysis aims to provide a clear argument against the classification of Filecoin as a security, advocating for a regulatory framework that supports innovation while ensuring investor protection. 

Why We’re Doing This: 

The SEC’s misguided attempts to label FIL as a security in certain actions highlight the urgent need for clear regulatory guidance. Such clarity can enhance industry confidence and facilitate the broader adoption of blockchain technologies, supporting their integration into mainstream applications and services. We specifically chose Filecoin for this analysis because it is so clearly not a security. This case serves as a broader illustration of the SEC’s failure to provide clarity, which is detrimental to the adoption of real-world uses for this technology. 

What’s Happening: 

1. Overview of Filecoin: Filecoin is a decentralized blockchain network designed for peer-to-peer cloud storage, offering economic incentives for reliable file storage since its public release in 2017 by Protocol Labs.
2. Key Components of Filecoin: FIL serves as the native cryptocurrency used within the Filecoin network, essential for purchasing cloud storage and participating in network operations without reliance on external currencies.
3. Storage and Retrieval Services: The network operates through providers who offer storage and retrieval services to users, facilitated by cryptographic proofs and structured through negotiated deals published on-chain.
4. Regulatory Framework: Under U.S. securities laws, assets like FIL could potentially be classified as securities under the “investment contract” definition established in SEC v. Howey, which determines whether transactions involve investments with profit expectations from others’ efforts. FIL should not be considered an investment contract due to its primary role being facilitating decentralized data storage and retrieval – this is a functional, non-speculative use that distinguishes it from assets that can be offered and sold as part of investment contracts. 

Why It Matters: 

1. Legal Clarity for Crypto Assets: Defining FIL’s regulatory status is crucial as it sets a precedent for how decentralized cryptocurrencies are treated under securities laws, impacting their market accessibility and operational compliance.
2. Impact on Innovation: If classified as a security, Filecoin and similar tokens might face regulatory hurdles that could stifle innovation and development within the blockchain and decentralized storage sectors.
3. Investor Protection vs. Market Access: The classification decision affects both investor protection and market access, balancing the need for regulatory oversight with fostering an environment conducive to technological advancement.
4. Global Implications: The outcome could influence global regulatory approaches to decentralized technologies, potentially shaping international standards for blockchain and cryptocurrency governance. 

For media inquiries, please contact press@digitalchamber.org. 

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On Wednesday, May 29, the U.S Treasury Department released the “Illicit Finance Risk Assessment of Non-Fungible Tokens.” The Risk Assessment, required under Treasury’s 2022 “Action Plan to Address Illicit Finance Risks of Digital Assets,” provides a comprehensive overview of the Non-Fungible Token (NFT) market structure, delving into the specific illicit finance threats and vulnerabilities associated with NFTs. It outlines mitigation actions to combat criminal activities and concludes with recommended actions. Treasury risk assessments do not carry any legal weight and are not official executive regulation but can serve to guide the regulatory and policy discussions and debates of the future. Their primary goal is to analyze potential harm posed to consumers, industry participants, and the general public from the threats outlined. These assessments are crucial for maintaining the stability and integrity of our financial systems. 

Analogous to Treasury’s Illicit Finance Risk Assessment for Decentralized Finance (DeFi), the report explicitly states that illicit finance activities utilizing NFT products and markets, including terrorist financing, money laundering, and proliferation financing, are uncommon in the space and that these activities primarily take place in traditional finance. 

NFT Illicit Finance Concerns 

However, the Risk Assessment did highlight prevalent issues of fraud, scams, and theft in the NFT space. It noted that between July 2021 and July 2022, $100 million worth of NFTs were stolen through scams, with $24 million stolen in May 2022 alone. Key types of scams include: 

• Rug Pulls: Creating fake projects to attract investment, then shutting down the project and stealing funds. “Slow rug pulls” involve using funds from an initial project to fund a second scam. 
• Market Manipulation: Deceptive behavior to mislead investors about an asset’s value. 
• Fake and Counterfeit Sales: Misrepresenting an NFT’s value, brand association, or access rights. This includes “sleepminting,” where hackers mint an NFT to appear as if created by a legitimate source, then sell it as authentic. 
• Fraudulent NFT Platforms: Scammers may fail to honor NFT exchange agreements or create fake platforms to steal NFTs. 
• Theft: Criminals can spread malware through social media links, fake advertising, or airdropped NFTs, draining victims’ digital asset wallets, and often use fake NFT creator accounts with phishing links to ask victims to connect their wallets. Vulnerabilities and bugs in smart contracts allow criminals to steal NFTs or buy them at reduced prices, and due to the immutability of many smart contracts, developers often cannot fix or recover funds from these exploits. 

NFT Vulnerabilities 

NFTs have vulnerabilities due to their nature, referenced assets, and regulatory gaps. Criminals exploit cyber vulnerabilities, trademark and copyright challenges, and market hype. Non-compliance with U.S. regulations and foreign regulatory gaps also present risks. 

• Copyright and Trademark Protection: Criminals misrepresent NFT rights, violating copyright and trademarks, inflating prices, and selling counterfeit NFTs. Identifying infringers is challenging due to anonymity and jurisdictional issues. 
• Hype and Fluctuating Pricing: Scammers use time-sensitive offers to pressure victims, and fluctuating prices can mask price manipulation and money laundering. 

Mitigation Measures 

The report outlines several mitigation efforts considered effective against these threats, including: 

• Industry Tools: Tools include scam databases, transaction controls, and blockchain analytics. These can identify scams, prevent wash trading, and flag risky users. Enhanced software reviews and cybersecurity measures are also recommended. 
• Applicability of Law Enforcement Authorities, Public Announcements: NFTs are considered property for asset recovery. Victims can report fraud to the FBI or IC3.gov. Public announcements raise awareness and guide users on preventing fraud. 

• Public Blockchain Transparency: Public blockchains allow tracking of pseudonymous transactions, aiding investigations. However, anonymity-enhancing technologies and off-chain activities limit this transparency. 
• Involvement of Covered Financial Institutions and Other Sources of Government Information: NFT buyers, sellers, and traders often rely on traditional financial institutions to purchase NFTs. Compliance with AML/CFT and sanctions obligations by these institutions can mitigate risks. Non-compliance, especially by foreign VASPs, poses additional risks. 

Recommendations 

• Regulation and Enforcement: Authorities should consider specific regulations and guidance for NFTs, clarify existing obligations, and raise awareness among NFT platforms. Regulatory agencies should continue to enforce current laws and take action against non-compliant entities in the NFT sector. 
• Engagement and Education: The U.S. government should continue engaging with the private sector to monitor NFT developments, promote innovation to mitigate scams and fraud, and educate consumers on NFT rights. Additionally, collaborating with foreign partners to assess and address illicit finance risks in the NFT ecosystem is crucial. 

For media inquiries, please contact press@digitalchamber.org. 

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The Digital Chamber is pleased to see H.R. 4763, the Financial Innovation and Technology (FIT) for the 21st Century Act has successfully passed the House with a vote of 279-136 and is now advancing to the Senate.  

The current regulatory environment in the U.S. has created uncertainty, driving businesses overseas, stifling innovation, and resulting in a loss of jobs and investment. This lack of regulatory clarity has allowed other jurisdictions to advance significantly in creating guidelines, leaving the U.S. behind. Addressing these issues, the FIT for the 21st Century Act establishes clear guidelines for the classification, trading, and regulation of digital assets while preserving and strengthening consumer protection.   

The passage of this bill is the result of over four years of dedicated policy work. The Digital Chamber has been instrumental in advancing this legislation through several key strategies: 

• Policy Development: Since 2020, we have worked with Congressional stakeholders to create comprehensive market structure legislation, initially introduced as the “Digital Commodity Exchange Act” in 2020.  
• Industry Engagement: We have collaborated with over 200 digital asset businesses over four years to weigh in on the legislative text, playing a key role in ensuring the bill promotes market integrity, protects consumers, and reduces the risk of fraud and manipulation. 
• Advocacy: The Digital Chamber has reached all 535 Members of Congress, urging the support of market structure legislation passage.  

The Digital Chamber’s Founder and CEO, Perianne Boring, said the following passage: 

“We are proud to see the FIT for the 21st Century Act passed with overwhelming bipartisan support. Today’s vote was not about the merits of crypto but instead was about acknowledging the need to create a safe market and trading environment for the over 50 million Americans using digital assets today.” 

We thank Congressmen G.T. Thompson (R-PA), French Hill (R-AR), Dusty Johnson (R-SD), Warren Davidson (R-OH) and Tom Emmer (R-MN) for their leadership and the leadership of the congressional staff who worked tirelessly to craft rules of the road for digital asset market participants, without compromising consumer protection.  

The Digital Chamber is committed to advocating for and educating about the FIT for the 21st Century Act as it moves to the U.S. Senate. Our goal is to see this pivotal legislation reach President Biden’s desk for signature.  

But, we still need your help. Here’s how you can take action:  
Call your Senator today at (202) 224-3121 and urge them to pass the FIT for the 21st Century Act. By taking this simple step, you’ll advocate for a brighter future for consumer protection, innovation, and job creation in the U.S. 

For media inquiries, please contact press@digitalchamber.org. 

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After last week’s bipartisan vote in the Senate, where H.J. Res 109 passed by a vote of 60-38 (with 2 members not voting) and support from 11 Democrats, 1 Independent, and 48 Republicans, repeal of the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) 121 is now on President Biden’s desk. He has a decision to make by May 28th, which is the 10-day deadline excluding Sundays. Here are the potential scenarios:

Veto

The President can veto the Joint Resolution as he indicated he would in a Statement of Administration Policy (SAP) on May 8th. A veto would effectively end the congressional effort to nullify SAB 121, as Congress likely does not have the votes to override the veto, which requires a two-thirds majority in each chamber.

Sign the Joint Resolution

President Biden can sign the Joint Resolution into law, nullifying the SEC’s SAB 121 and preventing the SEC from issuing a similar rule in the future.

Do Nothing

President Biden can choose to do nothing and let the 10 days lapse without signing or vetoing the Joint Resolution. This is where it gets tricky:

• If Congress is in session, the President’s inaction will mean that the bill is effectively signed into law, nullifying SAB 121.
• If Congress is not in session, the bill could face a pocket veto, where the President’s inaction prevents the bill from becoming law.

Analysis

The outcome remains uncertain. There is precedent for a President backtracking on a veto threat issued in a SAP and ultimately signing the bill into law. Under President Obama, four bills that received a presidential veto threat in a SAP were ultimately signed by him.

Despite May 28th falling during a congressional recess week for Memorial Day, Congress is likely to remain in session through pro-forma sessions, even if they are expected to be away from Washington, DC on Memorial Day recess. Pro-forma sessions are brief meetings that can prevent a pocket veto by keeping Congress technically in session. As either House can call a pro forma session, a pocket veto is unlikely. 

We should know the outcome soon. Supporters of the Resolution, particularly Democrats, have been increasing pressure on SEC Chair Gary Gensler to withdraw SAB 121 to avoid forcing the President to make a decision. While the SEC has been resistant to backtracking on crypto policy actions, they have succumbed to pressure in the past (e.g., Bitcoin Spot ETPs). 

The next few days will be very interesting to watch.