Tag: blockchain

Background

In the rapidly evolving landscape of financial innovation, cryptocurrencies have emerged as a disruptive force, captivating innovators and investors alike. With their potential to unlock new possibilities for decentralized peer-to-peer transactions, it is no surprise that they have also drawn significant attention from governments and regulators. In recent years, policymakers have invested significant resources in their attempts to understand and navigate the complex and ever-changing domain of “crypto,” and to put in place effective regulatory frameworks (with varying degrees of success across different jurisdictions). 

However, it is always worth emphasizing that cryptocurrencies only account for a small portion of the overall transformational potential of the underlying distributed ledger technologies (DLT), such as blockchain. These systems could fundamentally transform our financial system and capital markets via processes like tokenization. As a way of further illustration, the current cryptocurrency market capitalization stands today at $2.42 trillion, while a recent BCG report estimates that tokenization alone could unlock a $16 trillion opportunity by 2030 – focused solely on illiquid assets. Furthermore,  if we take BlackRock’s Chair and CEO Larry Fink at his word, the broader use cases and potential of these technologies could far exceed even these estimates over time.  

Given these figures, it is reasonable to ask if policymakers and regulators have been and continue to miss the forest for the trees – a focus on one aspect of the underlying technology (i.e., crypto) while overlooking the broader potential of the underlying technology to transform our capital markets and enhance U.S. financial competitiveness globally. In addition, is it also fair to question whether the very real difficulties just in nomenclature have contributed to a broader malaise across the “digital assets” space that has stunted the potential of the underlying technology to transform our capital markets? 

Terminology as a Barrier 

Delving deeper, the Global Financial Markets Association (GFMA) together, with Boston Consulting Group, Clifford Chance, and Cravath, Swaine & Moore LLP published an in-depth report covering the potential of DLT for capital markets. The report highlighted several key calls to action for industry participants and regulators, such as harmonizing legal and regulatory frameworks and building consensus on common standards to enable interoperability. However, as you read through the report, it becomes evident that a significant barrier to progress is the ongoing confusion surrounding terminology – especially the lack of consensus around what exactly we mean when we say “digital assets”. 

Consider the Association for Financial Markets in Europe (AFME) August 2024 report, Digital Finance in the EU. In this report, AFME expends a good amount of effort into distinguishing between “DLT-based forms of traditional securities” with other commonly used terminology.   

Failure to differentiate between various assets, products, and services, or the assumption that everything “digital” is synonymous with “crypto”, or that everything “blockchain” is crypto, has significantly impaired important and necessary discussions around how blockchain-based infrastructures can transform today’s siloed, highly fragmented, costly and inaccessible capital markets. This is analogous to past discussions around “FinTech,” where firms or providers associated with the term were often unfairly labeled as “unregulated” or “inherently risky”. Unfortunately, while this makes for good political soundbites it also acts as a deterrent to looking under the hood to understand and differentiate the actual risks from the very real potential of the various components. 

Carla L. Reyes, Associate Professor of Law at SMU Dedman School of Law reiterated this broader point around a need for a greater understanding of the technology during last year’s House Energy and Commerce Committee Innovation, Data, and Commerce Subcommittee hearing. In her research, she considered linguistic evidence of misunderstandings about the differences among types of cryptocurrencies, applications of blockchain technology and its impact on the law and policy-making sphere. She found that “stakeholders in the legal field — legal academics, lawmakers, judges, and lawyers — tend to use cryptocurrency-related terms interchangeably, and often hold a specific example out for use in building the applicable legal framework.” In so doing, she stated that “law and policy risk ignoring the important variations in cryptocurrencies and their technical attributes. That failure, in turn, can lead to one-size-fits-all policy and legal frameworks that leave industry confused and clamoring for deeper clarity… good policy for blockchain technology requires understanding the technology, its uses, and its limitations.” 

More Than Crypto 

A deeper understanding of the technology and its practical applications for financial institutions would help illustrate to regulators that the mere presence of the word “digital” in front of an asset, product, or service should not automatically trigger a paradigm shift in regulation. In many instances, particularly with the tokenization of real-world assets – many of which have well-established legal histories and track records – there is little if any, regulatory ambiguity. The rules are clear and they already exist. As the GFMA report states, “Where the legal nature of a service of function does not change, we do not believe that the use of DLT-based technology to support or record the provision of that service or function should result in a change in the regulation or regulatory characterization of that service of function…. As regulated financial institutions innovate using DLT protocols to enhance Books and Records capabilities, this should not result in a change in the regulatory characteristics of the assets recorded on such Books and Records systems – including additional punitive capital treatment or creating barriers for responsible innovation.”  

Unfortunately, this key thesis is still not widely understood, and the industry continues to be obstructed by confusion and conflation of a myriad of different assets, products, and services underneath the ever-expanding term “digital assets”, and the enduring regulatory uncertainty. This greatly hampers ongoing efforts by the financial services industry to utilize new, transformative infrastructures and technologies to evolve our capital markets and make them fit for purpose in the modern world. 

While policymakers and regulators must strike a delicate balance between fostering innovation and protecting consumers, if we are to ever move forward, there needs to be a greater willingness to delve deeper into the weeds; to understand that there is more to all of this than just crypto; and that the underlying technology, when fused with other innovative components, can significantly evolve our capital markets. Continued conflation, misappropriation, or misrepresentation of terms makes the path toward a more liquid, accessible, and transparent marketplace for all much more difficult to achieve. 

By Jackson Mueller, Policy Director, The Digital Chamber 

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The Digital Chamber (TDC) proudly supports the bipartisan introduction of the “Empowering Law Enforcement to Combat Financial Fraud Act” led by Representatives Nunn, Gottheimer, and Fitzgerald. This crucial legislation marks a significant advancement in the ongoing battle against the growing threats of financial fraud, particularly those targeting vulnerable populations such as seniors. 

As the blockchain and digital asset industries evolve, so do the tactics of those exploiting these technologies for illicit purposes. This Act appropriately addresses the need for clearer guidelines, enhanced resources, and better tools for State, local, and Tribal law enforcement agencies to combat complex financial crimes, including “pig butchering” scams. 

By allowing eligible Federal grant funds to be used for investigating senior financial fraud, pig butchering, and other forms of financial fraud, the Act ensures that law enforcement agencies nationwide have the training, personnel, and technological tools needed to effectively address these sophisticated crimes. Additionally, the Act’s proposal for Federal law enforcement agencies to assist in using blockchain tracing tools demonstrates a pragmatic approach to leveraging advanced technologies in the pursuit of justice. 

TDC is particularly encouraged by the Act’s emphasis on interagency collaboration, training, and the responsible use of blockchain technology. These elements are crucial in ensuring that law enforcement agencies are not only equipped to investigate and prosecute financial fraud but also to protect victims and prevent these crimes from occurring in the first place. 

TDC commends Representative Nunn for his leadership and urges the swift passage of this critical bill. 

If you have any questions, please reach out to Policy@digitalchamber.org

The Digital Chamber applauds Congressman Timmons’ leadership and the announcement of the New Frontiers in Technology Act (NFT Act). This is the first bill in the US Congress directly addressing the legal and regulatory treatment of non-fungible tokens (NFTs).  

Following recent securities lawsuits against NFT companies such as Dapper Labs and DraftKings, and the Wells notice from the US Securities Exchange Commission against NFT exchange OpenSea, this critical legislation that ensures that consumptive-use NFTs, and their evolving use cases, are correctly designated as consumer goods, not financial products. 

Key Provisions  

1. Defines Non-Fungible Tokens: The bill defines NFTs as any asset which is of such quality or limited production that it can be independently valued; which is recorded cryptographically on a public distributed ledger; that is the digital equivalent of a tangible or intangible good; or that can be exclusively possessed and transferred person to person, without reliance on intermediaries. It excludes any note, stock, treasury stock, security, future, security-based swap, evidence of indebtedness, certificate of interest, or any financial instrument that would indicate the existence of an investment contract. 

2. Creates Protections for “Covered” Non-Fungible Tokens: The bill creates clarity for “covered non-fungible tokens,” defining them as any NFT with the primary purpose of being a work of art, musical composition, literary work, or other intellectual property; a collectible, merchandise, virtual land, or video game asset; an affinity, reward, or loyalty; or a right, license, or ticket. This coverage does not protect NFTs that are marketed by an issuer or promoter primarily as an investment opportunity or making actual or implied actions designed to increase the value of the token. 

3. NFT Study: Finally, the Act directs the Comptroller General of the United States, a role within the General Services Administration—and not, importantly, a financial regulatory body—to carry out a study of non-fungible digital assets within one year of the enactment of this bill. 

TDC Efforts 

The Digital Chamber has worked with digital asset champions across industry, Congress, and regulatory bodies, to advocate for common sense legislation that will end the predatory and out-of-jurisdiction enforcement actions of the SEC against the NFT industry. The Digital Chamber has consistently been at the forefront of groundbreaking policy and regulatory conversations that served to lay the groundwork for this bill, fighting for the NFT industry to thrive within the United States. 

Your Support is Crucial   

Help the digital asset industry flourish responsibly without the hindrance of misapplied securities regulation.  Contact your Representatives in Congress and voice your support for this important bill. By supporting this Act, you can ensure continued technological innovation, greater consumer protection, and a true home within the United States for blockchain technology. 

Amid growing concerns over the Securities Exchange Commission’s (SEC) latest overreach into the digital asset industry with their wells notice issuance to OpenSea, The Digital Chamber (TDC) is calling for legislation to clearly define certain NFTs as consumer products and exempt them from federal securities laws. This language should:  

• Clearly define that NFTs, which are created for the purpose of consumptive use, are not financial products. 

• Highlight that NFTs should not be classified as securities under the authority of the SEC, or as any other type of financial instruments.   

 
NFTs Are Consumer Goods, Not Financial Products 

In 2023, TDC conducted an in-depth study of the NFT ecosystem. In our Pixels to Policy report, we highlight a number of the most popular NFT applications, from digital art and collectibles to video games, to unique digital event experiences, and more. Many NFT applications are clearly not designed as investment contracts or financial tools for speculation, even if consumers occasionally sell NFTs for a profit, much like traditional collectibles or artwork. This secondary market feature does not make them financial products. 

These items should be classified as consumer goods, not securities. TDC is advocating for legislative clarity that reflects this distinction. 

The Importance of Protecting NFT Creators and Communities  

However, SEC Chair Gary Gensler’s regulation-by-enforcement approach has jeopardized the livelihoods of countless individuals who rely on NFTs to pursue their passions, connect with their communities, and sustain themselves by selling and trading digital goods and access rights within this thriving ecosystem.  

NFT companies providing these minting services and data transfer infrastructure have also endured a lack of legislative clarity and have suffered as a result. Recent securities lawsuits against DraftKings and Dapper Labs, along with a threat of an enforcement action against the NFT marketplace OpenSea, have not only put the industry at risk but also sent a troubling message to consumers: their rights are unjustly restricted by an agency acting beyond its authority. 

Call for Congressional Action 

Congress must act now to ensure that this burgeoning industry remains within the US, for the benefit of the US economy, and not move overseas to more favorable regulatory environments. The Digital Chamber strongly encourages Congress to clarify that Consumptive-Use NFTs are consumer goods and not financial products.  

Update 9/16:

TDC is please to announce that the US Congress is directly addressing the legal and regulatory treatment of non-fungible tokens (NFTs). We applaud Congressman Timmons’ leadership and the announcement of the New Frontiers in Technology Act (NFT Act). Read more about this monumental legislation in the TDC Update here.

If you have any questions, please reach out to Policy@digitalchamber.org

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What’s Happening:

The US Treasury officially withdrew a rule proposed in 2020 by FinCEN, the Financial Crimes Enforcement Network. The rule would have:  

• Subjected individuals using unhosted, or self-custodial, wallets to requirements that would ultimately ban peer-to-peer digital asset transactions, decentralized finance (DeFi), particular NFT platforms, and other decentralized or peer-to-peer activities.  
• Required self-hosted wallet users to collect and report on counterparty information for each transaction they participate in. 

The reporting requirements are technically impossible in most cases. Since blockchain wallet addresses are pseudonymous, users can trust the transactions and their counterparties without knowing or being able to learn personally identifiable information that this rule would have required for reporting purposes. This innovative design not only sets blockchains apart from traditional financial and data transfer technologies, but also makes it prohibitively difficult for users and developers to collect counterparty information outside of centralized platforms. Similar legislative and regulatory efforts to “ban” self-hosted wallets and non-centralized activities in other jurisdictions, such as the European Union, have also been unsuccessful in previous legislative efforts. However, with EU legislators discussing updates to their Markets in Crypto Assets (MiCA) Regulation, this issue may be renewed in that region.   

Background: 

TDC has been deeply involved in supporting the U.S. Treasury’s decision to withdraw the proposed rule on self-custodial wallets. We started by sending a detailed letter to Secretary Mnuchin, expressing our serious concerns about how the rule would impact digital asset innovation and individual privacy. Recognizing the urgency, we also launched a petition to stop the last-minute rulemaking, mobilizing support from both industry leaders and the general public. Our thorough analysis of the proposed rule highlighted potential negative effects on the digital assets sector, advocating for a more balanced regulatory approach. In our response to FinCEN’s Notice of Proposed Rulemaking (NPRM), we reiterated these concerns, arguing that the rule would unfairly burden users of self-hosted wallets without providing clear benefits. Through these concerted efforts, we played a key role in the Treasury’s decision to retract the proposal, underscoring our commitment to shaping fair and effective regulatory policies for digital assets. 

Why it Matters:  

The rule was part of a broader effort to apply the same Know-Your-Customer and Anti-Money-Laundering rules from traditional finance to crypto. While The Digital Chamber strongly supports efforts to eliminate fraud and illicit finance in crypto, the would-be application of this rule does not meet these policy goals. Instead, it would force virtually all crypto activity outside centralized exchange platforms to cease. Moreover, blockchain analytics reports continue to show that illicit finance and money laundering in crypto account for less than one percent of overall transaction activity (see TRM Illicit Crypto Economy report). The application of this rule would have had outsized harm to the industry in exchange for microscopic progress toward its policy objective, when measuring total transaction volume.  
 

Key Points:  

Counterparty reporting requirements are rigorously enforced in traditional finance and by centralized crypto platforms, where they serve their intended purpose. However, these requirements do not fully address the policy objectives they were designed for, as fraud and money laundering in traditional finance are in the trillions of dollars. In contrast, blockchain systems offer full transaction transparency, making it easier to trace and catch illicit activities. Traditional financial networks, on the other hand, often lack transparency; cash transactions, fraudulent accounts, scams, terrorist financing, and money laundering activities are not always visible to regulators and law enforcement. Applying the same regulations in traditional finance that do not fully meet intended policy objectives to crypto transactions and individual users is a suboptimal method of stopping crime and protecting consumers, at best.   
 

Our Perspective  

“The Digital Chamber strongly supports technical efforts, legislation, and rules that meet the critical policy objectives of combatting fraud and illicit transactions and protecting consumers. However, this rule would have brought large parts of the industry to a halt. We applaud the Department of the Treasury for recognizing that there are ways of achieving these policy objectives in the crypto ecosystem that will allow the industry to live on and innovate. It will become safer and more secure as it does so. We look forward to working with policymakers and industry to create these better-fitting policy and technical solutions.”  – Jonathan Rufrano, Policy Director, The Digital Chamber. 

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August 20, 2024 – The Digital Chamber today filed an amicus brief in NVIDIA CORP. v. E. OHMAN J:OR FONDER AB, in support of NVIDIA’s motion for reversal of the judgment of the US Court of Appeals for the Ninth Circuit.  

Why is this case important? 

NVIDIA is the subject of a class action lawsuit in which plaintiffs allege that a significant portion of Nvidia’s gaming GPU sales were driven by purchases from cryptocurrency miners. Plaintiffs allege that NVIDIA’s CEO downplayed this in public statements and failed to disclose the potential impact of volatility in the cryptocurrency market, which later affected NVIDIA’s financial results. 

The plaintiffs’ case relies on “expert” opinion based on unsupported assumptions about the cryptocurrency industry, constructing a theory disconnected from the facts of NVIDIA’s business.   

This case revolves around the Private Securities Litigation Reform Act of 1995 (PSLRA) and two key PSLRA requirements: plaintiffs must allege with “particularity” facts that strongly suggest the defendant acted with scienter, and they must clearly state the facts supporting their belief that statements were misleading. 

Our amicus brief provides the Supreme Court with crucial context about the PLSRA. The Act was enacted to deter nuisance lawsuits that burdened high-growth, high-tech companies with costly discovery and extortionate settlements. Congress specifically aimed to protect these vulnerable sectors, like the cryptocurrency industry, from abusive securities litigation, due to their inherent volatility. We explain how the proper application of the PSLRA’s strict pleading standards should protect the entire cryptocurrency industry.   

Under the PSLRA, a complaint must clearly identify each statement claimed to be misleading, explain why it’s misleading, and provide detailed facts supporting that belief.  

This case shows how allowing speculative expert opinion to substitute for particularized factual allegations of securities fraud (in other words, clear and detailed facts about the securities fraud) creates the very problems Congress tried to solve with the PSRLA.   

In this case, the plaintiffs rely on non-evidence-based “expert opinions.” These opinions, based on general market research and unreliable or hidden assumptions, are NOT enough—undermining the purpose of the PSLRA. 

If the plaintiffs win, it will set a dangerous precedent, allowing speculative and unsupported claims to succeed in court. This could lead to a surge in frivolous lawsuits against companies in the cryptocurrency industry, stifling innovation by burdening them with costly litigation and discouraging investment. Ultimately, this would slow the growth of blockchain technology and undermine the very protections that the PSLRA was designed to provide for emerging, high-tech industries. 

“Today, TDC took its advocacy effort to the U.S. Supreme Court for the first time. We felt compelled to weigh in due to the grave risks of a potential increase in frivolous securities lawsuits based on nothing more than unfounded negative perceptions about the cryptocurrency industry and its high-growth business cycle,” said Perianne Boring, Founder and CEO of The Digital Chamber. “We are hopeful that the Supreme Court will consider the arguments laid out in our brief, and we will continue to support for fair and equivalent application of laws for the cryptocurrency industry.”  

TDC’s counsel on the brief, Joshua B. Simmons of Wiley Rein LLP, said that “it is a privilege and an honor to have the opportunity to represent TDC before the U.S. Supreme Court.  TDC is at the forefront of the cryptocurrency industry, and our firm understands well the intersection of technological innovation and policy. This brief reflects TDC’s key insights into this pivotal case.” 

TDC is represented in this matter by Frank Scaduto, Joshua B. Simmons, Kevin B. Muhlendorf, Krystal B. Swendsboe, Joel S. Nolette, and Christina V. Lucas of Wiley Rein LLP. We appreciate the contributions to this initiative by the Wiley team and other members of The Digital Chamber. 

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

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