Takeaways From The Latest SEC Enforcement Actions on Crypto Assets | Sarah Chen - DLxLaw

okay uh hi everyone um today I'm going to talk about the um takeaways from the latest SEC enforcement actions on crypto ass space um I know you know among the audience is not just lawyers there are contributors developers uh Engineers people interest in the space investors anyone and really so I want to make sure this presentation is nothing dry and too loyalty uh hopefully you can all walk away with something useful and uh something for you to keep in mind um obviously the latest us regulatory landscape is is on everyone's mind so uh with that uh very briefly about myself my name is saratan I'm a attorney at DLX law we are a boutique Law Firm focusing exclusively on blockchain web three matters I personally have a background from General Corporate at M matters and I guess like many of you here I decided to PIV into web 3 because it's very interesting exciting and here we are um all looking at this together uh quick legal disclaimer the information here is very general information only and is not intended to be legal advice um and there is no attorney clent privilege uh relationship being formed by accessing this material um so when we uh talk about SEC jurisdiction SEC only has J jurisdiction over any activities matters um companies if there is a security Ed issue um looking back at all of the cases brought by SEC there are really two categories of cases one is brought against issuers those are what uh what we know those actions against repol Labs against terraform labs and early on from telegram for against Telegram and rip U kick um and the question was simple uh was there a section five violation that the issuer entity which is the labs entity that um had a Securities offering unregistered in violation of the Securities act um later on more recently mostly last year sec's initiated a few actions against intermediaries those are not the issue entities but rather exchanges in the crypto asset space as I'm sure you're aware against coinbase binance Kraken and those um platforms so um the key question uh underlying both set of both categories are what are these Securities at issue are the crypto asset themselves Securities and or is something else is there some else some some other Securities transaction going on and whether SEC has a jurisdiction over these matters um so with that I want we can impact the first category of cases first the first category are those what we call issue work actions um those if you know since you're sitting here I'm sure you are familiar um there is a very well-known test called hoi test um where um the there are four prong is the investment of money common Enterprise um rely on efforts of others uh and expect expectation of profits um the courts over the past 76 years really have been applying that test to many different kinds of fundraising activities it is generally true that a company that sells something to raise money in order to build out a platform um some projects is conducting a Securities offering that has been the case over the past 75 years it's not new to crypto it's not unique to crypto and that's what we see in Telegram in Kick That Court in those cases applied the investment contract task to um to the transaction underlying transaction and decided that okay Telegram and kick in those cases violated Securities Law um that's also true for Library which was more recent last year and um more and as of that was July last year we all know that uh there was an decision issued in Ripple that the court took a more nuanced approach it um it looked at the xrp sales by by repol laabs not um by by doing a more nuanced approach by splitting them into three different categories of transactions number one is the institutional sales by Ripple and those type of sales were really not that different from any other fundraising activities we see in the past it's that's consistent with catogram consistent with kick and was found to be violated violating security act the second category called a PR programmatic sales it was Anonymous programmatic sales of crypto asset in this case xrp um on different exchanges um those transactions are blind bit ass transactions in a very deep and active trading Market um and the court considered various various factors and concluded that buyers of xrp um those trading platforms do intend to fund the business of Ripple they don't know who are buying the tokens from they don't know where the funds are going to and they come to the conclusion and and the you know Court come to conclusion that there is no violation of the Securities Act and the last category is the other distribution of xrp tokens to employees and third parties so this is a um I would not say uh Innovative but but at least very different approach taken um in Ripple Labs versus the earlier cases however very soon in the same court a different judge in terraform Labs rejected that approach um he was very clear and decline that he declined analyze different types of transactions or do draw any distinction between different manners and sales of these assets um instead um judge raikov in the case was very clear saying that transactions in which US Luna and some other crypto assets were investment contracts and so the crypto assets were Securities um I think so so unfortunately there is no Clarity by the court at this point on this issue and that leave open the question are the fible tokens themselves security and in the Ripple case it was clear xrp as a token is not in in itself an investment contract while in terraform labs the judge also was clear saying that us because transactions in which US Luna were investment contracts those assets themselves were Securities um so that's that's where we are on the first category of SEC actions against issuers and the open question is very fundamental and instrumental to the second category of cases which are enforcement actions brought against exchanges um as probably everyone here knows SCC already initiated actions against coinbase binance and Kraken and settled with bcks um as an example for coinbase they charge coinbase with operating as crypto asset trading platform as an unregistered National Security exchange broker and clearing agency in the complaint they alleged that 12 tokens list on the exchange War Securities and each of these charges really turned on the question whether the crypto asset themselves with security independent of any fundraising activities there is no issue or entity involved here or the crypto assets Securities themselves um very recently that was in uh last month in January during our arguments the SC staff did concede on that point by indicating that a given asset may not be a security but there is an unclear undefined ecosystem ongoing that constitutes an investment contract and the security we will see if um the court in in the case agree and um whether it buys this argument this agrees or disagrees um but that said there are these few different actions are currently ongoing in different circuits that means the course the difference circus may not agree on the the same qu the very same question and if they don't we still do not have any Clarity unfortunately um in the along the same lines um that's as of last week a plan a plaintive which is a project called ler a which has developed its own crypto asset tting platform called legit exchange initiated an action against SEC seeking injunctive release from the court um that they don't need to register with SEC as a exchange broker or clearing agency that's the exact same position exact opposite position that SEC is taking in the coinbase case bance case and craon case um the plenti strategically choose a chose a different circuit so we now have the same legal issue being actively litigated in four different circuits um and we will see if um if any um if these courts agree on this very same issue um a few other issues um was actively litigated in the case were was actually presented in the exchange cases are um one of them the first one staking um the SEC charged coinbase for failing to register the offer of crypto assets taking platform um as you may know the um the as I said earlier the how test has is a fullron test SEC alleged that the staking as a service program meets all for test or for pro and thus was an unregistered security offer the second one is a coinbase wallet and the SCC alleged that coinbase operated it as an unregistered broker by offering its wallet application and we will see of course the same it turns on the same issue whether the crypto asset that users are able to trade by using the coinbase wallet or themselves security if not then there ISC has no jurisdiction it's no Securities Law violation and last one is a stable coin um that one is a little um surprising to many people um because as you see here Alle that b USD the stable coin was offered and sold as an investment contract and therefore a security um it's important to note that BD was off is sold with a variety of different factors ongoing and they were very heavily marketed for its profit generating profit making opportunities um it was very heavily touted by you know various apys yield different programs that allow uh users to earn passive income um this is these factors are unique to BD we will see if the court comes to any conclusion whether BD itself is a security and or the uh offerings of BD as a totality of circumstance uh is a security security offerings so um with that two there are two um categories of cases currently ongoing right one is those against issuer um unfortunately and it's not very clear as I just said at the current status um judge Taurus in the the district New York in the po case took a very nuanced approach she analyzed different types of transactions and considered the I mean applied the how test to different types of transactions of SEC of xrp sales while um judge raikov in the same district court took a different approach he considered all the sales of us of Luna different tokens as a whole and come to a conclusion that all right there are securi offerings and the Securities um the you know just a back as a background SEC is currently active is expected to appeal to Second circuit uh we will see whether the what the appal core comes to conclusion and until until it arrives at at the level of Supreme Court we will not have a final say of you know we won't have a final say from the court was the status or was the correct approach of Howe analysis and in the second category of intermediate um as I said earlier it really turns on the question whether crypto asset themselves whether xrp or different a different crypto asset is itself a security um these cases right now because they're actively being actively litigated in different circuits um any decision in one circuit is not binding on another on cases in another circuit so also same thing until we have arrive at the Su Supreme Court level it's unclear and uh it's remain to be seen with the latest landscape with the latest latest status of the law uh on this issue um so I know that this does not leave anyone here with a lot of clarity I understand that so with that um I think you know as a law as a lawyer a lot of projects clients non clients come to us and ask a question how can I be compliant I want to you know we are developing some cool project uh um as you know web three space we want to can be compliant and we want don't want to get SEC attention um I think it's important you know with that is a piece of you know advice not general not legal advice but more like a piece of General informational for um advice is um to think really focus on what's the Project's building what's the mission of the project what's the goal of project and not be distracted by the price of token we understand of uh crypto token is a many many times a fundamental part of what many projects are building and we want to advance the technology and and we understand that it's part of it but at the same time um some unnecessary um attention can be drawn if some uh if there is some very aggressive marketing focusing on crypto asset token price um we know what Regulators do do not like is seeing that a um retail user who does not understand anything about blockchain on crypto uh invest the money because there is very heavy marketing very aggressive promotion with some rocket ship emojis on their tweets uh and lose end up losing their money that's what they don't want to see and I'm sure that's many of you here do not want to happen either um so really where you are doing the where you are doing the marketing where doing a promotion think about what's the goal of the project and really really stay too to ourself what we're trying to do here and what's the you know what's beneficial for the for the community for the people who are interested in the technology um with that I know this uh setting is not very um great for questions but at the same time I want to tell you that we um I will stay here for a few for some time and we can if you have any questions I'm happy to um answer discuss also this is our my contact information feel free to email me um we always want to know what people are building and get to understand or learn what's the latest in the space and really learn from each other um so with that thank you very much uh thank [Applause] you so