The Week of May 19-25 Was the Most Promising for the Regulation of Blockchain Technology in the United States in a Very Long Time

The week of May 19-25 was the most promising for the regulation of blockchain technology in the United States in a very long time.

Bi-Weekly Digital Asset Legal Update: House Passes FIT 21, Uniswap Responds to SEC Wells Notice, and SEC Approves Ether Spot ETF 19b-4 Applications

The week of May 19-25 was promising for the regulation of blockchain technology in the United States. Polsinelli’s Blockchain+ team delayed the publication of this Bi-Weekly update by a week to allow us to cover these exciting updates. These updates include the House of Representatives’ bipartisan approval of the Financial Innovation and Technology for the 21st Century Act (“FIT 21”), Uniswap decentralized finance (“DeFi”) developer responding to Wells notice from the U.S. Securities and Exchange Commission (the “SEC”), and the SEC apparently reversing course on its Ether spot ETF stance. Overnight, it seems like political tides may be turning, with a rising number of administrative and elected officials from across the political spectrum supporting various digital asset proposals.

This week is also that of Consensus, the largest conference in the digital asset industry, taking place in Austin, Texas. Polsinelli attorneys and BitBlog writers, Jonathan Schmalfeld and Stephen Rutenberg will be participating and are looking forward to meeting with and discussing the current digital asset legal landscape with our BitBlog readers.

These developments and a few other brief notes, including claw-back notices sent to many creditors of Voyager Networks, are discussed below.

House and Senate Vote to Overturn Senate Accounting Bulletin 121 (“SAB 121”): May 8-16, 2024

Background: The first crypto-specific bill to reach a full vote in either chamber of Congress passed both chambers with bipartisan support. On May 8th, the House passed Joint Resolution 109 to overturn SAB 121, the controversial guidance from the SEC requiring public companies that custody crypto-assets to treat those assets as liabilities on their balance sheet. With most U.S. banks being public companies required by other regulators to meet asset ratio tests based on their financial statements, this makes it impractical (if not impossible) for most depository banks to take custody of crypto-assets on behalf of customers. The bill was sponsored by Democrat Wiley Nickel (NC) and Republican Mike Flood (NE), with 21 House Democrats voting in favor of the bill despite a White House statement that it intends to veto the bill if it reaches the President’s desk. The bill passed in the Senate a week later, including the approval vote of Democratic Senate Majority Leader Chuck Schumer (NY). While the bill only needed a simple majority to pass, it ended up with a filibuster-proof 60 votes, but less than the two-thirds vote that would be needed to override a Presidential veto.

Analysis: Preventing the safest, most trusted custodial institutions in America from holding digital assets is a step back, rather than a step forward, in consumer protection. It also provides disparate treatment, as banks are not required to account for any other custodial asset as if the bank itself owns the asset. It remains to be seen whether President Biden will make good on his promise to veto or if the SEC will withdraw the rule as requested by Congressman Nickel. While the Presidential veto remains likely, this Congressional support, combined with FDIC Chairman Martin Gruenberg announcing his planned resignation, is a possible sign of the diminution of the influence of certain subsets in the Democratic Party that have been most vocal in their opposition to the digital asset industry.

Uniswap Responds to SEC Wells Notice: May 21, 2024

Background: Uniswap made the fairly unusual decision to publish its response to the SEC’s Wells notice. Wells notices and their responses are generally confidential and are used when the agency’s staff intends to recommend bringing formal charges of securities law violations against the entity under investigation. You can read Uniswap’s blog post announcing the decision to publish its response here. In the response, Uniswap advocates that “[t]he Commission should not take on these significant litigation risks and that bringing this case would encourage Americans to use harder-to-regulate foreign interfaces and trading protocols, while also discouraging future innovators from attempting to foster new ideas that bring much-needed competition and innovation to financial and commercial markets. Although there are legitimate questions about how best to protect customers and market integrity when traders transact on a peer-to-peer basis without an intermediary, those are policy questions that are primarily for Congress and are part of ongoing policy discussions that [Uniswap] Labs has helped lead.”

Analysis: While the Wells notice itself has not been made public, the response gives us a hint to its contents and prior communications between Uniswap and the agency. For instance, the blog post indicates that “[t]he SEC asserts that the Uniswap Protocol is an unregistered securities exchange controlled by Uniswap Labs, that the Uniswap interface is an unregistered securities broker-dealer, and that the UNI token is an investment contract.” While the response comes out swinging, it is unlikely to dissuade the agency