I gained a reputation as a skeptic about the legal ownership of selling cryptocurrency tokens in the United States. I used to write about this in detail, especially when I was studying for my Masters in 2017, and accordingly, I had more time and latitude to say what I wanted.
Moreover, unlike the recent crop of crypto critics like former government lawyer John Reed Stark, I held this position at an unpopular and obscure time (who takes endless glee at trolling the industry when it’s in shambles). For example, see my friend Tim Swanson and I quoted in a CoinTelegraph article on July 9, 2014, when I said, “Mitigating the legal risks of issuing securities on a cryptoledger” says “(virtually) no one has done this. Right. I’ve never seen a properly structured crypto security to date.” .
Preston Byrne is an attorney and partner in Brown Rudnick’s Digital Commerce Group.
People thought I was crazy. Others may have thought I was just a fool. The truth is probably somewhere between the two. Remember, of course, that the concept of an “initial coin offering” (ICO) didn’t really exist in 2014; Entrepreneurs like Joel Dietz marketed his “Swarm” crowdfunding token as “crypto-equity,” an innocuous term for more complex projects like Ethereum, which launched its ICO a month after I cited it in the CoinTelegraph article. But even that was not called an ICO. It was, according to advice given to Joe Lubin by his lawyers, “a sale of crypto fuel for the Ethereum network.” Or as the New York Attorney General alleged in a recent security filing against Cucoin.
Ethereum then exploded in 2017, and with it came a thousand imitators and other variations like it. US regulators were slow to respond. ICOs added fuel to the fire when then-SEC Director Bill Hinman made his famous “Hinman speech,” which was the (now discredited) “decentralized enough” exception. Whoa exam Bearing in mind that Hinman is from San Francisco, the general assumption among those of us who weren’t in the cool SF venture-capital crowd is that he successfully convinced that office that Ethereum, a popular investment there, was next. The best thing for the internet and the government to do is get out of the way and let Ethereum prove it.
After five years, I think it’s safe to say that Ethereum hasn’t cracked many of the scaling issues it needs to do to become the next Internet. With those broken promises aside, perhaps it’s no surprise that the government decided to restore the status quo with the NYAG’s lawsuit against CuCoin.
In terms of non-fraud enforcement, the SEC began bringing the first set of enforcement actions announced through settlements in late 2018, months after the publication of the Hinman speech, along with several coin-related projects. Founder of early decentralized exchange, or “DEX,” EtherDelta announced the first such settlement on November 8, 2018; The SEC claimed that the DEX operator was running an unregistered exchange, which suggests that the SEC has taken the view that some of the assets in EtherDelta — Ether and ERC-20s — are securities. Ten days later, the SEC announced its first settlements of two completely unremarkable ICO issues, Airfox and Paragon. Both respondents agreed to register their tokens as securities (which doesn’t seem to have happened as far as I can tell).
What followed over the next year was a series of strange settlements, which failed to act as a deterrent to further ICO issuance, while at the same time a series of strange transactions attempted to comply with the non-regulatory guidelines it issued. By Bill Hinman. For example, EOS, which advertised its product on a giant Times Square billboard during the 2017 consensus and raised $4 billion in crypto, somehow let it skate by with a $24 million fine — and a requirement to register!
Other projects were not so lucky. Kik Interactive, Telegram, and Ripple Labs have arrived, absolutely awesome ICOs; Kik and Telegram lost badly in federal court, and I don’t rate Ripple’s chances. Similarly, the very small LBRY project based in New Hampshire, which predates EOS by several years, has not, as far as I know, offered a settlement deal with the SEC that would allow their business to continue operating; The only logical reason I can think of for this is that the SEC’s Boston office wants a skull and the only place in New England you’ll find a crypto startup is in New Hampshire.
This brings us to the Coinbase complaint. Nothing about this will surprise any lawyer practicing in the US after 2018.
The allegations are numerous. The SEC alleges that Coinbase violated the registration requirement of the Securities Act of 1933 in connection with its custodial staking offering.
It charges Coinbase with violating the registration requirements of the Exchange Act, which requires anyone dealing in securities to be registered and overseen by the commission. In addition, Coinbase acts as an unregistered broker-dealer and acts as an unregistered clearing agency, “any person acting as an intermediary in making payments or deliveries in connection with transactions in securities or… providing facilities for the comparison. of data regarding the settlement terms of securities transactions.”
I’m not going to bore you with chapter and verse on broker-dealer registration requirements. Nor will I go into detailed Howie analysis of many of the coins mentioned in the complaint – including Solana, ADA, Matic, FileCoin, Sand, AXS, CHZ, Flow, ICP, Near, VGX, Dash, and Nexo. The important point here is that as a remedy, the SEC is seeking a permanent injunction against Coinbase from operating an unlicensed exchange. If they get one of the tokens to stick and win the trial, they may be able to shut down Coinbase’s core business entirely.
What surprised me was that it took this long. In 2017, I hypothesized that one day there would be an event — something I referred to as law enforcement “initiating something akin to simultaneous morning raids on major exchanges and the homes and offices of prominent ICO promoters. Agencies in various countries are coordinating their actions. It’s hard to say if we’re at the beginning of an elaborate process, but the SEC Going after Coinbase, no one in Coinbase’s business is safe.I called that event “The Zombie Marmot Apocalypse” and I think it’s safe to say that it’s largely down to crypto and it’s upon us now.
Then the question turns next. Crypto isn’t going anywhere, so I think the answer is “new exchanges that don’t carry any of this regulatory baggage”. Based on how it might look, my current thinking is:
So. Crypto is not dead, it just needs some legal tune up. May the smart and compliant startup succeed.