The Blockchain Bi-Weekly presented by the Polsinelli Blockchain+ team is a rundown of some of the key stories in the Web3, blockchain and crypto ecosystems curated by our attorneys navigating the intersections of code, smart contracts, and US law.
As expected with Congress on break, the news the past two weeks was dominated by updates in major industry litigation efforts. While there was some action on the House’s stablecoin bill in the wake of the major announcement by PayPal that it released its own fully backed stablecoin, most of the focus has stayed on the Coinbase litigation against the SEC and the SEC’s decision to appeal the adverse rulings against the agency in Ripple.
These developments and a few other brief notes are discussed below.
PayPal Announces Launch of U.S. Dollar-Pegged Stablecoin, PYUSD: August 7, 2023
Background: As we noted in the Briefly Noted section of the last Bi-Weekly update, on August 7 PayPal announced it would be launching a fully-backed dollar-denominated stablecoin, PayPal USD (“PYUSD”). The planned token is an ERC-20 token, which means it can be transferred to self-custodial wallets, but similar to USDC and USDT, it does have freezing functionality and can be seized.
Summary: Due to the follow-up news from Washington D.C. on this hotly debated issue of regulated stablecoin issuers, the Blockchain+ team wanted to provide a more in-depth background on the payment processing giant PayPal entering the stablecoin issuer field. Republicans have used the PayPal announcement to make a renewed push to pass the Clarity for Payment Stablecoins Act in the House. Democrat Maxine Waters was reportedly “deeply concerned” about PayPal’s new stablecoin. This may just be the first of many private stablecoins to come, as the issuer of the PayPal stablecoin, Paxos, is reportedly working on other white label stablecoins as well.
Senator Lummis and Others File Amicus in Coinbase Litigation: August 11, 2023
Background: On August 11, there was an expected bevy of amicus filings in Coinbase’s litigation against the SEC, with filings in support of Coinbase coming from Senator Cynthia Lummis, the Blockchain Association, a16z/Paradigm, the Chamber of Digital Commerce, the DeFi Education Fund, and a group of securities law professors. The SEC has until October 3 to file its opposition.
Summary: Most of the focus was on Senator Lummis’ brief which argues that the SEC is overstepping its authority by treating all crypto assets as securities, which contradicts legislative efforts in Congress and requires proper legislation. Senator Lummis is the co-sponsor of currently pending digital asset legislation titled the Responsible Financial Innovation Act. The brief’s importance lies in its representation of a congressional perspective that challenges the SEC’s approach and urges the court to defer to the legislative branch for creating a holistic crypto regulatory framework. While all the briefs are well-written and worth a read, the group of securities law professors’ brief also provides a cogent argument supporting the idea that and “investment contract” requires both an “investment” and “contract” to fall under the Howey test for a scheme.
SEC Files Intent to File Interlocutory Appeal in Ripple and Ripple Responds: August 16, 2023
Background: On August 9, the SEC filed a letter request to file a motion for leave to file an interlocutory appeal of the Court’s July 13, 2023 Summary Judgment ruling. On August 16, Ripple responded with its own letter of intent to oppose the SEC’s request. The SEC was given until August 18 to actually file its motion for leave to appeal with all briefing on the subject to be completed by September 8. The SEC’s arguments largely followed its letter, claiming the Court erred in its ruling regarding programmatic sales and “other distributions” to employees and charitable organizations as securities offerings.
Summary: Seeking this interlocutory appeal is an aggressive move from the agency. Many thought the current leadership would be inclined to ride the issue out until trial, knowing that uncertainty would be better than a potential sped up major loss on appeal. For more background on the Ripple decision which the SEC seeks to appeal, read our breakdown on the BitBlog available here. As we noted at the time, the Court’s ruling as to “other distributions” was the most cursory of the decision, and there may be a factual record at play which was the reason for such a terse decision on a major aspect of the litigation.
Court Issues Summary Judgment in Favor of Treasury Department in Tornado Cash Matter: August 17, 2023
Background: In September of 2022, Coinbase funded a lawsuit brought by six individuals…
Read More: Blockchain+ Bi-Weekly – August 2023 #2 | Polsinelli