The Non-Custodial Conflict: US Government Actions Stir Crypto Community Concerns

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‘It would be absurd’ for a US court to rule private NFTs as securities: Lawyer

February 23, 2023 Coin Telegraph

Coin Telegraph

The comments from the hosts of lawyers comes as Judge Victor Marreo said that Dapper Labs’ NBA Top Shot Moments NFT may constitute a security.

Blockchain Association’s chief legal officer says “it would be absurd” for a United States court to rule that digital assets on private blockchains are securities, following a federal judge's decision to allow a lawsuit against Dapper Labs's NBA Top Shots NFTs to play out.

U.S. attorney Jake Chervinsky made the comment after federal judge Victor Marreo denied a motion to dismiss a 2021 lawsuit that accused Dapper Labs of selling nonfungible tokens (NFTs) as unregistered securities.

Chervinsky was among a host of lawyers on Twitter to reiterate that the judge’s denial of the motion does not mean a ruling has been made on the lawsuit, only that it was “facially plausible.”

“The judge didn't decide anything. He allowed the case to proceed past a motion to dismiss because the securities claims were at least ‘plausible,’ an extremely low bar and not a final ruling at all,” he explained.

“This dispute aside, it would be absurd if all valuable digital assets stored on centralized databases were securities.”

“This would turn every major video game developer, event ticketing platform, travel rewards program, etc. into a public reporting company regulated by the SEC,” he explained.

This is false.

The judge didn't decide anything. He allowed the case to proceed past a motion to dismiss because the securities claims were at least "plausible," an extremely low bar and not a final ruling at all.

Do I really have to say "basketball cards are not securities"??? https://t.co/W1yYVcW1Ki
— Jake Chervinsky (@jchervinsky) February 22, 2023

Another U.S. lawyer, Jesse Hynes, also weighed in on the motion in a Feb. 22 Twitter post, noting that motions to dismiss are “rarely ever successful” because the plaintiff only needs to plead enough evidence for the case to proceed.

“The judge ruled in the Dapper case that the plaintiff pled enough evidence that IF ALL THE ALLEGATIONS ARE TRUE, that there is a securities violation.”

“Now we go into discovery to learn what the real facts are. Once that is done Dapper will likely file for a motion for Summary Judgment,” the lawyer added.

Meanwhile, another U.S. lawyer, James Murphy — known as “MetaLawMan” — noted that the allegations that Dapper Labs issued the NBA Top Shot Moments NFT on a privately-run blockchain were a “fundamental” factor behind the court’s decision to reject the motion to dismiss.

4/ The Judge cited the fact that Top Shots trade on a Private blockchain run by the Issuer as a key factor in his ruling.@XRP trades on a Public blockchain.

For this reason, the Top Shot opinion could be considered net positive for Ripple.

Not a legal opinion--just a tweet.
— MetaLawMan (@MetaLawMan) February 22, 2023

This prompted MetaLawMan to suggest that this “could be considered a net positive” for Ripple in its own case against the U.S. Securities Exchange Commission (SEC), because XRP is issued on a public blockchain.

The class action lawsuit against Dapper Labs was filed in May 2021 by plaintiff Jeeun Friel, who claimed that Dapper Labs was selling NFTs as unregistered securities.

Judge Marreo denied the motion to dismiss the lawsuit on Feb. 22. He said that the particular scheme by which Dapper Labs offers the Moments NFT possibly creates a sufficient legal relationship between investors and themselves, which satisfies the investment contract criteria under the Howey Test.

However, it's unlikely the ultimate ruling of this case would establish a precedent for NFTs, as Judge Marreo said that not all NFTs will constitute securities and that each case will need to be assessed on a case-by-case basis.

Shortly after the dismissal, the Dapper Labs-issued FLOW token fell 6.4% from $1.24 to $1.16 in 15 minutes. However the FLOW token has since rebounded at $1.29, according to CoinGecko.

US crypto regulation happening ‘behind closed doors’ — Blockchain Association CEO

February 22, 2023 Coin Telegraph

Blockchain Association

The “work has been done” for stablecoin regulation in the U.S., but many in Washington D.C. are feeling “burned” and “betrayed” over the FTX collapse last year.

The United States Congress needs to take control of crypto legislation and make it a more “open process” where the entire marketplace is looked at “comprehensively,” suggests Kristin Smith, CEO of the Blockchain Association — a prominent U.S. crypto industry nonprofit.

In a Feb. 22 Bloomberg interview, Smith said the industry needs U.S. lawmakers to lead crypto legislation despite it making the process “very slow,” with regulators “stepping in” in the interim.

Smith noted that despite regulators “moving very quickly,” progress on legislation is happening “behind closed doors,” suggesting it’s vital for more industry involvement in an “open process,” which would involve Congress.

Smith believes the issue with regulators leading legislation with enforcement actions and settlements relates to “very specific facts and circumstances.”

She explained it’s a difficult position for Congress at the moment, as many in Washington D.C. who “were close” to former FTX CEO Sam Bankman-Fried and FTX feel “burned” and “betrayed” over the collapse of the cryptocurrency exchange in November 2022.

Smith is hopeful that stablecoin regulation will soon happen in the U.S., saying Congress has been looking at it “since 2019” and the “work has been done.” She said it “came close” to happening last year before the collapse of FTX.

She added that crypto risks are different from traditional financial services, so regulators must spend more time looking at market regulation and “tailor to those risks.”

Smith suggested that stablecoin and “market side” regulation should be a higher priority than focusing on legislating crypto-related criminal activity, saying that public ledgers make it “much more transparent” than we see in the traditional financial system.

This comes after the Blockchain Association’s chief policy officer, Jake Chervinsky, took to Twitter on Feb. 15, stating that no matter how many enforcement actions the Securities and Exchange Commission and Commodity Futures Trading Commission bring, they are “bound by legal reality,” adding that “neither” has the authority to “comprehensively regulate crypto.”

Crypto regulation decided by Congress, not the SEC: Blockchain Association

February 15, 2023 Coin Telegraph

Advocacy

The group's policy head doubted a divided Congress can create crypto legislation but said it doesn’t give regulators absolute authority in the interim.

Despite attempts to police cryptocurrency through enforcement actions, United States financial regulators “are bound by legal reality” and Congress will ultimately decide crypto regulations the policy expert for the crypto advocacy group Blockchain Association has suggested.

The association's chief policy officer, Jake Chervinsky, shared his views in an extensive Feb. 14 Twitter thread on the state of crypto policy.

He noted neither the Securities and Exchange Commission (SEC) nor the Commodity Futures Trading Commission (CFTC) “has the authority to comprehensively regulate crypto.”

14/ No matter how many enforcement actions the SEC and CFTC bring, they are bound by legal reality:

Neither has the authority to comprehensively regulate crypto, neither can obtain it through any amount of enforcement, and neither will ever have it without an act of Congress.
— Jake Chervinsky (@jchervinsky) February 14, 2023

Chervinsky believed a deal on crypto legislation seems “unlikely, given the ideological gap between House Republicans and Senate Democrats.” He accused the SEC and CFTC of overstepping their authority in an attempt to “get things done” without Congress.

Chervinsky called for the industry to remain calm following the recent flurry of activity from “crypto’s chief antagonist,” the SEC, and pointed to its crackdown on staking services as an example.

13/ The SEC's main tactic is regulation by enforcement, and it struck again last week by labeling Kraken’s staking service a security.

That's frustrating, but it doesn't change much for anyone else. Settlements aren't the law, and every set of facts is unique. Others will fight.
— Jake Chervinsky (@jchervinsky) February 14, 2023

The SEC’s Feb. 9 settlement with crypto exchange Kraken, that banned the exchange from ever offering staking services to U.S. customers, was publicly rebuked by SEC Commissioner Hester Peirce.

In a Feb. 9 dissenting statement, Peirce argued that regulation by enforcement “is not an efficient or fair way of regulating” an emerging industry.

Chervinsky suggested litigation is one way the crypto industry can push for good policy, noting the judiciary plays an important role in dictating policy that has been “ignored.”

20/ FIFTH, we can litigate.

Policy is made in all three branches of government, and we’ve ignored the judiciary for too long.

At the core of crypto is a fight for civil liberty, a fight that calls for impact litigation.

Our best allies may be in the courts. Let's go find them.
— Jake Chervinsky (@jchervinsky) February 14, 2023

Crypto exchange Coinbase also faces an SEC probe similar to what resulted in Kraken’s settlement.

Coinbase CEO and co-founder, Brian Armstrong, has taken a more resolute stance, claiming that getting rid of crypto staking would be terrible for the U.S.

Armstrong argued in a Feb. 12 Twitter post that Coinbase’s staking services are not securities and would “happily defend this in court if needed.”

Coinbase's staking services are not securities. We will happily defend this in court if needed.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023

Judge’s rulings in landmark cases create a legal precedent. If such a case were brought to court and a judge decided Coinbase’s staking services did not classify as securities, other crypto companies in a similar position could use the precedent as part of their defense.

‘Agent of an anti-crypto agenda’ — Community slams Gensler over Kraken crackdown

February 10, 2023 Coin Telegraph

Adam Cochran

SEC's recent charges against crypto exchange Kraken over its staking program have sent tremors through the crypto industry.

Members of the crypto community seem outraged over the recent charges laid against crypto exchange Kraken in relation to its staking-as-a-service program in the United States.

On Feb. 9, the United States Securities Exchange Commission (SEC) announced it had settled charges with Kraken over “failing to register the offer and sale of their crypto asset staking-as-a-service program,” which it claims is qualified as securities under its purview.

Kraken agreed to settle the charges by paying $30 million in fines and to immediately cease offering staking services to U.S. retail investors, though they will continue to be offered offshore.

The move appears to have attracted the ire of not only the general crypto community but also of investors, politicians and industry executives.

Cinneamhain Ventures partner and Ethereum bull, Adam Cochran, called out SEC chief Gary Gensler, describing him as “an agent of an anti-crypto agenda” rather than a regulator, and questioning why the same standards weren’t applied to Sam Bankman-Fried and FTX:

2/2

Gensler is not a regulator. He is an agent of an anti-crypto agenda, who only aims to wield his power as cudgel for those he doesn't agree with.

So the big question then, is why didn't FTX get this treatment?

Whose pocket is he in?
— Adam Cochran (adamscochran.eth) (@adamscochran) February 9, 2023

In a Feb. 9 statement shared on Twitter, Kristin Smith, CEO of the Blockchain Association, argued that the situation at hand is a textbook example why Congress — not the SEC — should be working with industry players to forge appropriate legislation:

The following statement is attributed to @KMSmithDC in response to today's settlement between the SEC and Kraken:https://t.co/32KysvKfz0 pic.twitter.com/8vkWZXB6a2
— Blockchain Association (@BlockchainAssn) February 9, 2023

U.S. Congressman Tom Emmer — who has long been a critic of Gary Gensler — reiterated the importance of staking in the crypto ecosystem.

In a Feb. 9 Twitter post, the lawmaker explained that staking services will play an important role in “building the next generation of the internet” and argued that the “purgatory strategy” will hurt “everyday Americans the most,” as they may soon be forced to fetch such services offshore.

Meanwhile, Ryan Sean Adams, the founder of the Ethereum show Bankless, suggested to his 220,800 Twitter followers on Feb. 9 that the SEC could have taken other measures rather than charging Kraken out of the blue:

You could have:

- Mandated proof-of-reserves
- Required staking transparency
- Supported decentralized staking

Instead, we just got another gary g. ban hammer to the head. And we have no confidence you won't come for decentralized staking next.

You're driving it all offshore.
— RYAN SΞAN ADAMS - rsa.eth (@RyanSAdams) February 9, 2023

Other members of the community questioned how Kraken could possibly have registered with the securities regulator, as there was “no clear path” to approve crypto staking.

Others suggested it could impact Ethereum’s consensus layer, given Kraken is the fourth-largest validator on Ethereum, according to on-chain metrics platform Nansen.

However, not all were against the SEC’s decision. Prominent Bitcoin bull Michael Saylor — who has long considered ETH and other proof-of-stake cryptocurrencies to be securities — agreed with Gensler’s analysis that retail investors “lose control” of their tokens when they’re delegated to external staking service providers:

"Not your keys ... " - @GaryGensler. The @SECGov understands the importance of self-custody. https://t.co/oxPkFeJ77k
— Michael Saylor⚡️ (@saylor) February 9, 2023

Meanwhile, attorney and chief policy officer of the Blockchain Association, Jake Chervinsky, noted that such “settlements are not law” and that Kraken’s decision to settle was likely an economic decision rather than a legal one:

Settlements are not law. They're a decision that the economics of settling are better than fighting, no more.

The SEC thinks staking-as-a-service is a security. Kraken didn't admit or deny either way.

It may be a tough question, but the SEC hasn't answered it either way today.
— Jake Chervinsky (@jchervinsky) February 9, 2023

The debate comes as the SEC’s charge towards enforcing action against staking service providers prompted Coinbase CEO Brian Armstrong to say that “regulation by enforcement” would be a “terrible path” for U.S. innovators, as they’ll be forced to push more of their services offshore.

Despite endless media appearances, SBF unlikely to testify on 13th

December 5, 2022 Coin Telegraph

accounting

One observer suggested Bankman-Fried may be reluctant to discuss FTX due to the legal implication of lying under oath to the U.S. Congress.

Former CEO of FTX, Sam Bankman-Fried, has signaled he's unwilling to testify before the United States Congress until he’s “finished learning and reviewing what happened.”

Bankman-Fried was responding to a Dec. 2 tweet from U.S. Representative Maxine Waters inviting him to testify in a scheduled U.S. House Committee on Financial Services hearing on Dec. 13 to discuss "what happened" at FTX.

In a Dec. 4 response on Twitter, the former FTX CEO said he feels it is his “duty to appear before the committee and explain,” but only once he's “finished learning and reviewing what happened," adding he wasn't “sure” whether it would happen by the 13th.

Rep. Waters, and the House Committee on Financial Services:

Once I have finished learning and reviewing what happened, I would feel like it was my duty to appear before the committee and explain.

I'm not sure that will happen by the 13th. But when it does, I will testify. https://t.co/c0P8yKlyQt
— SBF (@SBF_FTX) December 4, 2022

Some in the community pointed out the response appears out of line with his recent actions, including taking part in several media interviews and posting endless tweets about what led to the fall of FTX in November.

Blockchain Association Head of Policy and U.S. Attorney Jake Chervinsky suggested to his 120,500 Twitter followers that Bankman-Fried was reluctant to take part in the Dec. 13 hearing because '"lying to Congress under oath is less appealing."

Translation: he doesn't mind lying to Andrew Ross Sorkin or George Stephanopoulos, but lying to Congress under oath is less appealing. https://t.co/DZTyzMwn9s
— Jake Chervinsky (@jchervinsky) December 4, 2022

On Nov. 30, Bankman-Fried made his first live public appearance since the collapse of FTX during the New York Times' DealBook Summit where he was questioned over the circumstances behind the crypto exchange's demise. A day later, he appeared in a Good Morning America interview, and also in a Twitter space hosted by IBC Group founder and CEO Mario Nawfal.

Most recently, Bankman-Fried was questioned by Coffeezilla in a Twitter Spaces interview on Dec. 3, which saw him leaving the interview around 20 minutes in.

Meanwhile, Coinbase CEO Brian Armstrong has called out Bankman-Fried's purported narrative in recent days, stating on Dec. 3 that “even the most gullible person” should not believe Bankman-Fried's claim that FTX's transfer of billions of dollars of customer funds to its trading firm Alameda Research came from the result of an unintentional “accounting error.”

I don't care how messy your accounting is (or how rich you are) - you're definitely going to notice if you find an extra $8B to spend.

Even the most gullible person should not believe Sam's claim that this was an accounting error.
— Brian Armstrong (@brian_armstrong) December 3, 2022

As for SBF’s recent media antics, Tesla and Twitter CEO Elon Musk “agreed” with a member of the crypto community SBF doesn’t deserve any more media attention until his court date, with Musk adding he needs an “adult timeout.”

Agreed. Let’s just give him an adult timeout in the big house & move on.
— Elon Musk (@elonmusk) December 3, 2022

CZ and Saylor urge for crypto self-custody amid increasing uncertainty

November 14, 2022 Coin Telegraph

Anthony Sassano

Binance CEO Changpeng Zhao said self-custody is a “fundamental human right,” while Michael Saylor said self-custody is necessary to prevent powerful actors from accumulating and abusing power.

Industry heavyweights have urged crypto investors and traders to self-custody their crypto assets amid the significant market uncertainty brought on by the collapse of FTX.

In a Nov. 13 tweet to his 7.6 million followers, Binance CEO Changpeng “CZ” Zhao pushed the crypto community to store their own crypto via self-custody crypto wallets.

“Self custody is a fundamental human right. You are free to do it anytime. Just make sure you do do it right,” he said, recommending investors to start with small amounts in order to learn the technology and tooling first:

Self custody is a fundamental human right.
You are free to do it at any time.
Just make sure you do do it right.
Recommend start with small amounts to learn the tech/tools first.
Mistakes here can be very costly.
Stay #SAFU
— CZ Binance (@cz_binance) November 13, 2022

Speaking to Cointelegraph during the Pacific Bitcoin conference on Nov. 10-11, MicroStrategy executive chairman Michael Saylor also discussed the merits of self-custody given the current market environment.

Saylor suggested that self-custody not only provides investors with property rights, it also prevents powerful actors from corrupting the network and its participants:

“In systems where there is no self-custody, the custodians accumulate too much power and then they can abuse that power.”

“So self-custody is very valuable for this broad middle class, as it tends to create [...] this power of checks and balances on every other actor in the system that causes them to be in continual competition to provide transparency and virtue,” he explained.

Backstage interview with the charming Michael @saylor ⚡️

✅ check @Cointelegraph to read his advice on how to handle the bear market

@pacificbitcoin

pic.twitter.com/yWZmEsgQar
— Joe Nakamoto (@JoeNakamoto) November 11, 2022

Saylor also made the argument that self-custody plays an important role in maintaining the integrity and security of blockchains because it increases decentralization:

“If you can’t self-custody your coin, there’s no way to establish a decentralized network.”

The recent events that transpired last week appear to have already pushed many investors and traders towards self-custody solutions.

Since the sudden collapse of FTX in early November, the number of Bitcoin (BTC) withdrawals on centralized exchanges reached a 17-month high, according to on-chain analytics firm Glassnode:

#Bitcoin $BTC Number of Exchange Withdrawals (7d MA) just reached a 17-month high of 3,424.315

View metric:https://t.co/QyB7zouWee pic.twitter.com/Su4biTEM7h
— glassnode alerts (@glassnodealerts) November 13, 2022

While at the same time, net inflows into self-custody wallets have soared.

Smart contract wallet Safe — previously Gnosis Safe — reported over $800 million in net inflows since last Tuesday when the FTX saga began to spiral out of control:

Over $800M net in-flows into @Safe since last Tuesday. $325M on Thursday alone. Looks like a flight to self-custody. pic.twitter.com/hiuij9dp7s
— lukasschor.eth | Safe (@SchorLukas) November 13, 2022

The outflow from centralized exchanges caused by the FTX meltdown also created problems for hardware-based cryptocurrency wallet provider Ledger — who were temporarily unable to process a mass influx of inflows due to scalability issues.

The token of the Binance-acquired self-custody wallet Trust Wallet (TWT) also increased 84% to $2.19 over the last 48 hours before cooling off to $1.83, according to CoinGecko.

The token allows token holders to participate in deciding how the wallet operates and what technical updates are to be made.

Investor confidence in centralized exchanges took another hit on Nov. 13 when Crypto.com accidentally sent 320,000 ETH to Gate.io.

Ethereum bull and host of The Daily Gwei Anthony Sassano on Nov. 13 called out the crypto exchange over its mistake and later stated that investors should not store assets on centralized exchanges “for longer than you need to.”

Meanwhile, Blockchain Association head of policy Jake Chervinsky said that self-custody education should be one of the first things newcomers learn, while Bitcoin proponent Dan Held told his 642,800 Twitter followers that self-custody is a crucial element to self-sovereignty:

Self custody your Bitcoin and run a full node.

That’s how you achieve self sovereignty.

Don’t trust, verify.
— Dan Held (@danheld) November 12, 2022

Jake Chervinsky

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