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FIT 21
What happened?
Two weeks ago, the House Committee on Rules announced its intention to consider the Financial Innovation and Technology for the 21st Century act (FIT 21) from 2023.
Importantly, the bill explicitly excludes blockchain protocols and developers in its definitions of digital asset dealers, brokers, and trading systems. The bill also excludes certain “decentralized finance activities” from the bill’s scope:
‘‘Compiling network transactions, operating or participating in a liquidity pool, relaying, searching, sequencing, validating, or acting in a similar capacity with respect to a digital asset.”
‘‘Providing computational work, operating a node, or procuring, offering, or utilizing network bandwidth, or other similar incidental services with respect to a digital asset.”
‘‘Providing a user-interface that enables a user to read and access data about a blockchain system, send messages, or otherwise interact with a blockchain system.”
‘‘Developing, publishing, constituting, administering, maintaining, or otherwise distributing a blockchain system.”
‘‘Developing, publishing, constituting, administering, maintaining, or otherwise distributing software or systems that create or deploy a hardware or software wallet or other system facilitating an individual user’s own personal ability to keep, safeguard, or custody such user’s digital assets or related private keys.”
This is a notable change from last year’s version, which had potential ambiguities regarding the extent to which DeFi activities were covered by the bill. The bill also requires that the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) carry out a joint study on DeFi and that the Comptroller General conduct a separate study as well.
As of last week, several amendments to the bill have been proposed.
What does this mean?
The House’s consideration of a comprehensive effort to establish certainty for crypto developers and businesses in the United States will be a major symbolic moment, and its passage would represent yet another rebuke to the SEC’s unlawful attempt to ban U.S. participation in the industry and technology. We thank the members and staff who have worked for the last 18 months to put this important legislation together.
Senators Challenge DOJ’s Targeting of Developers
What happened?
On May 9, Senators Cynthia Lummis (R-WY) and Ron Wyden (D-OR) wrote a letter to US Attorney General Merrick Garland concerning the Department of Justice’s (DOJ) recent interpretation of the federal prohibition on operating an unlicensed money transmitting business, including in their case against Tornado Cash developer Roman Storm. The Senators argue that the DOJ’s interpretation expands this scope beyond Congressional intent, particularly in its application to non-custodial crypto asset software services. They emphasize that said services do not meet traditional definitions of “acceptance” and “transmission” of funds, and are excluded by FinCEN in their past guidances and most recently in 2019. The Senators end their letter by urging the DOJ to drop their “flawed” interpretation.
What does this mean?
The Senators’ letter came as a result of the DOJ’s recent indictments of Samourai Wallet developers—a non-custodial wallet application—and Storm. The DOJ has so far failed to grapple with the concepts of self-custody and control of user funds. And as the Senators pointed out, FinCEN has long taken the view that the “production and distribution of software” itself does not constitute money transmission, and that “total independent control” over third party funds is necessary for someone to be a money transmitter. The Senators are right to remind the DOJ of the well-established definition for “money transmission” and to urge them to act accordingly.
Tornado Cash Developer Pertsev Convicted in Netherlands
What happened?
On May 14, Alexey Pertsev, one of the developers of Tornado Cash, was convicted in a Netherlands' court of laundering $2.2 billion in illicit assets and sentenced to a prison term of five years and four months. Pertsev’s lawyers will have 14 days to appeal the judges’ decision.
What does this mean?
It’s disappointing to witness any court rule against a software developer of privacy-enhancing technology under the assumption financial privacy is inherently criminal and the developer should have anticipated as much. But as Peter Valkenburgh of Coin Center points out, the Dutch ruling has a lower standard of intent for criminal culpability than in the U.S. and should not influence the case in the U.S. brought by the DOJ against Tornado Cash developers Roman Storm and Roman Semenov.
Coinbase and Kraken’s Court Battles with the SEC Continue
Coinbase
On May 10, the Securities and Exchange Commission (SEC) filed two motions against Coinbase.
The first response addresses Coinbase’s motion for an interlocutory appeal to the Second Circuit Court of Appeals, which challenges the district court’s application of the Howey test to digital asset transactions. In their response, the SEC argues that Coinbase fails to demonstrate that interlocutory review is warranted and that Coinbase invented a new legal test of “whether an investment contract can exist absent any post-sale obligation” that the court has already rejected.
In the second filing in the Third Circuit Court of Appeals, the SEC responded to Coinbase's petition that a new regulatory framework should be developed for digital assets, arguing that existing laws are adequate and a new framework is unnecessary.
Kraken
On May 9, Kraken filed another motion in the Northern District of California to ask the court to dismiss the SEC lawsuit against it. Kraken asserts that the SEC fails to identify legitimate investment contracts on Kraken’s platform and that the SEC’s application of the Howey Test would significantly expand the SEC’s jurisdiction and amount to “a significant reordering of the U.S.’s financial regulatory structure,” which “should be debated in Congress, not in the courts.”
What does this mean?
In our amicus brief in SEC v. Kraken, we argue against the SEC's broad assertion that nearly all digital assets fall under its regulatory purview as securities. Should the Second Circuit Court accept Coinbase’s request for an interlocutory appeal and rule in their favor, it could significantly challenge the SEC’s expansive regulatory claims.
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