Dogecoin’s Day in Court
In this episode of the CryptoCounsel at Wiley, Josh and Frank try their hand at acting (since Matt Damon was unavailable) to highlight the complexities of crypto regulation and the divergent opinions within the SEC. They also discuss the next frontiers of crypto regulation, from the House of Representatives legislation (FIT 21) to the latest Supreme Court case involving Coinbase, where the court ruled on arbitration clauses without addressing the broader implications for Dogecoin.
Transcript
Josh Simmons
Welcome to the CryptoCounsel at Wiley. We are the podcast that decodes the most important crypto disputes in litigation and regulation. I'm Josh, an international lawyer who does crypto disputes.
Frank Scaduto
And I'm Frank, a securities lawyer who also does crypto disputes.
Josh Simmons
Great to be with you again, Frank.
Frank Scaduto
You too, Josh.
Josh Simmons
We're going to start, as always, with three quick bits about recent news in the field, some hot topics and the first one is that President Biden recently ordered a Chinese owned real estate entity to divest assets near an air force base in Wyoming. This is only the sixth time such a divestment has happened; it happens for national security reasons and the consequence is that the Chinese owned company will have to remove all equipment and improvements at the property. This is a decision that followed an investigation by the Committee on Foreign Investment in the United States. Again, in the alphabet soup of Washington, D.C. that is called CFIUS. So Frank, what was the problem with this Chinese owned real estate?
Frank Scaduto
Josh, we're on a podcast about crypto. I'm going to guess it had something to do with cryptocurrency?
Josh Simmons
You got it, it's about crypto. This facility was going to be a cryptocurrency mining operation. The Chinese owned company had acquired the property in 2022, but that's not enough for national security reasons. The problem here is that it was awfully close to an air force base, but you don't need to hear my words on this. I'm going to quote the president who said that the operation had proximity to “A strategic missile base and key element of America's nuclear triad, and the presence of specialized and foreign sourced equipment potentially capable of facilitating surveillance and espionage activities.” Frank, does this mean that cryptocurrency is spying on us?
Frank Scaduto
Cryptocurrency is the new spy balloon, Josh? I mean, look, blockchains, the whole idea is transparency. You can see everything that's happening, so I think I'm going to say no.
Josh Simmons
This is a thorny one to disentangle. We have colleagues here at Wiley who handle CFIUS matters, so keep an eye out for a future episode on CFIUS and crypto.
But let's turn to quick bit number two. The House of Representatives recently passed a law known as the Financial Innovation and Technology for the Twenty-First (21st) Century, which is being called “FIT 21”. The law intends to establish clear guidelines for the classification, trading, and regulation of digital assets, that's crypto. So, Frank, House of Representatives has passed a bill, does this mean that all our crypto legal issues have been resolved?
Frank Scaduto
Yep. Let's hit stop recording. Go home. We had a good run, Josh.
Josh Simmons
Wait, did you never see the episode of How a Bill Becomes a Law?
Frank Scaduto
It's been a while, but I guess Congress is maybe not going to get all the way over the hump with this?
Josh Simmons
Takes more than just the House, right?
Frank Scaduto
I think so. That's what they taught us in law school, at least.
Josh Simmons
And people in the field are saying that this is a bill that ultimately the President might veto. Still others in the crypto industry are encouraged that at least a number of folks in the House with some bipartisan support are taking some action; we'll keep an eye on that space.
Crypto update number three, the Supreme Court just decided a major case involving Coinbase. In the case a group of sweepstakes entrants accused Coinbase of telling customers that they were required to purchase Dogecoin to enter into the sweepstakes. This is really the reason for the podcast - I want to know, how much Dogecoin do you own, Frank?
Frank Scaduto
I actually just shifted it all into Dogeverse.
Josh Simmons
I have no idea what Dogeverse is. I'm missing out clearly.
Frank Scaduto
Let me explain. I think the website will make it very clear. Spawned by a collapsing supernova, Cosmo the Doge was born with the unique ability to hyper jump between the stars of the crypto universe.
Josh Simmons
I kind of like Dogecoin better. It was cute, right? It's just a Shiba Inu meme.
Frank Scaduto
So Dogeverse is a multi-chain Doge token. It is similar; it is a meme token, but it can be traded and exist across multiple blockchains.
Josh Simmons
Given how interesting this is and now that the Supreme Court has decided a case, guess what they had to say about Dogecoin.
Frank Scaduto
What did they say?
Josh Simmons
Not much, nothing really, they unfortunately ducked the Dogecoin commentary. It would have been fantastic dicta and instead they reached a relatively straightforward legal conclusion, which was that in this case, there were two contracts at issue, one involving an arbitration clause and another allowing arbitration, and it's a court rather than an arbitrator who decides which contract governs.
Frank Scaduto
So there was no dank memes about Dogecoin in the Supreme Court's opinion?
Josh Simmons
That will be the day when the Supreme Court puts the dank meme in its opinion but for now we have a unanimous decision clarifying the scope and of authority with respect to arbitration clauses and contracts. Which, for an arbitration lawyer, is quite interesting. For crypto fans, generally, they'd probably rather talk about Dogecoin.
Frank Scaduto
Perhaps and dank memes.
Josh Simmons
So those are the three quick bits. Let's get into—
Frank Scaduto
Oh, wait, wait, Josh. Come on, this is our third episode, right? And I've been wondering. We're talking about quick bits. Your favorite 16-bit video game console. I mean, you got to have an answer to this.
Josh Simmons
Is there anything better than the Super Nintendo?
Frank Scaduto
I would say no. I think the Super Nintendo was the superior choice. I had a Sega Genesis and not a Super Nintendo. I would go to a friend's house to play Super Nintendo. Played an inordinate amount of Chrono Trigger as a child and Final Fantasy to a lesser extent.
Josh Simmons
Final Fantasy was fantastic. Final Fantasy III, which they then renamed Final Fantasy VI, because that's the Japanese order.
Frank Scaduto
Very nice, yes, you clearly are a Final Fantasy connoisseur.
Josh Simmons
We're back to Satoshi, who allegedly is from Japan.
Frank Scaduto
I mean, so they say.
Josh Simmons
There's your quick bits but we are going to pick up with this question of cryptocurrency and regulation by the SEC. We've talked about, when is cryptocurrency a security, how's that going to be decided; there's a lot of uncertainty about it but we've talked about the SEC as a singular entity. Why is the SEC a bit more complicated than that?
Frank Scaduto
So, I mean, the SEC is a— it's a commission. It is a number of people who are commissioners. It has a chair who exerts influence over its agenda, that's Chairman Gensler, who we've talked about but there are other commissioners who also get to vote on the actions that the commission takes and a few of those commissioners are more sympathetic to the cryptocurrency industry. For purposes of this discussion, you and I recently saw a dissenting statement by two of those commissioners, Commissioner Peirce and Commissioner Uyeda, in an enforcement action involving ShapeShift AG.
Josh Simmons
ShapeShift AG, that sounds like an interesting company. Where do you think that one's based?
Frank Scaduto
I would say somewhere in Europe.
Josh Simmons
Correct, because if it was a U.S. company it might be “incorporated or LLC” but here, AG, that's a European company, almost certainly and this one, hearkening back to finance, which is where a lot of parallels in the cryptocurrency arise. This one's based in Switzerland.
Frank Scaduto
Ah, excellent and, I mean, as far as I know, putting aside the Switzerland connection, it was one of the earlier innovators in the crypto platform space. I believe it started in 2014. So this is well before some of the kerfuffles that we're now talking about with the SEC even began to ramp up and it was doing its thing until the SEC said, wait a minute, you may be an unregistered dealer of crypto, which we think is a security. So in this particular case, the two dissenting commissioners, Peirce and Uyeda, actually issued a somewhat funny and I think illustrative statement of where we are and where companies need to be thinking about in terms of where we're going. They published a dissenting opinion that also had a television episode scene embedded within it and it was called As the Crypto World Turns.
Josh Simmons
So the SEC is a bit ahead of the Supreme Court who can't get the meme inside the opinion, but the SEC can create a soap opera drama in their dissenting opinions?
Frank Scaduto
The crypto-friendly SEC commissioners are clearly fans of dank memes.
Josh Simmons
What was this soap opera for ShapeShift?
Frank Scaduto
So I think we should just read it. They have a whole scene with lines and I suppose we could just act it out. So one of us gets to be future ShapeShift; do you want to be future ShapeShift?
Josh Simmons
That sounds like me.
Frank Scaduto
And I will be SEC.
Josh Simmons
Okay and before we start to be clear, we're not making this up. This is dialogue written by dissenting SEC commissioners, right?
Frank Scaduto
I mean this is in a opinion of the SEC of those dissenting commissioners available on their website. Anyone can go get it. This is probably the first dramatization of it, I would gather. I don't know if anyone else has.
Josh Simmons
We're all about innovation at the CryptoCounsel.
Frank Scaduto
And for the record, I want our listeners to know this, Matt Damon turned down our request to perform these lines.
Josh Simmons
And to be fair we showed him the audition and he realized he probably couldn't compete.
Frank Scaduto
I mean, let's roll the tape or what is it? I guess I'm not a director, what do you say for start scene?
Josh Simmons
Let's start scene.
I am future ShapeShift—
Hello. I would like to register as a dealer.
Frank Scaduto
Why?
Josh Simmons
Because I think some of the assets that I plan to deal might be deemed at some point by the SEC to be securities.
Frank Scaduto
Which ones?
Josh Simmons
I'm not sure because I can't really understand what criteria you use to decide whether a token offering is a securities transaction and if it is, whether the token that was the subject of the investment contract remains a security in secondary market transactions.
Frank Scaduto
If you don't know whether you're dealing in securities, you can't register and, by the way, if some of the assets you're dealing in are not securities, you also can’t register.
Josh Simmons
So, can you help us think through which assets are securities?
Frank Scaduto
No. We suggest that you read the 2017 DAO report, and it will all be clear to you. You can also look at our enforcement actions if you want.
Josh Simmons
I read it and I've read about your enforcement actions. I still have questions.
Frank Scaduto
Hire a lawyer.
Josh Simmons
I did and the lawyer has even more questions.
Frank Scaduto
Sorry. We cannot help any more than we already have. We don't give legal advice.
Josh Simmons
End scene.
Poor future ShapeShift!
Frank Scaduto
That's powerful. Yeah, I mean, what do they do now? Is it over? Is it just like, close up shop, fire your lawyers, go home, and cryptos, that's it?
Josh Simmons
First, they give a round of applause to these dissenting SEC commissioners for their riveting dialogue but the dissent doesn't get to make the law in the SEC, and so they're going to have to come up with other options. What should they do?
Frank Scaduto
All right. I guess we got to figure that out for them. So one thing that we have been seeing, you and I have talked about this a little bit, is these preemptive litigations against the SEC, suing the SEC to get clarity on what you can do and what you can't do and there's been three, four, five lawsuits in the last two, three months that do exactly that.
Josh Simmons
I know about one of them because we filed the amicus brief in support of Coinbase's litigation against the SEC in the Third Circuit, where they are seeking to require the SEC to engage in rulemaking. That's one path, what else?
Frank Scaduto
So, some of the other paths that we're seeing are in the district courts and the trial level where companies are suing the SEC or the SEC commissioners by name, not just the commission as a regulatory entity to say, we have a product, we have a platform, we have a business strategy, give us a ruling. Is this legal? Is it not legal? And they're obviously alleging, the plaintiffs in these cases, that the SEC has not given enough clarity to prevent these things from going forward and there's not enough of a basis to regulate these ideas as securities. So that they want the courts to say, yeah, here's a ruling, you can go forward and do that. The SEC is not allowed, under the current state of the law, to prevent you from doing that.
Josh Simmons
Did they file the suit against all five commissioners? Why not give an exception to the two commissioners who are on their side with this riveting dialogue?
Frank Scaduto
Yeah. I mean, you'd like to think they get a little bit of credit for that, but alas, they have to name all the commissioners since it's the full commission that has to take up the action. It does raise, I suppose, some interesting questions about how the dissenting commissioners who authored our lovely television episode, how they would approach these lawsuits but for better or for worse, they had to name all of the members of the commission.
Josh Simmons
So that's two different litigations ongoing, both in a way against the SEC. What else?
Frank Scaduto
I think we'll just focus on those real quick before we jump to another. The interesting thing about those is I don't think it's coincidence they have been filed in federal district courts in Texas. Many of them in the Northern District of Texas, which is in the Dallas area and then one in the, I believe it's the Western District, but it's the Waco division because the company, it's a fashion company is actually based in Waco.
Josh Simmons
I would have assumed that the reason they filed in Texas is that they all love barbecue. Is this not true?
Frank Scaduto
I suppose they also love barbecue. I love barbecue. I imagine you do.
Josh Simmons
I do, but I prefer North Carolina barbecue.
Frank Scaduto
[Affirmative Noise] me too. Vinegar.
Josh Simmons
But they filed in Texas, regardless of the barbecue. Why is that?
Frank Scaduto
They did, they did. So, the thinking is that Texas is a jurisdiction that is more likely to be sympathetic to these kinds of lawsuits and these kinds of claims and in particular, Texas is situated in a court of appeals called the Fifth Circuit and the Fifth Circuit is particularly on record as being sympathetic to plaintiffs and it is on record as seeing a lot of regulatory overreach, especially by the SEC.
Josh Simmons
And already we've had competing, disagreeing decisions in the Southern District of New York and so in this Texas litigation there could be competing decisions, there could be divergent outcomes, but the Fifth Circuit where all of those decisions would be appealed, could establish clearer, more favorable law, which makes Texas a favorable jurisdiction.
Frank Scaduto
That's the idea and I mean there is some good sense to it, so I suspect we will see more lawsuits like this, and it is an option for companies who are looking for a path forward for the future ShapeShifts out there to take some action. It's not cheap because filing a lawsuit and litigating it and having to go through that process costs money, but I think for a lot of these companies it's just an investment in their future and in their business model because without clarity, which they don't have many other ways of getting, it's hard to form a plan forward as you see from the ShapeShift situation.
Josh Simmons
It is a really interesting issue from a strategic legal angle because for those who don't follow appellate law closely, even if there are disagreeing outcomes, for example in the Second Circuit which governs New York, and the Fifth Circuit overseeing Texas, that's the kind of split between circuits that could wind itself up to the Supreme Court and that's when ultimately you could have some real clarity from the judiciary on these legal issues that the executive and legislative branches have not been particularly clear on.
Frank Scaduto
Yeah, that's right and what's interesting about these lawsuits is even though they are by specific companies involving specific digital assets and the particular facts that are associated with that, they're clearly drafted with the broader industry in mind and trying to take calculated swings at the commission to get rulings that will hopefully help an entire industry or an entire group of players in the space. They're very well crafted lawsuits and I think we'll see more and I think they make a lot of sense for companies that have the means and are worried about the continued situation as it is.
Josh Simmons
But what's interesting sometimes about the strategic litigation is that while the implications are broad and they could affect the entire crypto industry, the particular parties in a case can be quite narrow in a single store, for example, you mentioned one coming out of Waco. What's that case?
Frank Scaduto
Yeah, I mean, it's a fascinating one. It's by a small fashion company called Biba or Beba, sorry if I'm mispronouncing that, but they basically sell fashion goods; they sell like a duffel bag, I think is what the case is mostly about and they wanted to use a crypto token to essentially promote a discount. They would airdrop it to customers with the idea being that it would give them 30 or 50 percent off the purchase of one of these bags and then they came to realize like, wait a minute, if we do this we may be out of business sooner rather than later, simply because the SEC comes along and says you can't do that. So they decided to partner with the DeFi Education fund and bring this lawsuit to say, look, this is what we're doing, we think we should be able to do it. The SEC shouldn't be able to stop us, help us Court.
Josh Simmons
Hold up. So, a fashion shop in Waco is dealing securities? How is that possible?
Frank Scaduto
They're airdropping digital tokens to offer their customers discounts. I mean, it's the wild thing about crypto is it has these unbelievable applications that ten years ago when the blockchain space started, you thought, okay, cryptocurrency, it's a blockchain, it allows people to basically use it as a currency. Now it's going in all these crazy directions where, I mean this is a small startup company is using it to power their business. And, in fact, I'm looking right here, right now, at one of their duffle bags, lovely, on page 21 of the complaint, but this is not a sophisticated financial boiler room operation abusing crypto for bad purposes. This is a company with a real product, with real customers, who wants to do real good things and it just wants to know if it could do that and that's what this lawsuit is all about. And what's wild— they, hired some really good lawyers to bring it. It's a really good complaint, and this is all bleeding edge stuff, but hopefully between this and some of the other complaints, you'll start to get a body of law, to your point, that can percolate through the courts and then you get, if you get to the Supreme Court and they give you a definitive decision, then that's the ballgame.
Josh Simmons
Let's go back to future ShapeShift in this dialogue because we talked about how that's a Swiss company and one of the challenges facing the U.S. market and foreign companies is that with all of this uncertainty, which is going to take time, even if this litigation goes forward and it results in favorable decisions that clarify the scope of regulation of crypto, that's going to take time. Meanwhile, crypto is moving fast, companies have to make decisions about where to invest. Is a company like ShapeShift AG, based in Europe or based in Asia, are they just going to try to avoid the U.S. market, what happens?
Frank Scaduto
That is an option, I don't think it is a great option. I think if you're a company, you hopefully want to be working and doing business in the U.S. It’s the world's largest capital market. It's a huge opportunity for companies. So, for the solution to be you just avoid the U.S. altogether, I don't think that's terribly realistic and you want the future ShapeShifts to hopefully, not only be doing business here, but be based here. I mean that's the goal with this industry, it's growing, it's going to be huge, it's a part of the future of the economy worldwide. It makes no sense for the U.S. to cede that position to Europe or Asia or some other market simply because we can't get our act together on the regulatory side or what laws govern the rules of the road.
Josh Simmons
Not only that, but companies based outside the United States will have difficulty keeping their operations, keeping crypto trades away from the U.S. market because we're a major economy; there's a lot happening here, and so I think ultimately in the face of this uncertainty companies are going to have to have good advice. They're going to need to think carefully about exactly what their operations are. How do they navigate, whether they're based in the U.S. or somewhere else, how do they navigate this market?
Frank Scaduto
I think the thing that is really important to think about is hiring lawyers and advisors who actually understand this technology. There is a really, really good, recent op-ed in Coindesk, I believe, on this very point, telling people, if you want to get the right advice, get the right results, you have to have people who know this technology and are not just trying to apply old rules or other disciplines to it because something is clearly getting lost in the translation. Securities and Exchange Commission, other regulators, don't seem to have a full appreciation for what's different, what's new, what's unique, and why the preexisting SEC regulatory regime, which goes back to the 1930s, is a good way of dealing with this new technology and this entire new ecosystem.
Josh Simmons
And that's why we're here. We want to help teach you listeners and advise on both the technology and how complicated legal structures, some dating back decades, are being applied and should be applied to that technology.
Frank Scaduto
Yeah, absolutely. Just to go back to some of these lawsuits real quick. Some of them are citing laws on the books that have been around forever but that's what they have to do to get their foot in the door but really, the ask is just, can we please create a current, usable, new set of rules that actually acknowledges where we are technologically?
Josh Simmons
And right now the SEC says no.
Frank Scaduto
At least sort of ask us on a case-by-case basis and from future ShapeShifts example is not always entirely clear what that answer might be depending on what day you ask.
Josh Simmons
But at the same time, you have the House of Representatives passing a bill. You have the courts litigating these issues, so there should be more clarity in time, but until that happens, companies should look for the best advice, be very careful strategically in how they are dealing with regulations, particularly in the crypto space.
Frank Scaduto
Absolutely.
Josh Simmons
Thank you for listening to the CryptoCounsel at Wiley.
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