Intro
Last week, two crypto firms filed lawsuits against federal agencies, and House Majority Whip Tom Emmer asked the White House Office of Management and Budget why a Bitcoin mining survey is an emergency.
Top Points
A Texas-based firm building a digital asset trading platform is asking a federal court to rule that digital assets sold on the secondary market are not investment contracts and that it's free to operate without fear of certain SEC enforcement actions.
House Majority Whip Tom Emmer (R-MN) voiced concerns with OMB's "emergency" approval of a Bitcoin miner survey in a new letter.
On Friday, a federal district court in Texas halted the survey by granting a temporary restraining order requested by the Texas Blockchain Council and Riot Platforms. A preliminary injunction hearing is scheduled for Tuesday at 10am.
You can read this newsletter in its original form (published on Friday morning, 2.23.24) on Cap Hill Crypto.
LEJILEX Files Declaratory Judgment Action
Overview
On Wednesday, LEJILEX and the Crypto Freedom Alliance of Texas (together "Plaintiffs") filed a complaint against the SEC in federal court in the Northern District of Texas.
LEJILEX is building Legal.Exchange - non-custodial digital asset trading platform that allows users to buy and sell digital assets through the use of underlying smart contracts.
The Crypto Freedom Alliance of Texas ("CFAT") is a non-profit membership organization advocating for the responsible development of digital asset policies in Texas.
TLDR: Plaintiffs are asking the court to issue a declaratory judgment clarifying that LEJILEX is not operating as an unregistered securities intermediary because secondary market sales of digital assets - like the ones that would occur on LEJILEX's exchange - are not sales of securities.
Legal Arguments
Declaratory Judgment Act
Under the Declaratory Judgment Act, a party may ask the court to declare its legal rights when it faces a "genuine threat of enforcement." See Complaint at 50 (quoting MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 129 (2007) .
Here, Plaintiffs are asking the court to:
(1) Declare that secondary-market sales of digital assets are not securities.
(2) Declare that Legit.Exchange is not an unregistered securities exchange.
(3) Declare that operating Legit.Exchange will not make LEJILEX an unregistered broker or clearing agency.
(4) Enjoin the SEC from bringing an enforcement action against LEJILEX or similarly situated members of CFAT for failure to register as a securities exchange, broker, or clearing agency.
Plaintiffs argue they face a genuine threat of enforcement here because:
(1) the SEC has already brought enforcement actions against other digital asset trading platforms for alleged registration violations (e.g., Coinbase and Binance), and
(2) the SEC has not issued regulations making it possible for digital asset trading platforms to register with the SEC.
Digital Assets Are Not Investment Contracts
Like the defendants in SEC v. Coinbase and SEC v. Binance, here, Plaintiffs argue digital asset sales on their platform are not sales of investment contract securities because they "do not involve any kind of ongoing commitment on the part of the asset seller or developer to manage any common venture for the asset buyer’s benefit." Complaint at 2. If the definition of "investment contract" captured such digital assets, then the SEC would have regulatory power over a "boundless array of other assets as well, from collectibles to luxury goods and beyond." Id. at 2-3.
Plaintiffs also drill down on why secondary-market transactions are especially unlikely to be investment contracts. In the case of a digital asset bought and sold on an exchange, the money the buyer pays for the digital asset goes to the asset seller – not the asset creator. See id. at 39-40.
And while a buyer may "hope" a digital asset’s creator will expend efforts to increase its value, the buyer is not "entitle[d]" to any commitment or obligation on the part of the asset creator or seller to manage any common enterprise. Id. at 20, 41-42.
In other words, there is no investment in a common enterprise with the reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others, as required by Howey. See id. at 11.
Major Questions Doctrine
Under the Major Questions Doctrine, the Supreme Court will reject agency claims of authority when (1) the asserted authority concerns issues of vast economic and political significance and (2) Congress has not clearly granted the agency such authority.
In short, Plaintiffs argue here:
"If Congress really did want to empower the SEC to regulate not only the trillion-dollar digital asset industry, but every transaction involving an asset that the purchaser expects will increase in value on account of some future action by the creator, then it would have to speak much more clearly than it did in the nearly century-old statutes that the SEC has belatedly invoked."
What’s Next?
Amanda Tuminelli, Chief Legal Officer of DeFi Education Fund, explains:
"Next steps: Assuming the SEC accepts service (normal legal procedure), the SEC has 60 days to respond - either by filing an Answer to the Complaint's allegations, moving to dismiss the Complaint, or asking for more time to respond. Safe bet that they do one of the latter two."
Whip Emmer Pushes Back Against Bitcoin Mining Survey
On Tuesday, House Majority Whip Tom Emmer (R-MN) sent a letter to OMB Director Shalonda Young voicing concerns and seeking answers as to why the OMB approved a mandatory survey of Bitcoin miners under emergency authority.
TLDR: Whip Emmer opposes the EIA's policy objective and is deeply concerned with OMB abusing its emergency approval authority.
Background
On January 24, OMB approved the Energy Information Administration’s "emergency" request to conduct a Bitcoin mining survey. The EIA justified the approval on the grounds that (1) Bitcoin’s price increase will boost mining activity (and thus electricity consumption) and (2) a "major cold snap" in the U.S. is also spiking electricity demand.
The mandatory survey will require 82 crypto mining firms to report information to the EIA regarding electricity consumption, energy providers, mining equipment, and more. See Survey Form EIA-862.
The Letter
In the letter, Whip Emmer characterizes the EIA’s proffered justification as "insufficient," highlighting the agency’s failure to mention miners’ "unique ability to curtail load during peak hours or inclement weather." Letter at 2.
He notes that while the EIA is supposed to be policy neutral, it "seems to be enforcing the Biden administration’s regressive policy position against energy consumption and applying it subjectively to the digital asset industry." Letter at 1.
Emphasizing process concerns, Whip Emmer argues OMB’s abuse of emergency approval “will work to the detriment of our nation’s system of checks and balances.” Letter at 2.
In closing, Whip Emmer asks OMB a series of questions aimed at better understanding the office's rationale for issuing emergency approval, including:
What criteria did OMB use to determine the legitimacy of the "emergency" and how did EIA prove this "emergency"?
Is the decision to fast-track the crypto mining survey consistent with past emergency approvals?
Did the EIA disclose to OMB how it plans to protect sensitive proprietary information that miners may be required to report?
Has OMB previously approved an emergency request for information collection that carried criminal penalties if subjects failed to respond?
Did the EIA provide any evidence of soliciting public input prior to requesting emergency approval?
What's Next?
While OMB approved the "emergency" survey for 6 months, the EIA is proposing to extend the survey for 3 years. You can read EIA's notice in the federal register and submit comments here.
The comment period closes on April 9, 2024.
Challenge in the Courts:
On Thursday, the Texas Blockchain Council and Riot Platforms, Inc. filed a complaint in the Western District of Texas asking the court to grant a preliminary injunction to stop the survey. The complaint alleges the survey is unlawful because OMB's emergency approval violated the Paperwork Reduction Act and the Administrative Procedures Act.
On Friday, the court granted the temporary restraining order until the preliminary injunction hearing on Tuesday (2.27). Accordingly, EIA announced it will not be enforcing any survey requirements and will sequester any data received from any party responding to the survey through March 22, 2024.
Look Ahead
Looming government funding deadlines:
March 1 - Funding bills for Agriculture; MilCon-VA; Transportation-HUD; and Energy and Water expire.
March 8 - Funding bills for Commerce, Justice, Science; Defense; Fin Services and General Government; Homeland Security; Interior, Environment, and Related Agencies; Labor, HHS, and Education; Legislative Branch; State and Foreign Ops expire.
Quick Hits
CBDC/Appropriations
Rep. Warren Davidson (R-OH) calls for House to move forward on anti-CBDC legislation - including a rider to defund CBDC efforts in a House appropriations bill.
DAAMLA & CANSEE
Rep. Byron Donalds (R-FL) outlined his opposition to the Digital Asset Anti-Money Laundering Act ("DAAMLA") and the Crypto-Asset National Security Enhancement and Enforcement Act ("CANSEE") in an op-ed for Blockworks.
DeFi
Antonio Juliano, founder of dYdX, offers key principles for DeFi regulation, covering consumer protection, disclosures, market integrity, equality of access, criminal activity, and innovation.
Europe & Bitcoin
In a blog post, the European Central Bank published a hit piece on Bitcoin.
Notable quotes:
"Bitcoin has failed on the promise to be a global decentralised digital currency and is still hardly used for legitimate transfers."
"We...reiterate that the fair value of Bitcoin is still zero."
"[I]t seems wrong that Bitcoin should not be subject to strong regulatory intervention, up to practically forbidding it."
"The Bitcoin network has a governance structure in which roles are assigned to identified individuals. Authorities could decide that these should be prosecuted in view of the large scale of illegal payments using Bitcoin."
2024
Prominent crypto lawyer and entrepreneur, John Deaton, launches bid to challenge Senator Elizabeth Warren (D-MA).
Deaton announces run and previews policy platform in new video.
