Crypto vs. The World | Jake Chervinsky & Amanda Tuminelli

I want to also zoom out a little bit just to explain a little bit what I think is going on behind the scenes here, which is an existential battle for the heart of this industry. We've spent a lot of this conversation about the securities laws and the financial markets issues are important, but they are not likely to spell the end of this industry. The national security issue is fundamentally different.

Welcome to Banklist, where we explore the frontier of internet money and internet finance. And today on Bankless, we explore the frontier of our industry's confrontations with the powers that be. Crypto versus the SEC, crypto versus the Department of Justice, sometimes it feels crypto versus the world. While there's always a lot of activity on the crypto legal front, this particular moment in time feels particularly active. Today on the show, we have Jake Shravinsky and Amanda Tuminelli, two of crypto's most Chad lawyers. Amanda, chief legal officer to the DeFi Education Fund, is taking the SEC to court on multiple counts. Every single court case, of which there are five different ones discussed in this episode today, brings new precedent and new clarity to the crypto space. The theme of this episode today might be crypto bites back.

Rather than the SEC ruling by enforcement, the crypto industry is claiming clarity by capturing new ground

from hopefully winning legal battles versus the SEC. Jake Stravinsky as well is always useful to discuss the between the lines, behind the scenes perspectives about what's really going on in the machinations of the legal entities that are giving crypto trouble.

Bankless Nation, listening to this episode, will give you a very comprehensive overview as to the state of crypto's legal battles, where we are, where we're going, what the 2024 elections means for us, and also the state of crypto versus the final boss, the Department of Justice. That one's at the very, very end. So let's go ahead and get right into this episode with Jake and Amanda. But first, a moment to talk about some of these fantastic sponsors.

That makes this show possible, especially Kraken, our preferred crypto exchange for 2024. If you do not have an account with Kraken, consider clicking the links in the show notes to getting started with Kraken today. Bankless Nation, super honored to introduce you to Jake Shravinsky, Chief Legal Officer over at Variant on the board of the DeFi Education Fund. Jake's everyone's favorite lawyer on crypto Twitter, but doesn't mean he's your lawyer. We've had on the show uh Jake has been on the show countless times because he's always on the frontier of the industry's legal battles. Jake, welcome back to Bankless.

Awesome, maybe back?

Amanda Tubinelli, chief legal officer of the DeFi Education Fund, which has taken a main character role versus the SEC lately. Amanda and the DeFi Education Fund are made fighting to make sure that US citizens can claim our airdrops, among many, many other things. Amanda, also, welcome back to Bankless.

Thank you. Thanks for having me.

So, guys, things uh seem to be particularly uh busy in the realm of crypto and legal. Things are kind of like always busy in that realm, but uh like especially right now.

Things seem to be like some of their busiest. There's a lot going on. There's the ETF conversation. We are suing the SEC. Amanda's suing the SEC. There's like Roman Storm's case. There's Coinbase. So overall, before we get into what I think is just going to be kind of just like a total landscape as to the current events of legal versus the powers that be, overall, what's it like to be a lawyer in crypto these days? Amanda, you want to start?

Sure. Yeah, it does feel a little bit like every day brings something different. I have a plan for each day, and then I wake up and see like which regulator has decided to say something new and totally disrupt my entire day.

But it is, I think it has been heartening to see the industry going on the offense. I think we're seeing it happen more and more.

We're seeing people be proactive and vocal. And that has been uh really fun to be a part of recently.

Yeah, especially as we get into some of the just the concrete current events, the they said, then we said, then they said kind of stuff. I think overall, just to set the tone of the conversation, it's really helpful just to get like a vibe check. So, like Jake, vibe check for you. Just how are you feeling as a lawyer in crypto right now?

Yeah, I mean, I think fives are pretty good. So I, you know, one interesting thing since the last time I spoke with you, David, is I joined Variant. So I'm in the venture role now, getting to work with founders, which is a ton of fun. Thanks very much.

And I think, you know, that's um that's sort of where the good vibes are coming from for me, is I think the industry is really making a lot of progress. We've spent a lot of time in the crypto law and policy and regulation worlds feeling sort of stuck in a rut, like nothing is moving and there's nothing we can do, and we're just sort of sitting ducks being attacked by regulators left and right, or being attacked by Congress and other policymakers. And I feel like in the last six months or so, almost you know, coincident with the start of the bull market, we've also had sort of a bull market rally in progress on the legal front. And that's in a number of different ways, both in terms of uh the offensive litigation strategy that the DeFi Education Fund has been carrying out, also some of the news that we've gotten from courts, you know, not all good, but all progress. And I think that's really meaningful. And then also a lot of new designs in the industry, things like the DUNA, which maybe we'll talk at this new Wyoming structure that Dows might be able to use. So I think a lot of innovation happening on the legal side, which feels really good for once, uh a bit of a change.

Jake, since you're on the venturous side, maybe you could kind of give us a vibe check of like the disposition of founders that you're talking to. Maybe United States based founders versus abroad founders. I know like in 2022, being a United States based founder, I would like characterize as like timid and fearful.

Uh what would you say is like the disposition of founders that you're talking to today?

Yeah, I mean I think founders are excited and I think what they're looking for is a way to do business in the United States. And as I'm sure you know,

For a long time, the sort of conventional wisdom among lawyers under Gary Gensler's SEC was just don't do business in the United States, right? Block US users, don't do airdrops to US users, don't offer your platform to US users, right? Do geofencing and all this kind of stuff. And I feel like what we're starting to figure out is a way that we can work through some of these legal issues so that we can get these, you know, new assets and new products and services into the hands of folks in the US. So I think founders are really excited about that. It's obviously not all positive. There is still a ton of fear and a lot of time and resources and effort being put into regulatory and legal strategy at a very early stage for crypto companies. So you know that the typical tech company doesn't hire a lawyer until they have maybe 25, even maybe 50 employees. And they don't have to spend a whole lot of money on outside counsel. Very different in crypto, right? Crypto companies are hiring lawyers as employee number 10 or even earlier, and they're spending hundreds of thousands or even millions of dollars on outside counsel. That's obviously very distracting and very unfortunate, very different from the traditional tech world. But I think founders are seeing a path through the issues, and I think that's giving people a lot of confidence.

Amanda, what's your kind of conversation with external companies or or the people that that you chat with uh in in the same regard? Any perspective you want to add here?

Yeah, I think I'd echo a lot of what Jake said. I also think that there's,

even though we have had a lot of different regulatory and enforcement actions, people are still trying to figure out solutions to the problems that are based on the technology. And that's been really great to see. I think a lot of the zero knowledge projects and projects that are trying to figure out a way forward to meet some of the compliance obligations that they might face at some point

are still going forward. They're still doing that work. So

Um

I think that it's it I feel positive. I also think vibes are good and I think people are gonna keep building, so that's good.

So let's go ahead and get into the current events of the day. I think we can start with Coinbase versus the SEC, just simply because the news about this was most recent. I think for each one of these current events that we're going to go through, I'm going to kind of give my like high-level summary of what the details are that I can remember, which is probably going to approximate what the listeners know about it as well. Coinbase versus the SEC, the way that I would summarize this current event here is that not too long ago, Coinbase filed for a motion to dismiss the SEC's case versus Coinbase with the court, just saying, like, hey, this entire court case is like arbitrary, capricious, frivolous. You should dismiss the whole entire thing. And then recently the court came back and said uh no to no, but also yes. And they said no to the staking contract part of the SEC case versus Coinbase, and yes to the uh we're going to dismiss the wallet side of things. And so this was like more or less like a kind of like a half-court shot by Coinbase, like kind of a big stretch for them to just say, hey, court, like throw away this entire case. Uh so we got like a partial victory there with Coinbase, uh, with the court throwing out the uh wallet side of things, but we are going to proceed with the staking contract side of things. Uh Jake, maybe you can kind of just like uh wind us all the way back. How did this uh court case come to be at all? Uh, and then where do we stand today?

Yeah, so so let me do a little bit of stage setting as you suggested, and then we can talk a little bit about the substance of the court's order on the motion for judgment on the pleadings. So the SEC filed this enforcement action against Coinbase last June.

And it was really big news because obviously Coinbase is one of, if not the most important crypto companies in the United States, maybe even in the world, right? This is where a lot of people get their first exposure to this space. And what the SEC alleged against Coinbase is that it was an unregistered national securities exchange because it allows trading in assets that are themselves unregistered securities. And in the complaint, the SEC lists 13 different tokens that it alleges are unregistered securities, among a handful of other allegations, including that Coinbase was a broker by virtue of having a wallet that allowed swap functionality, right, access to DEXs, and also allegations that their staking service was itself an unregistered security. The fact that they were offering a staking account basically was a security, totally irrespective of what the assets were involved there. But there's a little bit more too. There are allegations about the Coinbase Prime offering and whether that also makes Coinbase a broker and some other sort of minor things. But I think those are the three most important points that have a broad industry impact beyond just Coinbase, right? And in a really significant way, Coinbase is fighting this battle not just for the company. It's not just a bet the company case. In many ways, it's a bet the industry case, right? If Coinbase loses, all of us are in a whole lot of trouble. So that's why we're all watching this case so closely.

And Coinbase filed this motion for judgment on the pleadings, arguing that

Even if the court accepts all of the SEC's factual allegations as true, nonetheless the SEC is wrong as a matter of law, and so the case should be dismissed.

And I think that's that's a really important framing for the court's ruling because the court did have to assume that the SEC was telling the truth throughout the complaint. Now, if you ask us, I think we tell you the SEC is not telling the truth about a lot of the facts in the complaint, but that's that's sort of the stage that we're at.

So let me get a little bit into what the court said in the order.

There's a couple positives, a couple negatives, and a whole lot of remaining uncertainty.

On the positive side, Coinbase won the argument that it is not a broker as a result of offering a wallet with swap functionality. This is a massive win, not just for Coinbase, but frankly for the entire DeFi space, because there's been this question about whether a wallet or a front end or some other user interface that allows users to access an underlying DeFi protocol.

Makes the provider of that piece of software into a broker. And what the court basically says is

these providers are not brokers because they are not in a principal agent relationship with the user where the user is relying on the provider to make some decision for them, right? To decide how or where to execute some transaction, where the user is relying on their skill and expertise in order to perform that service.

Instead, the providers are basically just information providers. They're giving the user information about price discovery and allowing them to make the decision whether they want to execute the trade or not.

But the key is at all times, the user is in control of their assets, and the user is the only one who gets to decide whether the trade is executed or not. So again, huge win, not just for Coinbase, but I think for the entire DeFi space.

Just to really drill this point home, this uh basically um uh is concerning any sort of wallet. Uh so of course not just Coinbase wallet, but like Uniswap wallet based in the United States. Uh you know, anything like Zapper or Xereon, any sort of front end, uh any sort of any sort of front end that touches DeFi in the back end, you're saying has been given some precedent about how they do not have a principal agent problem, a principal agent relationship with their users, and therefore are just like software, not like broker. And so any this entire sector of what you're calling like global globally DeFi is now has very strong precedent protecting them.

I think that's right. I would describe it as being significantly de risked. That's like the lawyer way of saying I'm not giving anyone legal advice. It's useful disclaimer, and you know, don't do or not do anything based on what we say on this podcast. But yes, a massive win for all of those types of services, including aggregators. So I think that's that's a big win for DeFi.

The other win in the case is some really helpful language, actually in the context of staking related to airdrops. And you know, I'm not going to repeat the Howie test because I'm sure everyone listening is pretty too familiar with the Howie test. But you know, we talk a lot about the first prong of the Howie test, the investment of money prong. And this is why many people believe that airdrops are not securities, right? The tokens that are airdropped are not themselves securities, and the airdrop itself is not a securities transaction because the recipient does not invest any money in the creator and distributor of the token. And the court has some really interesting language that helps us understand where the line is to see an investment of money or not. What the court says is you have to look to see if there is a risk of loss for the recipient of the token, a financial risk of loss. And if the recipient of the token isn't putting some capital on the line where they could actually lose money in the transaction, then there's not an investment of money in the court's opinion. And I think that's really helpful for us to understand the modern theory of token distribution, which is not just this sort of surprise airdrop, right? No one knew it was going to happen, and then all of a sudden you have the right to claim tokens, but rather airdrops that incentivize specific types of user behavior and also waves of recurring airdrops one after another to incentivize different types of behavior. What this risk of loss analysis tells us is there's a lot more freedom for distributors of tokens to ensure that they are not running afoul of the securities laws as long as the recipients of those tokens are not risking financial loss as a result of receiving that token. So another big win in the case.

Well, there's a couple conditions I think that um I think are worth bringing up here. There's like the airdrop condition of like I have a pudgy penguin and somebody distributes me a token because I hold a pudgy penguin. I never, as a result of that token airdrop, my pudgy penguin was never at risk of loss. But then that's what that's one circumstance. A different circumstance is like I am putting my ETH inside of some sort of contract inside of a particular protocol that has like maybe exploit or like bug risk or just economic risk as a result of that protocol. Like maybe maybe it's a leverage protocol, maybe it's a restaking protocol. And so like uh I'm I'm not selling my ether. I'm not doing anything other than like uh moving my ether into some sort of like smart contract that is owned by the by the airdropper.

Uh but like there is but I'm doing something and they have some sort of I'm putting it into their contracts and as a result of that I'm getting an airdrop. That seems to be a different circumstance where like it might be a little bit easier to argue that there is risk of loss there. Is there is there am I parsing on some nuance here? Like what would you have to say about this?

You're you're totally spot on and you and you zoomed right into the gray area sort of in the middle of this issue where there is still uncertainty, right?

Okay.

Obviously there is an investment of money in the case of an ICO where the person who receives the token has literally paid the creator of the token in order to get it. I think there's obviously not an investment of money if you literally are surprised by an airdrop that you never gave up anything for. The gray area is this case where

The recipient has parted with some financial asset in some way, but they have not actually invested that money in the creator of the token. Now, we in the industry are going to argue that is not an investment of money for the securities law's purposes because it doesn't create the same type of entrepreneur-investor relationship where the securities laws are supposed to come in and ensure there's no information asymmetry between the entrepreneur and the investor. So it's a totally different situation if the alleged investor is simply putting some asset into a decentralized protocol where they don't need disclosures from the creator of the asset. I'm guessing the SEC is going to disagree with that because the SEC thinks literally everything in the world is a security. So we're still in sort of the gray area of uncertainty on that point.

Amanda, we're gonna get to uh the uh DeFi Educations Fund uh case against the SEC. That's like pretty proximate to what we're talking about now. But like before we get there, like to overall, just what's your perspective on on this whole conversation? I'm sure you have a bunch to add.

Yeah, I was gonna say this is a really good segue uh to our airdrop case, but um on Coinbase, I I agree with everything that Jake said. I would say that

Yes, it would be very bad for the industry if this whole case gets resolved against Coinbase. We're very far away from that. There's going to be a discovery period. There will be more motions. And I do think that parts of this opinion can change with more facts added to the case. So it's possible that for I think really in the staking section in particular, when Judge Vela has a full record in front of her, including specific factual details about staking, my hope is that she will realize that some parts of what the SEC has said about staking is just factually inaccurate and doesn't get the tech right. So I think that there is room for this decision to be different at summary judgment.

But even if like the whole we just lose entirely, I would I would just say it is one judge in one district court and there are other courts around this country that are going to be hearing very similar issues.

Um I'm not sure if you're familiar with the Legilex and CFAT case that was filed in the um in Texas district court.

So it's possible that there they're seeking a court order that Legilex is not an unregistered securities exchange. There are very relevant facts here that would apply to any digital asset trading platform. If they get that court order that Legilex is not an unregistered securities exchange, that also sets really good precedent around the country.

And if there's one case going one way and another case going another way, that just means it's ripe for an appeal.

And I think everyone knows we're in it for the long haul across the industry. Like if we need to appeal all the way up to the Supreme Court, we will.

So I would just say all hope is not lost. Um, yes, it would be massively helpful if Coinbase wins the whole thing, of course. Um, but even if it's not um a full win, it's still, you know, it's not the end of all hope.

So of the three pillars that I kind of identified, the uh the staking contract, uh, the wallet, and then Coinbase as an actual securities exchange, the wallet, we've got a nice big fat green check mark on. Like we have one that pillar. Uh the um the airdrop thing is like a partial victory with a potential full victory. Uh the staking contract, TBD, uh, and then also uh the actual Coinbase like um uh is is a securities exchange or not. No, no progress there, but like a lot left to uh a lot left of like time and like stuff to actually have happen there. Is that is that correct?

Yeah, yeah, that's right. There's there's a lot left. I would say though, you know, not to be too Pollyanish about this. There is some bad news here, and it is on that sort of main question whether Coinbase might be an unregistered national securities exchange. Because aside from the investment of money prong.