On Regulatory Framework of Crypto Industry
Please be noted that any discussions concerning legal affairs in this town hall are only personal opinions and do not constitute any investment advices.
In this town hall, our guest Rob, a securities lawyer who had come to share his thoughts on the Ripple case in our previous town hall, joined us again to share some updates of the legal cases relevant to the crypto industry, as well as some of his thoughts on these cases.
According to Rob, there were multiple government agencies which were looking at the crypto industry and thinking of putting it under their supervision. A very well known example will be the SEC, under the leadership of Chairman Gensler, had been relentlessly chasing after crypto world and trying to put most of the cryptocurrencies into the category of security. Also the CFTC (Commodity Futures Trading Commission) required that some of the tokens be regarded as commodities and therefore be subject to their supervision.
Rob shared two legal cases in the town hall, in order to shed some lights on our confusion and bewilderment about whether there is a regulatory framework to supervise this industry.
The Uniswap Case Implications
This was a case where some plaintiffs sued against Universal Navigation Inc., probably the parent company of Uniswap, and the VC groups investing in Uniswap, with the claims that they had violated the Federal Security Acts, after the plaintiffs traded some scam tokens on the Uniswap platform and made loss. The plaintiffs thought that those token are securities and Uniswap in turn functions as an exchange of these tokens, and as they failed to find the issuers of those scam tokens, so Uniswap and VC groups, the developers of this exchange who also charge fees for using the platform, should be held accountable for their losses.
The judge of this case, Judge Failla from Souther District of New York, granted a motion from Uniswap and VC groups to dismiss this case, with the reasoning that there was no clear legislative directive to put these tokens under the purview of Securities Acts and the judge felt it a stretch of federal exchange laws to apply in this case. The legal opinion of Judge Failla can be found here.
According to Rob, the SEC had also been trying to broaden the definition of investment contract to put the tokens being traded under their purview, which they had been successful in a lot of different places. But he also thought that we were starting to see some kind of pushback from the courts, just like what happened in the Ripple case and this Uniswap case. The courts are not necessarily agreeing with some of the interpretations and positions made by SEC in these cases.
But generally Rob was quite optimistic about the result the this Uniswap case, where the judge ruled agaisnt Uniswap's accountability for just deploying codes. That might signify some kind of pushbacks or disagreement from the courts when SEC and CFTC were trying to put crypto industry under their purview.
CFTC Orders Against DEFI Protocols
In the recent orders issued by CFTC against DEFI protocols such as Opyn, Deridex and ZeroEx, CFTC took the stance that those protocls, as they had control over their smart contracts, should be held responsible for the trading activities happened on their platforms. Rob expected that this might be something that the SEC and CFTC would be chasing in the future, in which case if an entity has control over a protocol, they might be considered liable for selling securities or providing exchange services for them, etc.
The Major Question Doctrine
There is a very famous Chevron defense doctrine, which courts may defer to the opinions or explanations of some administrative agencies when the legislative delegation to these agencies on a particular issue or question is not explicitly defined.
On the contrary, the Major question doctrine is a principle of law interpretation, where courts will presume that Congress does not delegate to the administrative agencies some issues of major political or economic significance.
When agencies like SEC or CFTC want to vastly expand their power and authority to regulate giant swaths of the economy, the Major question doctrine might come into play where courts might rule that it's not up to an agency but rather Congress to decide if this agency is granted the power to do that, depending on whether this is a significant expansion of the agency's power, or whether the matter is related to a significant portion of the economy.
Rob also gave an example of how SEC was over-expanding their administrative power apart from what they are doing with crypto industry. SEC was trying to implement some climate change rules which require businesses to disclose their carbon output or greenhouse gas emissions etc. in the name of protection of investors. It probably would be a stretch of their delegated power.
The moves by these agencies, such as SEC trying to define most of the cryptocurrencies as securities or CFTC regarding them as commodities, might not be recognized as lawful delegation to these agencies. But we would have to see what the courts would allow in the future.
Legal Implications On UNAs
Rob also brought up a recent Ooki DAO case, where the CFTC took the position that token holders, just by holding a token that had governance rights, should be considered as part of an UNA (Unincorporated Nonprofit Association). In many jurisdictions of U.S., UNAs are not recognized as a legal entity but rather an aggregate of individuals, so they don't have any ability to defend themselves in courts, and anybody associated with an UNA can be held with unlimited liability related to it.
Fortunately, there was a major push to actually give UNAs some rights and limited liability, which was the revised UNA model act. This act had been adopted by a number of juirisdictions in U.S. such as Nevada, Wyoming and Texas etc., where an UNA now for certain issues can be treated as a separate legal entity and its members will only have limited liability towards the UNA.
Rob thought that would be another major issue in the future that everyone should pay close attention to. If a DAO is taking a legal structure of an UNA, you can be regarded as a member by just holding the DAO's tokens which have governance rights. In California, members of an UNA may have unlimited liability to it, while other states like Nevada respects the limited liability for their UNA members.
Opinions about Retailism
Rob thought that the Retailism concept that brought up by Jango was a very cool solution to a problem in the financial world, where big guys like wholesalers, VCs, investment banks, accredited investors, etc. had been trying to dump their bags to little guys, i.e. the retails investors. Projects operating under the retailism pattern will be very transparent to all participants, and retail extraction of small investors like mom-and-pops by those big guys can be avoided to a great extent.
Jango thought that the retailism concept works not only in terms of big investors versus small investors, but also in terms of a Juicebox perspective or even a legal perspective. The owner of a retailism project is a contract, opposed to a multisig, an individual or an on-chain governance entity, this concept eliminates the possibility of any changes to the project routine like funding cycle configurations, except for very few deterministic options.
These ownerless contracts can be designed in other ways, like proposed as interesting games, that solve the incentive problems between earlier investors who take on more risks and later retail customers, as well as those between early-on developers and later ones.
Jango also said it would be ideal if we could put together a product that can explain retailism, and refine the metaphors and components in a way that would be palatable for people who actually are looking to use it. We can start with the many projects that we've funded as a DAO and built them as creators, before extending to other projects into the future.
He thought that a big cloud over a lot of what Juicebox had offered during the past year was the legal uncertainty, which had been leading too much into the multisig style of project ownership, governance style of project ownership, or just one -dimensional pure fundraisers. There is always a messaging problem for a lot of what we are capable of. How do we create an experience that educates what's going on?
And then the legal uncertainty made the bidirectional Juicebox interactions very difficult to carry out with confidence. Oftentimes, if you have a great idea, this just adds on risks. The Juicebox toolset may prefer a more public and honest relationship between everyone involved.
It's exciting to get to a point where we're trying to refine the tools, and learn from the recent events to ship something that we're willing to take the risk on, and do so in a way that means well, hopefully with all interests involved, or at leat with most interests involved.