As an attorney at the largest digital asset trade association in America, I deeply appreciate the role of the American justice system in the development of the law.
But the role of the justice system is outsized when applied to the new legal issues of digital asset technology as regulators continue to enforce existing laws in a way that fails to consider the paradigm shift that comes with blockchain technology.
As Washington races to catch up with this nascent industry, the future of digital assets may instead remain in the courts.
Today, digital assets are at the forefront of technology, finance and law; it’s already clear that blockchain could form a new backbone for the Internet. While cryptography has been around for decades, its contemporary application in a truly decentralized manner is new. Historically, financial regulation has been built on a single premise: the existence of an intermediary. Intermediaries carry with them a certain amount of risk and that risk can be adequately managed through disclosure, reporting and enforcement regimes.
Digital asset technology changes this archetype.
While there are some intermediaries within the digital asset ecosystem, the technology itself is neutral and enables true peer-to-peer digital transactions in the same way I hand over cash to tip a manicurist instead of using my card.
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With this in mind, any attempt at regulation anything in the digital asset ecosystem similarly – the Securities and Exchange Commission’s approach – makes little sense. Financial use cases within digital assets also require a new approach; Our regulatory system is based on the existence of intermediaries, so the regulation of assets without an intermediary falls outside much of the current regulatory scope (except, of course, for laws that prevent actions such as fraud or manipulation of the market).
Gaps still exist, and government agencies such as the SEC and the US Treasury Department’s Office of Foreign Assets Control have initiated enforcement actions against ecosystem participants in the absence of regulatory clarity.
It is these lawsuits – whether brought by the government or by a participant seeking to remedy the harm – that can add much-needed clarity.
For example, the SEC’s enforcement actions against the three largest digital asset exchanges – Binance, Coinbase, and Kraken – and the offensive lawsuit filed by the Crypto Freedom Alliance of Texas and LEJILEX against the SEC, all seek to answer a crucial question. Does the SEC’s characterization of investment contract analysis (the Howey test) comply with the law? The SEC outlined a “totality of circumstances” view of Howey with some built-in assumptions.
Both the SEC “test” itself and the assumptions underlying the test are in dispute in each of these four cases. The outcome could have a drastic impact on how entrepreneurs and developers innovate in the future or whether they are allowed to innovate with this technology.
Let’s then look at the three Tornado Cash cases. Two are civil lawsuits, filed by plaintiffs who claim their constitutional rights were violated by OFAC-designated sanctions for the Tornado Cash software. The other is a criminal case brought by the Department of Justice against the two developers of the Tornado Cash software. All three of these cases involve questions about how the government can impose mandatory reporting and monitoring obligations on software developers — a new issue that will soon be decided by federal judges.
And, of course, there are numerous other seminal cases that answer questions such as how securities laws apply to artists and content creators, whether mandatory reporting of wallet address information violates the Fourth Amendment, and the extent to which a decentralized group of individuals constitutes an organization.
American courts have the power to set precedent and protect our fundamental constitutional rights, such as the right to be heard, the right to be free from unreasonable searches and seizures, and the right to speak and associate freely.
When our politicians fail to craft bespoke regulation or simply go too far in trying, the courts can serve as a necessary check and balance for innovation to thrive in the realm of emerging technologies.
As a senior advisor for the Blockchain Association, Marisa helps develop and advocate policy positions on behalf of the cryptocurrency industry, as well as manage long-term legal projects and strategic litigation. Prior to joining the Association, Marisa represented corporate clients in regulatory enforcement actions, internal investigations and civil litigation matters at Covington & Burling and O’Melveny & Myers. Marisa also served as a federal law clerk in the United States District Court for the Central District of California. Marisa earned her bachelor’s degree from Brandeis University and her doctorate from Loyola Law School in Los Angeles.
