Grayscale and Uniswap rulings contain strong message for US lawmakers

Quick Take

  • In rulings this week, courts sent a strong message to lawmakers that revamped regulation may be necessary.

Federal courts seem to be signaling lawmakers in Washington that the time for revamped cryptocurrency regulation is now. 

In cases involving Uniswap and Grayscale over the past week, courts have denounced reasoning from the Securities and Exchange Commission, with one judge suggesting Congress should take the lead. 

The high profile rulings come as lawmakers, mostly led mostly by Republicans, have been trying to draft and advance bills over the past year in an effort to write comprehensive rules for the industry. SEC Chair Gary Gensler, meanwhile, has argued that new legislation is not needed to regulate crypto and has said securities law is time-tested

Some experts say the judicial logic in both recent court cases, especially from judges that were appointed by Democrats, hold special significance.

Grayscale gets a win

Three judges in the U.S. Court of Appeals for the D.C. Circuit ruled on Tuesday morning that the SEC has to re-review Grayscale's bid for a spot bitcoin ETF after the asset management firm sued the agency last year following the rejection of its plan for the conversion of the flagship GBTC fund. 

Judges Sri Srinivasan, Neomi Rao and Harry Edwards made that ruling, with Rao writing the opinion. 

Edwards is known for being a progressive judge, while Rao is a conservative appointed by former President Donald Trump. Srinivasan is a President Barack Obama appointee and a more moderate Democrat, said Justin Slaughter, a policy director at Paradigm. 

With both Srinivasan and Edwards siding with Grayscale, that could send a signal that the SEC could "lose to a lot of Democratic judges," Slaughter said. The D.C. Circuit Court is known as being the second most important court in the country because it hears cases about rulemakings, and it's also seen as the SEC's home court due in part to its Democratic majority, he added.

There's an assumption that a federal judge appointed by a Democrat will be more willing to rule in favor of a Democratic administration, and vice versa for a Republican administration, said John Aughenbaugh, associate professor at Virginia Commonwealth University. 

"That doesn’t always work out," Aughenbaugh noted.

In areas of law for something new, like regulating crypto, an "odd alliance" can form among federal judges, Aughenbaugh added. 

"What really struck me about the Grayscale decision was not so much that the judges were appointed by different presidents, what struck me was the fact that you had judges appointed by presidents of different political parties that basically had the same message to the SEC, which is — 'you need to come up with some reasoned decision making, you just can’t go ahead and treat one bitcoin product differently than another,'" Aughenbaugh said.

Uniswap judge sends a message

In a separate case involving Uniswap on Wednesday, the U.S. District for the Southern District of New York dismissed in full a class action lawsuit brought against Uniswap Labs, the Uniswap Foundation and investors Paradigm, Andreessen Horowitz and Union Square Ventures. 

The ruling sets a precedent by asserting that code developers shouldn't be held responsible for its misuse by others. It noted that liquidity providers don't necessarily forfeit legal title when contributing to a decentralized exchange pool.

Judge Katherine Polk Failla declined to "stretch" federal securities laws in that case, suggesting that such expansions are the domain of Congress. Failla was appointed by Obama in 2013 and is also overseeing a separate case involving Coinbase and the SEC. 

"It’s the same story again," said Paradigm's Slaughter, citing the Grayscale case. 

"You have Democratic judges, mainline, progressive Democratic judges, saying that this space is not regulated and that there needs to be legislation. That's significant. This is the easy part in the courts. The hard part is when you get to a 6-3 conservative judiciary Supreme Court," Slaughter said.

The Uniswap decision was an example of one branch of the government communicating with the other, Aughenbaugh said.

"That's the old administrative law geek in me, but I read that as like, wow, she is sending a very clear message," Aughenbaugh said. 

"It's not mean spirited necessarily, it's one branch of the government communicating with the other, which is, if you guys wanted a different ruling from us, then you should have stepped in and passed legislation allowing the executive branch to do this," Aughenbaugh added.

'Crypto isn't Democrat or Republican'

Others threw cold water on the idea that judges that were appointed by Democratic presidents hold any extra weight. 

"Crypto isn't Democrat or Republican," said Better Markets CEO Dennis Kelleher. "Investor protection is not Democrat or Republican. When crypto lost $2 trillion dollars in value in about a year, it wasn’t Democrats only, or Republicans only that lost money — it was Democrats, Republicans or people who don’t vote. So investor protection is not a partisan issue."

Kelleher cited recent wins for the SEC, including when former President Bill Clinton-appointed Judge Jed Rakoff of the U.S. District for the Southern District of New York rejected in a separate case the idea that a Ripple Laps decision might invalidate the SEC's case against Terraform. 

Judge Analisa Torres, appointed by Obama, ruled in July that some of Ripple's sales did not violate securities laws, while others did, leaving a partial win for both sides.

The crypto industry wants to write their own laws and pick their own regulators, Kelleher said. 

"On social issues, it is often clearer how a judge might rule on social issues based on which party put them on the bench, but that is generally just not the case when it comes to financial matters," Kelleher said. "In my view, it is particularly not the case when it comes to crypto matters because first of all, most people don't understand crypto and the core issue in crypto is investor and market protection which is fundamentally not a partisan issue."

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