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Ninth Circuit:
Judge Properly Did Not Decide if Cybercurrency Is Security
Panel Affirms Dismissal of Action Against SEC Seeking Declaratory Judgment
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has affirmed the dismissal with prejudice of an action brought by an Orange County law firm seeking a declaration that those who make or receive payments via their computers or cellphones using cryptocurrency, over a network, are not subject to federal securities regulations.
Its decision came in a memorandum opinion on Thursday signed by Judges Gabriel P. Sanchez and Kim Wardlaw and Senior Judge Richard Paez.
The opinion denies resuscitation of an action instituted by attorney Fred Rispoli’s Hodl Law Firm against the Securities and Exchange Commission (“SEC”). It complains that the SEC won’t say whether it regards the Ethereum Network, and users of it such as Hodl Law, as coming under disclosure requirements of the Securities Act of 1933.
Ethereum is a software platform that relies on “blockchain” technology—a blockchain being a publicly accessible digital ledger primarily used to record cryptocurrency transactions.
While bitcoin is the most widely used form of alternative currency, Ethereum’s “ether” comes in second, with capitalization, according to Hodl Law, of approximately $350 billion.
Allegations of Pleading
Rispoli said in his Nov. 21, 2022 complaint against the SEC under the Declaratory Judgment Act:
“Plaintiff, a law firm that focuses on legal and regulatory issues regarding digital assets (also known as digital currency units (‘DCUs’) and/or cryptocurrencies), requests declaratory relief in the face of years-long, purposeful delay and obfuscation by the Defendant regarding its jurisdictional authority with respect to this technology. For over fourteen years, the Defendant has vaguely and ambiguously asserted its ‘right’ to police digital assets as securities yet has refused to identify more than one digital asset that it believes is a security prior to initiating enforcement actions.”
The pleading goes on to aver:
“Plaintiff engages in transactional activity on the Ethereum Network, along with literally millions of other users worldwide, which requires use of the Ether DCU…in order to conduct such transactions. The Defendant has refused to provide Plaintiff—and millions of other network users—any concrete guidance as to whether such activity could, at the Defendant’s whim, be prosecuted as engaging in the sale of unregistered securities.”
Dismissal of Action
Dismissal without leave to amend was ordered by District Court Judge M. James Lorenz of the Southern District of California on July 28, 2023. His primary ground was the lack of an actual controversy, meaning that the court lacked subject matter jurisdiction.
He said:
“Hodl Law fails to identify a case or controversy between it and the SEC sufficient to demonstrate standing. In the Complaint, Plaintiff does not claim that the SEC has investigated the Firm, or prosecuted it, but instead alleges that the SEC might bring suit against it for its activity on the Ethereum Network for violating securities laws. The possibility that the SEC may file suit against the Plaintiff is not definite and concrete….”
In its response to Hodl Law’s arguments on appeal, the SEC said in its brief that “Hodl Law fails to identify any authority providing it with a claim against the SEC.” Hodl shot back, in its reply brief:
“[T]his argument misses the point. The SEC fails to identify any authority providing it with congressional authorization to regulate the Ethereum Network….
“Critically, not only are there no laws passed by Congress that confer regulatory and/or enforcement authority over digital assets to the SEC…, but also there are several pending bills that would make it unambiguous that the SEC has no authority with respect to cryptocurrency.”
Ninth Circuit Opinion
The memorandum opinion says:
“The district court correctly concluded that we lack subject matter jurisdiction because Hodl Law failed to allege a ‘case or controversy’ within the meaning of Article III, section 2 of the United States Constitution.”
It elaborates:
“If the SEC determines that transactions involving Ether or the Ethereum network violate the Securities Act, Hodl Law would already be in violation of the law because it currently engages in such transactions as part of its law practice. But Hodl Law’s complaint contains no allegations that the SEC has investigated, prosecuted, or threatened to investigate or prosecute the law firm’s use of Ether or Ethereum. The SEC has not taken an official position as to whether Ether or Ethereum is a ‘security’ under the Securities Act. and it is possible that the Commission will never decide that Ether or Ethereum is a ‘security’ under the Securities Act.”
The opinion notes:
“And although Hodl Law cites to several examples of SEC enforcement actions against other cryptocurrency users, in none of those cases did the SEC allege either that Ether is a security or that the transactions on the Ethereum network violated the Securities Act.”
Administrative Procedure Act
In addition to putting forth a claim under the Declaratory Judgment Act, Hodl Law invoked the Administrative Procedure Act. Lorenz ruled that the act does not apply because a requisite—a “final agency action”—does not exist.
Hodl Law argued in its appeal that subsequent to Lorenz’s ruling, the SEC did take a position that crypto assets are securities, reciting that in a brief filed Dec. 15, 2023, the agency “affirmed to the Third Circuit that rulemaking on digital assets was ‘unwarranted’ because the present state of the law encapsulates this emergent technology such that a ‘new regulatory framework’ is unnecessary.”
Thursday’s opinion does not discuss that brief, but observations in connection with remarks on the topic of cryptocurrency by the then-SEC chair in a 2018 speech would appear to apply to the brief. The panel noted that the speech “was not the product of the SEC’s formal voting or delegation procedures, and thus does not have ‘the status of law.’ ”
The judges commented that “Hodl Law fails to identify any authority that requires the SEC to promulgate rules or respond to private parties’ requests for guidance.”
Rispoli commented Thursday night:
“The Ninth Circuit noted in its memorandum decision that the SEC has yet to provide its official position as to whether Ether or Ethereum is a security under federal law. Hodl Law sought an answer to that 10-year-old question but did not get it today and we are disappointed. We did, however, get more information as to the current administration’s stance on providing the American investor with clarity regarding cryptocurrency in general—more weaponized ambiguity. The firm will continue its quest for actual regulatory guidance from the SEC on the Ethereum question.”
The case is Hodl Law, PLLC v. U.S. Securities and Exchange Commission, 23-55810.
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