A bifurcated decision in a highly anticipated digital assets enforcement action may not provide the clarity that market participants want or need.

By Jack Barber, Jenny Cieplak, Benjamin Naftalis, John Sikora, Stephen P. Wink, Douglas K. Yatter, Luca Marquard, Adam Zuckerman, and Deric Behar

On July 13, 2023, Judge Analisa Torres of the US District Court for the Southern District of New York issued an order on motions for summary judgment in the civil enforcement action brought by the Securities and Exchange Commission (SEC) on December 22, 2020, against Ripple Labs Inc. (Ripple), its former CEO (Christian Larsen), and its former COO and current CEO (Brad Garlinghouse). The SEC’s claims include the unlawful offer and sale of securities in violation of Section 5 of the Securities Act of 1933 (the Securities Act), as well as aiding and abetting the allegedly unlawful offer and sale of securities by the individual defendants (see this Latham blog post for more information).

The issue before the Court was whether, at the time of the various offerings, the defendants sold XRP as an investment contract. The Court determined at the outset that “XRP, as a digital token, is not in and of itself a ‘contract, transaction, or scheme’ that embodies the Howey requirements of an investment contract. Rather, the Court examines the totality of the circumstances surrounding the defendants’ different transactions and schemes involving the sale and distribution of XRP.”

Consumers and businesses stand to benefit from rapid access to funds at any time when routed through participating financial institutions.

By Parag Patel, Barrie VanBrackle, Mik Bushinski, and Deric Behar

On July 20, 2023, the Federal Reserve announced the long-awaited launch of its real-time payment service, FedNow. The new service enables consumers and businesses to send and receive payments instantly on a 24/7/365 basis via participating financial institutions. It is available to financial institutions eligible to hold accounts at Federal Reserve Banks, and participating depository institutions may appoint a service provider or agent to submit FedNow payment instructions on their behalf. FedNow will initially only support domestic payments between US depository institutions.

FedNow can benefit consumers, businesses, and financial institutions with the promise of more flexibility and transparency of payments, improved cash flow and money management, and new customer service solutions.

Regulator clarifies that existing FCA rules will continue to apply but will also reflect the evolving landscape of financial promotions on social media.

By Nicola Higgs, Stuart Davis, Fiona Maclean, Gabriel Lakeman, and Gary Whitehead

On 17 July 2023, the FCA published a guidance consultation (GC23/2) relating to financial promotions on social media.

Acknowledging that social media is “being used by many consumer as a go-to source of information”, the FCA is updating its existing guidance on social media and customer communications to take into account the changing landscape of social media. The existing guidance, FG15/4: Social Media and Customer Communications, will be retired once the new guidance is finalised.

Latham’s payments specialists examine the proposed new EU payments package.

By Christian McDermott, Brett Carr, and Amy Smyth

The European Commission recently published its proposals for a new EU payments regime, which comprises the Payment Services Directive 3 (PSD3) and the Payment Services Regulation. During this one-hour webcast, we outline the purpose and…

Unlike traditional corporate entities with a typical hierarchical structure, a decentralized autonomous organization (“DAO”) – a management structure that uses blockchain technology – functions as a leaderless entity. Without a formal corporate structure, DAOs instead operate by distributing governance rights among persons who hold a specific governance token. Consequently, federal and state courts have been grappling with how to consider a DAO under existing laws that were traditionally interpreted against long-standing corporate entities.

As discussed in a prior post, DAOs allow individuals to organize and coordinate at arms-length, and rely on code (a “protocol”) to govern and execute functions traditionally determined by governing documents, like operating agreements and articles of formation, and undertaken by executives. A DAO’s protocol is committed to a public ledger on a blockchain, which guarantees accessibility and transparency. Each member is granted governance rights – the ability to propose and approve initiatives, called proposals – through a governance token. In light of their unique makeup, DAOs lack centralized leadership and a typical top-down management structure.

Accordingly, parties have debated whether a DAO should be recognized as a general partnership under state corporation laws (i.e., N.Y. P’ship Law §10: “an association of two or more persons to carry on as co-owners a business for profit….”) or, in the case of the Commodity Futures Trading Commission’s (“CFTC”) Ooki DAO enforcement, whether a DAO could be deemed an “unincorporated association” under the Commodity Exchange Act (“CEA”). Following the filing of the CFTC’s enforcement action, it is not surprising that the structure of the Ooki DAO, and the CFTC’s enforcement action against the DAO itself, has garnered a lot of media attention and industry reaction, and has raised novel legal issues.

Several questions have arisen in recent years regarding the potential liability of DAO members:

  • While DAOs are emerging as a viable structure in the DeFi space, does their non-traditional makeup necessarily shield them from real world liability?
  • Does a DAO’s structure render its activities “enforcement proof” or, at the very least, difficult to effect traditional service of process upon?
  • Can a DAO be an “unincorporated association” under federal or state law?
  • Who should be liable for the decisions made by a DAO?
  • Because token holders participate in the DAO’s governance, can they be deemed personally liable for its actions (akin to the general partners in a general partnership), even if each governance token holder is essentially unknown to the other DAO members, who likely reside in multiple jurisdictions?

The SEC suffered a significant loss last week in its ongoing legal battle with Ripple over the XRP digital token. While the District Court held that Ripple’s initial sales of XRP to institutional investors constituted the sale of unregistered securities, it was a Pyrrhic victory as the court held that all other ways in which…

On July 13, 2023, the Federal District Court for the Southern District of New York issued the hotly anticipated ruling in the SEC’s case against Ripple Labs, Inc. On cross-motions for summary judgment, the court found that only Ripple’s sale of its XRP tokens to institutional buyers pursuant to sales contracts constituted unregistered sales of securities in violation of Section 5 of the Securities Act of 1933.…

The viability of DAO structures draws attention after a judge declares that a decentralized autonomous organization is a “person” under the law.

By Nima H. Mohebbi, Yvette D. Valdez, Stephen P. Wink, Douglas K. Yatter, Peter Trombly*, Adam Zuckerman, and Deric Behar

On June 8, 2023, the US District Court for the Northern District of California granted the Commodity Futures Trading Commission (CFTC) a default judgment against Ooki DAO, a decentralized autonomous organization (DAO) that the CFTC charged in September 2022 with three violations of the Commodity Exchange Act (CEA).