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A complaint filed in federal court will test the boundaries of protection from liability for individuals behind decentralized autonomous organizations.

By Stephen P. Wink, Nima H. Mohebbi, Adam Zuckerman, and Deric Behar

On May 2, 2022, a putative class action was filed in the US District Court for the Southern District of California against the bZx protocol decentralized autonomous organization (DAO), the DAO’s two individual co-founders, two limited liability corporations (LLCs) that invested in the DAO and participated in its governance, and several other associated entities. DAOs are (in theory) organizations without a centralized leadership structure like traditional corporations or other limited liability entities. Their governance is generally driven by the coded terms of smart contracts maintained on a blockchain ledger, rather than top-down by a management team. And rather than having a hierarchy of control, DAO stakeholders with tokenized voting rights are typically considered “equals” in which one token equals one vote.

The long-awaited guidance clarifies the application of the “actual delivery” exception to leveraged virtual currency transactions with retail purchasers.

By Yvette D. Valdez, J. Ashley Weeks, and Deric Behar

Earlier this year, the US Commodity Futures Trading Commission (CFTC) approved final interpretive guidance (Guidance) concerning retail commodity transactions involving certain digital assets. The Guidance clarifies the CFTC’s views regarding the “actual delivery” exception to Section 2(c)(2)(D) of the Commodity Exchange Act (CEA) in the context of virtual currencies, and is intended for exchanges, trading platforms, custodians, and other market participants transacting in virtual currencies that are considered commodities (such as Bitcoin and Ether) and traded via leverage, margin, or other financing provided by the seller, trading platform, or other third party.

The milestone fund structure portends a reduced role for broker-dealers, who may be sidelined by innovators unwilling to wait for regulators.

By Stephen P. Wink and Deric Behar

On July 6, 2020, asset management firm Arca announced that the US Securities and Exchange Commission (SEC) granted it approval under the Investment Company Act of 1940 to issue shares of a closed-end US Treasury fund in the form of digital securities. The fund will comprise a managed portfolio invested primarily in interest-bearing and low-volatility short-term US government bills, bonds, and notes. Interests in the fund will be purchased directly from the fund and will be issued to approved Ethereum wallets as “ArCoin” ERC-1404 tokens, digital securities that are transferable using blockchain technology. ArCoins are decidedly not cryptocurrencies or stablecoins, but are securities tokens representing equity interests in the fund, with a net asset value that will fluctuate based on the value of the fund’s underlying Treasury assets in the same manner as other mutual fund shares.

The SEC issues second no-action letter for a digital token, but will “utility” token offerings reach the next level?

By Stephen P. Wink, Cameron R. Kates, Shaun Musuka, and Deric Behar

Gamers, rejoice! In only its second no-action letter to date for digital tokens, the SEC cleared the way for Pocketful of Quarters, Inc. (PoQ) to issue “Quarters,” one of two digital tokens issued by PoQ on the Ethereum blockchain.[i] PoQ, which was co-founded by a 12-year-old entrepreneur and his father, sought guidance from the SEC as to whether its offering of the stablecoin would require registration under Section 5 of the Securities Act and Section 12(g) of the Exchange Act. PoQ explained that Quarters are intended to be a “universal gaming token” that buyers can use across games deployed on PoQ’s platform. The benefit to gamers, PoQ asserts, is more efficient usage of value across participating online games rather than “siloed video game economies [that] result in large unspent balances of in-game currencies.”