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Coinbase Sues SEC Seeking Regulatory Answers

Coinbase turns to federal courts to compel SEC to provide clarity for the industry. On Monday April 24, Coinbase filed a suit against the SEC for failing to respond to Coinbase’s rulemaking petition “within a reasonable time.” The suit compels the Commission to respond to Coinbase’s petition filed in July 2022 that requests clarity and guidance for the crypto industry. The rulemaking petition was originally filed in response to charges filed by the SEC that claimed nine tokens traded on Coinbase were unregistered securities. The latest action filed by Coinbase on Monday requests the US Court of Appeal issue an order for the SEC to respond with a simple yes or no answer to the July 2022 petition within seven days. "Coinbase does not ask the Court to instruct the agency how to respond. It simply requests that the Court order the SEC to respond at all," the lawsuit reads.

Coinbase Chief Legal Officer Paul Grewal wrote in a blog post that he believes the SEC has already decided to deny the petition based on public statements and enforcement actions. If that were the case, Grewal notes that Coinbase would then be permitted to "challenge that decision in court and explain in that formal setting why rulemaking is required." Hours after filing the narrow action, Coinbase launched the "Stand With Crypto" campaign, advocating for sensible crypto policy in the US. The initiative features a commemorative NFT showcasing a blue shield to symbolize solidarity and requests supporters to add a shield emoji next to their Twitter usernames. According to Coinbase, all proceeds associated with the NFT collection will be donated via Gitcoin to vetted lobbyist and educational organizations such as the DeFi Education Fund, the Blockchain Association, CoinCenter, and the Blockchain Foundation.

Our Take

Coinbase’s suit against the SEC is the latest development in a slew of other suits, concerns, and blatant critiques against the Commission over the last several months by prominent companies and individuals from both within and outside of the crypto industry for failing to provide regulatory clarity and guidance on digital assets. Pressure against the SEC has been mounting as courts have questioned the SEC's inconsistent positions in other ongoing cases (e.g., the SEC’s rejection of Grayscale’s GBTC conversion to ETF and objection to the Voyager-Binance.US deal). SEC Chair Gary Gensler also faced an onslaught of criticism from the House Financial Services Committee last week on crypto and a range of other topics (read our newsletter from last week for more on this).

With Coinbase now taking a more proactive stance against the regulator and its practices (and leading efforts to unite the industry for a workable digital assets regulatory framework through the "Stand With Crypto" initiative), this latest filing may represent an important turning point for the industry. The rallying cry spearheaded by Coinbase may succeed in compelling the SEC to engage with the crypto industry more directly by providing clear and consistent actionable guidance (or at least responses) in the face of industry petitions. In Coinbase’s 73-page response to the SEC’s Wells Notice, which was recently made public by the company, Coinbase writes: “The Commission’s case against Coinbase will fail as a matter of fact and law.”

Failure to act on a comprehensive regulatory framework over digital assets in the U.S. will not mean the crypto industry stops growing, but it may mean that crypto stops growing in America. As a fundamentally global technology, the industry supporting digital assets is also global and in lieu of comprehensive and clear regulatory guidance, innovation and adoption of digital assets will simply thrive elsewhere. - CY

Circle's CCTP: A New Standard for Bridging USDC

Circle releases Cross-Chain Transfer Protocol (CCTP) for moving USDC between chains. CCTP is a low-level primitive for apps to bridge native USDC tokens from one chain to another using token burning and minting functionality. CCTP serves as permissionless infrastructure for developers to build on top of and may be integrated within applications, wallets, and bridge/messaging platforms. The benefits of CCTP include:

• removing the need to bridge USDC using the traditional lock-and-mint methods,

• solving the issues of liquidity fragmentation with bridging,

• abstracting complexity away from users,

• and enabling more seamless experiences and new cross-chain functionalities for swaps, deposits, purchases, and other on-chain activities.

Users accessing applications can initiate CCTP transfers of USDC by specifying the recipient wallet address on the destination chain, which will then facilitate a burn of the specified amount of USDC on the source chain. Circle will observe and attest to the burn event. The application will then fetch signed attestation from Circle, which will then enable the application to mint USDC on the destination chain to be sent to the recipient wallet address.

At launch, CCTP will support transfers between Ethereum and Avalanche but Circle plans to roll out CCTP support for other chains with native USDC in the near future. Partners that have integrated CCTP include Metamask and bridging protocols / SDKs (incl. Wormhole, Layer Zero, LI.FI, Celer, Multichain, Hyperlane). Circle charges no service fees for CCTP, though third-party applications building on CCTP may charge users separately.

Our Take

For several years, there has been growing demand in the crypto industry for bridging assets across chains. Building secure cross-chain solutions is an extremely difficult task as it requires multi-step verification and information synchronization across networks and typically requires locked asset management and pooled capital. As a result, bridges have been the targets of some of the some of the largest DeFi exploits. CCTP sets a new standard for moving USDC across chains by eliminating the capital inefficiencies required by most bridge protocols and avoiding fees charged by liquidity providers while also providing additional security features associated with natively issued USDC vs. alternative wrapped versions on other chains.

USDC is already the most popular bridged asset by volume across most major chains and CCTP will likely drive even more preference for USDC in DeFi applications and deepen overall liquidity. USDC bridge LPs will turn to alternative sources in DeFi for yield opportunities and fragmented USDC across chains can be aggregated as collateral for borrowing/lending and spending use cases. Aside from the bridging and liquidity benefits, perhaps the most impactful feature of CCTP is that it's permissionless - Circle already offers products like Circle Account and Core API to move USDC natively across chains but these are only available to commercial users. According to the CCTP website and developer docs, Circle does not have access to or store any PII when a user sends USDC through CCTP. With any user interfacing with a CCTP-enabled app now capable of utilizing this service from Circle, there will be meaningful improvements to on-chain UX including cost and time savings from fewer transactions that drive more adoption and facilitate more economic activity.

However, as we've seen with last month’s impact of USDC's depeg across DeFi markets, outsized reliance on a centralized stablecoin (and potentially now a cross-chain bridging protocol) poses significant risks. There will still be a need for cross-chain bridging protocols for users looking to move non-USDC assets or move to a non-CCTP supported chains - and it will be important that these alternative solutions are supported in the event that CCTP breaks down. Circle as a company faces regulatory scrutiny as nations are in process of implementing money transfer compliance standards and legislators across major geographies (incl. the US, UK, and EU) are drafting stablecoin legislation, which could alter how CCTP can be used by Circle in the future. That said, there's reason to be optimistic for CCTP's launch as transacting on-chain becomes more frictionless for users and greater cross-chain composability unlocks more potential for a multi-chain future. - CY

The End of Copycat BAYC NFT Collections

Yuga Labs, the largest NFT studio in the world, wins summary judgment on trademark infringement case against a popular copycat Bored Ape Yacht Club project. A federal judge ruled last Friday that Yuga Labs, the company that created the Bored Ape Yacht Club NFT project, is entitled to an injunction and monetary damages from Ryder Ripps and Jeremy Cahen over their copycat BAYC project, “RR/BAYC”. Ripps’ and Cahen’s copycat BAYC project released last year sold NFTs linked to identical copies of the original BAYC images for a significant discount. Interestingly, however, Yuga Labs sued Ripps and Cahen not for any alleged misappropriation of the copyright in the ape images, but rather because RR/BAYC’s misuse of the “BAYC” trademark. In defense, RR/BAYC claimed that Yuga Labs did not own an enforceable trademark in the BAYC marks and, even if it did, the RR/BAYC project did not infringe on Yuga’s putative rights in the marks because (a) RR/BAYC was intended to be a parody on BAYC (i.e., the RR/BAYC project was protected expressive work under the First Amendment); (b) that RR/BAYC’s was a permissible “fair use” of the marks and (c) that Yuga’s marks should not be afforded protection under trademark law because it was used to perpetuate criminal conduct (by compensating celebrity endorses without disclosing that compensation and selling unregistered securities, i.e., the “Unclean Hands” defense). The court disagreed, however, ruling that (1) Yuga Labs owns the BAYC marks and that those marks are valid and protectable; (2) that the RR/BAYC collection infringed on those marks; and (3) that RR/BAYC collection had no affirmative defenses (i.e., RR/BAYC’s First Amendment, fair use and “unclean hands” defenses failed as a matter of law). Overall, Yuga views this victory as a "landmark legal victory for Web3" and will presumably use this case to protect its IP for other projects in their portfolio.

Our Take

Yuga’s legal victory over RR/BAYC is significant for NFTs as this is the first blue-chip project to bring legal action against a copycat project. Yuga’s legal team is now actively removing a new copycat BAYC project on Bitcoin called “Bitcoin Apes”. Inevitably, the increased legal pressure from Yuga Labs will eradicate the trend of copying popular NFT collections, which may benefit the NFT ecosystem long-term through promoting originality while respecting the IP owned by others. Going forward, the increased risk associated with launching a copycat blue-chip project will likely be higher and will deter the creation of them.

Although the U.S district court ruled that RR/BAYC infringed on Yuga’s BAYC trademarks, the lawsuit highlights the lack of legal clarity regarding copyright ownership for NFTs. The court concluded that, "Under its Terms and Conditions, Yuga grants each BAYC NFT holder a copyright license for both personal use and commercial use with respect to their respective BAYC ape image, but not a trademark license to use the BAYC Marks." 

The license provided by Yuga contains critical contradictions, which reinforce our finding that NFT license agreements fail to transfer IP to NFT holders. Yuga states that “when you purchase an NFT, you own the underlying Bored Ape, the Art, completely.” However, by clearly granting a license in their agreement, Yuga implicitly acknowledges that BAYC NFT holders do not own the underlying art completely; collectors only own the ERC-721 token that points to the ape image. It is worth noting that despite Yuga Labs clearly owning the copyright to the BAYC collection, they decided to sue for trademark infringement. Yuga’s legal team presumably knew they could achieve their demands through a trademark infringement suit. This approach ensures that Yuga is not in the position to publicly disclose that they own the copyright to the BAYC collection.   

From the lack of user IP ownership in NFTs, the promise that NFTs can usher in a new era in digital ownership remains far off. Without rectifying this, the vision of Web3 will remain elusive and VC backed juggernaut NFT studios will own the IP for all blue-chip collections. To achieve a true digital ownership future in the web3 ecosystem, the digital transfer of copyright must be implemented to future projects. - GP & MMA

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• DAOs Could Get Official Standing Under Proposed California Law

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• Google Cloud to support Polygon to help grow ecosystem