Another SEC Wells Notice; DEF Files Additional Comments on IRS's "Broker" Rulemaking; Coinbase's FDIC Lawsuit
Immutable Wells Notice from the SEC
What happened?
Last month, the blockchain gaming platform Immutable announced it had received a Wells Notice from the U.S. Securities and Exchange Commission (SEC). A Wells Notice is a notification to a specific individual or entity that SEC staff will recommend that the Commission bring an enforcement action against the recipient. Immutable said that the notice it received included only minimal detail, provided fewer than 20 words of material explanation of the alleged violations, and stated at a high level, the SEC was accusing Immutable of violating securities laws by listing and privately selling IMX tokens in 2021. The Wells Notice was issued within a week of the SEC’s first meeting with Immutable, deviating from the typical process, which usually drags out longer and involves more extensive discussions.
Immutable argued that notice is yet another instance of the SEC “continuing to indiscriminately assert that tokens are securities” and that the notice’s vagueness underscores a broader pattern of regulatory ambiguity from the SEC, forcing companies to defend themselves against enforcement actions without a meaningful understanding of the applicable law.
What does this mean?
Immutable’s receipt of the Wells Notice is yet another example of the SEC’s continued reliance on “regulation by enforcement.” The case illustrates how failing to engage in rulemaking and proceeding through vague enforcement actions ties companies up in costly legal battles, stifling innovation and punishing conduct without adequate clarity on what constitutes a violation.
DEF Files Additional Comment Letter Re. IRS’s “Broker” Rulemaking
What happened?
Last week, DEF, in collaboration with the Blockchain Association (BA) and the Texas Blockchain Council (TBC), filed an additional comment letter to the Internal Revenue Service (IRS) in response to the Comment Request for Digital Asset Proceeds from Broker Transactions, which asks for comments related to the new tax form 1099-DA for reporting digital asset transactions in light of the Paperwork Reduction Act (PRA).
As a reminder, the IRS’s “Broker” Rulemaking is a critical focus of DEF’s work, as the proposed rulemaking lacks clear definitions for “broker” and “digital asset middlemen,” imposes undue burdens on DeFi participants without adjusting compliance requirements based on available resources, and fails to effectively enhance taxpayer compliance, creating unnecessary burdens for both taxpayers and the government. The IRS finalized the rule for custodial market participants in June 2024, leaving DeFi out of the rule for the time being. However, IRS promised to give DeFi further consideration later in the year, saying it will “continue to study this area” and it “intend[s] to expeditiously issue separate final regulations describing information reporting rules for non-custodial industry participants."
The comment letter argues that Treasury’s estimates regarding the burden on brokers to comply with the rule—originally 2.15 million hours and later adjusted to 2.25 million hours—is inaccurate and grossly underestimated, misleadingly focusing on the reporting requirement on a “per customer” rather than a “per transaction” basis, resulting in a vastly understated workload for brokers who may need to process multiple forms for each customer. The letter highlights that Treasury's estimates downplay the workload and financial burden on “brokers,” who may need to file 8 billion forms annually, potentially exceeding 4 billion hours and costing north of $260 billion yearly, far exceeding the potential tax benefits to the IRS. Thus, DEF, BA, and TBC conclude that for reasons in this letter and prior comments submitted, the Proposed Regulations run directly afoul of the PRA by providing inadequate, facially absurd estimates of the paperwork burden associated with the proposed regulations.
Therefore, the letter encourages the Treasury and the Office of Management and Budget (OMB) to acknowledge the actual burdens of the Proposed Regulations, to reconsider certain aspects of the Proposed Regulations, and to re-propose the rules to better account for the practical considerations in the digital asset ecosystem.
Coinbase FDIC Lawsuit on Chokepoint 2.0 Produces Documents
What happened?
Last Monday, Coinbase’s Chief Legal Officer, Paul Grewal, tweeted that the judge in Coinbase’s Freedom of Information Act (FOIA) case against the Federal Deposit Insurance Corporation (FDIC) has ordered the FDIC to release 23 pause letters in relation to Operation Chokepoint 2.0. As explained in Coinbase’s complaint, Operation Chokepoint 2.0 is an initiative led by the FDIC, in coordination with the Department of Justice (DOJ) and other federal financial regulators, that is aimed at deterring financial institutions from providing services to the crypto industry. According to the complaint, the FDIC sent “pause letters” to banks to ask “them to pause crypto-related activities," in violation of the Administrative Procedure Act.
Coinbase’s FOIA request and related litigation is part of their strategy to force regulators to provide clear guidance toward crypto regulation. As a reminder, in June, History Associates Incorporated filed lawsuits, on behalf of Coinbase, against the SEC and FDIC to procure documents under FOIA. Coinbase asked the SEC for documents regarding “closed investigations to shed light on how the SEC views its newfound, sweeping (and unlawful) authority” over digital assets like Ethereum. The judge in the SEC case recently ordered the SEC to identify the documents responsive to Coinbase’s request.
What does this mean?
The judge’s decision in the FDIC suit was a win for Coinbase and the industry at large. The documents produced in this case will likely provide the industry with transparency into the FDIC’s actions toward financial institutions vis a vis crypto.
