Beyond The Blockchain: Legal Challenges And Opportunities In The Era Of Digital Assets

• Published date: 05 February 2024
• Subject Matter: Technology, Security, Fin Tech
• Law Firm: Polsinelli LLP
• Author: Jonathan E. Schmalfeld and Romaine Marshall

Web3 represents the next evolution of the internet, characterized by decentralized networks and blockchain technology, enabling user-centric platforms and applications with enhanced security and data ownership. Digital assets, a cornerstone of Web3, include cryptocurrencies, non-fungible tokens ("NFTs") and other blockchain-based assets, offering novel methods of value exchange, investment and digital ownership. Every other week, Polsinelli puts out its BitBlog Bi-Weekly,¹ which breaks down the biggest legal developments in the blockchain, Web3 and crypto industry over the two preceding weeks.

Looking ahead, several discernible trends are surfacing that demand attention from companies actively involved in, contemplating entry into or indirectly influenced by the blockchain, Web3 and crypto sectors. The sphere of influence exerted by these emerging technologies extends far beyond the direct participants, potentially encompassing a broader range of industries and sectors than initially anticipated. This expanding impact underscores the importance for a wide array of businesses to stay informed and adapt to the evolving landscape of digital innovation.

Rise in Litigation in the Increasingly Legitimate and Valuable Industry

2023 saw an unprecedented amount of litigation in the industry, and we expect litigation will continue to rise in 2024. Thus far, the litigation has been primarily related to regulatory issues, with the three largest digital asset exchanges in the U.S. all currently subject to litigation with the Securities and Exchange Commission ("SEC").² Additionally, a conclusion is expected in the agency's highly publicized³ case against Ripple Labs, Inc., with both sides securing partial victories followed by a likely appeal after the decision is finalized. The high-profile criminal prosecutions and convictions of the former heads of FTX and Binance and others have dominated 2023 news, and 2024 will likely see other or related litigation.⁴

While regulatory litigation has been a constant in the industry, a new wave of private litigation is occurring and likely to increase, which can be expected, as industries in the billions have comparatively fewer economic incentives for litigation than do industries in the trillions, which the digital asset industry has risen into. After the digital asset market downturn in the spring of 2022, there was a wave of bankruptcy and insolvency filings and proceedings which will work their way through the courts in 2024.⁵ We also expect continued growth in trademark and other intellectual property litigation,⁶ as well as private securities⁷ and ownership disputes.⁸

As asset values go up, so do the incentives to incur litigation costs to resolve disputes over those increasingly valuable assets. With financial giants such as BlackRock and Fidelity⁹ entering the crypto space through a range of exchange-traded funds and with the growing value and use of digital assets, we expect litigation will continue to rise into 2024. While these lawsuits will primarily involve traditional contract, statutory and tort legal issues which are not unique to digital assets, the knowledge of an attorney who is familiar with these assets and their unique features will be an...