Understanding the Growing Significance of Legal Opinions in Crypto

The recent lawsuits between two crypto industry giants, Binance and Coinbase, and the United States Securities and Exchange Commission (SEC) have sent shockwaves throughout the digital assets community.

The tightening regulatory stance toward digital assets circulation also highlights the importance of U.S. securities legal professionals who have the ability to mitigate the risks of SEC exposure.

According to Nikita Tepikin, a leading lawyer at Legal Kornet, the new wave of regulatory inspections indicates a “significant change” in the mood of the authorities. He said: 

“It has intensified discussion about the classification of most cryptocurrencies as securities and the associated risks of crypto projects.”

In the intricate and ever-changing world of crypto, a thorough compliance review of projects and drafting of a legal opinion for token are becoming increasingly necessary for budding projects and can serve as a navigational beacon for companies particularly in countries with regulatory landscapes clamping down on the industry. 

Clarity in the U.S. market

The U.S. market has been a forerunner of crypto projects and regulator involvement in the space over the years, with many major companies like Circle, Coinbase, Gemini and Kraken all having their origins in the country. 

A legal opinion informed on the U.S. regulatory landscape also serves the confidence of crypto investors. Given that a legal opinion will help reduce risks of securities law violations and prosecution, it helps the project to be more apt to operate in accordance with those laws. 

When investors can trust that a project is legally sound, the dominos fall into place for increased loyalty to the project and signifies the team’s commitment to legal norms and transparency requirements.

Additionally, many if not all of the major crypto exchanges - Binance, Coinbase, KuCoin, Huobi - request crypto projects interested in cooperation to provide legal opinions often for either jurisdictions in the U.S.or Singapore. By having one from the onset, projects increase the trust of potential partners.

Assurance for exchanges in the U.S. market 

In the crypto space, exchanges are often seen as the gatekeepers to liquidity. Therefore it’s no coincidence that exchanges, including decentralized exchanges (DEXs), will need a legal opinion before moving forward, particularly in the U.S. market. 

U.S. regulators have already filed lawsuits against two of the largest cryptocurrency exchanges, Binance and Coinbase. However, it’s not only exchanges under the watchful eye of the SEC. 

It has increasingly taken legal action against individuals and projects, such as the ongoing battle with Ripple Labs, that they have deemed out of line with regulations.

Tepikin believes that requests for U.S. legal opinions from crypto-related projects will become “more frequent” and could become “mandatory rather than advisory” - even for decentralized exchanges (DEXs). 

Choose the right firm for a legal opinion¡

Projects are encouraged to find a firm that understands the nuances of both the project and the regulatory landscape in which the project will be deployed. 

The right firm is not just a legal advisor; it is an advocate for the project's legality and success in a market that is often misunderstood by regulators.There are a few key considerations to keep in mind:

1. Credential verification:

Before signing on to work with a law firm to provide a legal opinion, it’s important to verify the license, name and place of incorporation of the given firm. Moreover, a US legal opinion cannot be written without competence, which is evidenced by a U.S. attorney’s license. License validity status can be checked online via credible sites.

There are many lawyers without such a license who are willing to issue a legal opinion, though Tier 1 exchanges would not accept such an opinion due to potential risky exposure to legal issues.

2. Double check the opinions are in line with reputable exchanges with strict compliance standards. 

Most major players in the digital asset industry accept legal opinions from U.S. and Singapore jurisdictions. Despite common misconceptions, there are no universal legal opinions - place matters. 

It’s also recommended to examine the law firm’s portfolio to see how frequently they’ve worked with clients in the crypto space. 

3. Choose jurisdictions with stringent legislation

Law firms specializing in locations with strict legislation (i.e. U.S. and Singapore) could offer projects the ability to close in on any weaknesses that could potentially result in compliance issues. 

For example, if a project passes the Howey Test - used by U.S. regulators to determine if an asset is a security - then it would also pass legislation of nearly any other jurisdiction. 

Common misconceptions 

One prevalent myth is that a legal opinion is a one-size-fits-all solution. In reality, each project is unique, and a quality legal opinion is a bespoke creation. 

It’s also believed that legal opinions are simply an option, only to later realize their importance when regulatory troubles arise.

Additionally projects should understand that a legal opinion offers another level of assurance for a project, not a 100% guarantee. The purpose is to reduce risk of violations.

Dispelling these myths helps emerging projects prosper. Otherwise these misconceptions could hinder projects from reaping the full benefits of a well-prepared legal opinion.

Looking forward 

The digital assets industry is subject to changes and new realities overnight. It is a critical environment for proactive measures from companies that want to make a lasting impact. 

A legal opinion, especially in key markets like the U.S., emerges as a potent tool for projects seeking validation, protection, and compliance. As the ecosystem matures, exchanges' demands for such opinions will eventually become a mainstay. 

By choosing the right law firm and dispelling misconceptions, projects can capture the true potential of how legal opinions can work to help them achieve their long term business goals in a given market. 

As the global crypto narrative unfolds, projects equipped with comprehensive legal opinions are poised to emerge not just as players, but as pioneers, shaping the future of finance.