Intro/Disclaimer: A few months ago I started preparing updates for the attorneys at my firm practicing in the Web3 space regarding what legal stories people were talking about the prior week. I believe eventually we are going to do monthly or bi-weekly posts on the award winning BitBlog summarizing the top stories with tl;dr breakdowns on the stories’ importance and general thoughts on their ripple effects on the industry. In the meantime, I thought I would start putting the weekly updates on my personal blog as well on Tuesdays. Note, any opinions from these (or any of my other) blogs are mine alone, and are not adopted or endorsed by my firm.
Big week in Web3 legal developments as the SEC proposes a new qualified custodian custody rule, news of the agency’s planned action against a stablecoin issuer dropped immediately before an action against failed stable coin issuer Terraform was announced, and the Senate Banking committee spent their Valentine’s Day talking digital asset safeguards. While everybody is focused on Bitcoin Ordinals NFTs, here are last week’s legal developments:
SEC is Preparing for Battle Against Binance Stablecoin Issuer
The SEC is planning on bringing a lawsuit against stablecoin issuer Paxos, which is behind the Pax dollar (USDP) and Binance USD (BUSD) tokens. This comes at the same time that Paxos announced it would cease issuing new coins under the direction of New York state’s financial regulator.
Tl;dr– Last week, the SEC announced a settlement with Kraken over its staking-as-a-service product (which we covered in the BitBlog here). This week, it was the issuer of the Binance stablecoin that felt their wrath. It seems like the current SEC targets are everybody in crypto other than the biggest players. They sued Ripple for XRP sales when ETH was bigger and sold in largely the same way. They sued Kraken when Coinbase has a similar staking product. They are suing Paxos when Tether and Circle have far larger stable coins. But as we discussed in our BitBlog post, their method of picking off weaker targets may have backfired in Wahi.
Senate Banking Committee Holds Hearing on Digital Assets
The Senate Banking, Housing, and Urban Affairs Committee held a hearing on February 14th entitled “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets.” The focus of the hearing was the FTX collapse and what government safeguards are necessary for digital assets.
Tl;dr– Sen. Elizabeth Warren used her time to further spread her biased opinions regarding illicit use of cryptocurrency. She cited statistics from Chainalysis in her questions, and a Chainalysis representative has already said “the Senator was citing Chainalysis data, but she was cherry picking it to make her points, leaving out important details that put the data into context.” Here is a pretty good article about why Warren’s proposed cryptocurrency surveillance bill is almost certainly unconstitutional. Two of the three expert witnesses testified that the U.S. is at risk of falling behind other nations with cryptocurrency regulation, which might light a fire under some senators’ chairs to take action. It was also nice to see Sen. Tim Scott call out SEC Chairman Gensler over his appearances on morning talk shows while failing to appear before Congress.
SEC Proposed Custody Rule
On Tuesday the SEC proposed 434 pages of changes to the investment adviser custody rule that seem designed to prohibit US firms from investing in US crypto companies (among other changes unrelated to crypto custody). It requires investment advisers to custody all assets with qualified custodians while saying it’s unlikely crypto can be custodied in compliance with the rule.
Tl;dr– The good news: This is actual rulemaking instead of regulation by enforcement! Yay! Bad news: the proposed rules are worse than we possibly hoped for. Boo! Hiss! SEC Commissioner Hester Perice has come out in opposition to the rule, stating “By insisting on an asset neutral approach to custody we could leave investors in crypto assets more vulnerable to theft or fraud, not less.” Commissioner Uyeda supported the proposal while disagreeing with the crypto-custody provisions. I also found this Twitter thread breaking down the requirements to be helpful in seeing just how bad this proposed rule is. I expect the proposal to pass with little revisions after public comment, even while being staunchly opposed by industry groups.
Other Stories
Coinbase pushed back against the “all-staking-as-a-service are securities” news which was spreading in the wake of the Kraken settlement. The problem with regulation by enforcement, is the only thing we learned from the SEC’s action is that the specific things Kraken was doing are not permitted. This gives zero guidance for what is permitted though, leaving companies like Coinbase in the lurch to pen blog posts instead of instituting whatever protections the SEC thinks must accompany such products.
Yuga filed their reply in support of dismissing Ryder Ripps’ counterclaims which has the usual claims that they are right and the other side is wrong. The interesting part is, as suspected, one of the other developers signed a declaration which is pretty damning about the “this is all for art” claims. Hate to see it. This comes in the same week that Yuga called out the Defendants for failing to produce certain documents, and while Yuga comes under fire for allegedly misappropriated logo art.
Last week, one of the main stories was the Wahi Motion to Dismiss (and our BitBlog post summarizing that MTD). This week, the Blockchain Association filed an amicus taking umbrage with the SEC naming two individuals instead of the platform the alleged securities were sold on or the asset developers themselves who could then defend themselves from those claims.
Tornado Cash developer Alexey Pertsev is still in Dutch jail awaiting his April 20th trial, while Dutch authorities recently gained access to his laptop used for the privacy service development. You can read my article on why OFAC sanctions against Tornado Cash potentially violate the Fourth Amendment.
Prosecutors are asking for further bail conditions after SBF used a VPN on multiple occasions (allegedly to watch Football games). I dislike and distrust SBF as much as the next person, but this and the prohibition against his use of certain messaging services seems to be chilling the privacy rights of somebody who currently hasn’t be convicted of anything. It just feels icky to me, even if these are constitutionally permitted bond conditions. Bad facts make bad law.
I thought this was a helpful Opinion piece explaining the difference between security tokens and tokenized securities.
Binance’s US platform is expected to pay fines over regulatory probes in the coming weeks. Maybe in relation to this report that it moved $400 million to a firm managed by Binance international’s CEO CZ? In other unrelated news, Coinbase double checked to make sure its war chest retainers are paid up (joking, probably).
OpenSea delisted the Rihanna music NFTs due to a description that promised distribution of streaming revenue to holders; something that may go against the platform’s ban of NFTs that “appear to be promising fractional ownership and future profit based on that ownership.” This comes the same week that OpenSea did limited time no-royalty program much to the dismay of NFT project developers depending on those secondary sales percentages to operate.
It looks like we are about to see the first NFT focused company to IPO, with The NFT Gaming Company, Inc. announcing a $7 million IPO.
A year after the Terra/Luna collapse it looks like the SEC is finally going after the company and its founder Do Kwon. TBF, the SEC was pretty busy prosecuting the company trying to make blockchain YouTube rather than going after one of the biggest financial failures of all time. Priorities.
The Mango Markets exploitered filed a motion in his civil matter arguing that he should be permitted to keep the funds he retained from the exploit under the legal equivalent of “no taksies backsies” due to previously settling with the Mango Markets DAO (which Mango now claims should be excused due to duress because, obviously). It’s a tough look when the first page of Avis’s motion has typos and formatting issues, but in his defense, he is also fighting off criminal, CFTC, and SEC charges. So his lawyers are busy.
Illinois has proposed what some commentators are calling an “unworkable” bill related to blockchain miner and validators which required them to be able to do things like reverse transactions. That’s not how blockchains work, Illinois.
Paul Pierce was hit with a SEC fine for his promotion of ETHMax token. Good to see the SEC acting as the FTC and go after the real dangerous actors in the space like Kim K and The Truth.
Conclusion
If you have any questions or would like me to write about anything else, let me know on either of my twitter pages! As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.
The NFTtorney 