Off the Blockchain+, February 20-27, 2023

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.

After a busy week in regulatory actions last week, this week the news was primarily dominated with private actions, as Dapper loses its early dismissal efforts for a dismissal in the putative securities class action against it, and Coinbase announces its gateway to DeFi to its 100 million+ users. Here’s everything you missed last week in blockchain law:

Dapper Loses Motion to Dismiss in Topshot Civil Securities Case

Dapper Labs suffered a blow this week when its motion to dismiss a putative class action alleging securities law violations was denied. Order available here. The Court ruled that because Dapper built Topshot moments on its own private FLOW blockchain, and used funds from moment purchases to improve that private blockchain, there were sufficient allegations of pooling/horizontal commonality to survive the MTD.

Tl;dr–  This was obviously a big blow to Dapper, but news about this meaning Topshot moments (or any other NFTs) are now securities was greatly exaggerated. Instead, the Court seemed to take the position that because Topshot moments are built on FLOW (instead of ETH or some other third-party blockchain application), that use of funds from Topshot sales to improve the FLOW blockchain network created an issue of fact as to horizontal commonality through “pooling” of assets. Looking forward to Nakamoto Coefficient briefing (joking, kind of).

Coinbase Announces Launch of ETH Layer 2 Token

Coinbase teased and then announced they would be launching their own blockchain similar to Binance’s BNB chain. Read the announcement here and the development website here. There is no timeline for release, as this is still in testnet phase, and they are building off the Optimism stack. Coinbase said they are building this “[t]o bring in billions of users to the cryptoeconomy, dapps need to be easier, cheaper, and safer to interact with. For this to happen, we need to make it even easier for developers to build these dapps.”

Tl;dr–  Turns out, the 🔵 tease was more exciting than I was expecting while also being less ground breaking than many teased. The current plan is to have Coinbase centrally perform the validating functions for the network at least initially. This will allow Coinbase users to self-custody their assets and participate in various DeFi protocols in ways that aren’t currently possible through the Coinbase platform. It’s a centralized gateway to decentralized opportunities. It’s not the magic bullet to mainstream adoption, but when it’s implemented it will be a bigger step in the right direction than people are giving it credit for.

Other Stories

Ryder Ripps and Jeremy Cahen have asked the Court delay the ongoing federal claims against them brought by Yuga Labs while they appeal the Court’s decision denying their Motion to Dismiss related state law claims. For those keeping track at home, in December (after their MTD was denied) those Defendants moved to compel Yuga to produce certain witnesses for deposition stating tight timeline to complete discovery. Speed up? Slow down? They are certainly keeping everybody guessing on what position they are going to take next.

Lots of talk about Hong Kong’s regulatory actions on stablecoins and crypto generally this past week. Maybe China got wind that Charlie Munger was saying the US needs to be like China and ban cryptocurrencies, and that was what made them decide to soft back this recent Hong Kong move?

Congress is sending about a dozen staffers to Brussels and Paris to understand the European planned approach to crypto regulation through MiCA. This comes a week after individuals testified to the Senate banking committee that America was falling behind its European and Asian counter-parts regarding blockchain regulatory guidance.

AI created graphic novel “Zarya of Dawn” had its copyright affirmed this week by the United States Copyright Office. This is a phenomenal thread from @AshKernen and @eliana_esq breaking down the decision. While not strictly crypto law, with the integration of AI into NFTs and other creative digital outputs, basic understanding the protectability of that should be important to every lawyer in the space.

SBF has now additionally been charged with conspiracy to make unlawful political donations and defraud the Federal Election Commission. The indictment alleges that SBF made over 300 illegal political donations worth more than $10 million.

Whenever Congress talks crypto, there is always talk about its use in illicit finance. I want to bring light to the counter-points. Like how following the devastating earthquakes in Turkey and Syria, Chainalysis estimates roughly $5.9 million in cryptocurrency has been donated to aid organizations. Due to no reliance on third party intermediaries, these funds can be immediately put to use to help in relief efforts.

New York regulators have brought an action against CoinEx exchange for violation of New York securities laws by offering various alleged commodities and securities without registration. I guess they saw how much fun the SEC was having and wanted in on the action.

Three Arrows Capital is having its NFT collection liquidated in bankruptcy. The collection includes multiple cryptopunks and high value art blocks NFTs. Anybody want to go in on a Fidenza with me?

Circle, the company behind USDC Coin, is looking to go public despite recent SEC actions against stablecoin issuers.

Web3 social media start-up Towns raised $25.5 million in a Series A raise led by Andreessen Horowitz. Benchmark and Framework Ventures also participated in the round. It will be interesting to see where the dry powder goes, with both existing Web3 companies and up-start AI companies competing for funding during this down market.

SEC Commissioner Gary Gensler sat down with New York Magazine to restate his position that everything other than Bitcoin is a security and if projects hire a lawyer anything they sell needs to be registered with the SEC. As @lex_node ‘s Twitter thread points out, it’s a dog chasing a car without clarity on what he plans to do when he catches it. Since registration is not possible on open-source protocols, it is unclear what the endgame is here.

The MakerDAO “Black Thursday” lawsuit was dismissed. The judge dismissed after determining the Maker Growth Foundation had been dissolved (and was thus incapable of being sued) and for failure to state sufficient facts to support a claim.