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.
This commercial from Coinbase is a pretty good representation on the financial use cases for digital assets. It was a pleasant distraction in an otherwise hectic week for TradFi and DeFi. There was a Congressional hearing on digital assets, the New York AG brought a lawsuit claiming ETH is a security, the White House proposed a tax on energy used for Bitcoin mining, and one of the major banking institutions serving US cryptocurrency exchanges announced its plan to return customer deposits and liquidate its assets. And that was just Thursday.
Then Thursday afternoon/Friday happened. It is hard to know what will come in the wake of the Silicon Valley Bank downfall and ripples that it will cause in global financial markets. While it looks like disaster was averted in this case, I don’t think it will be the last banking victim of the current financial markets.
Here’s everything legal and blockchain from last week:
Silvergate Capital Announces Plan to Wind-Down Bank
Silvergate Capital has announced its intent to wind down affairs and liquidate its subsidiary, Silvergate Bank, which was one of the few federally chartered banks that did business with digital asset exchanges. This plan includes a full repayment of customer deposits. The liquidation announcement comes less than a week after Silvergate discontinued its payments platform known as SEN.
Tl;dr– Last week in “Other Stories” I talked about some suboptimal signaling from Silvergate about their ability to be an ongoing concern. This week, the other shoe dropped as it appears Operation Chokepoint 2.0 claims a major victim along with Signature Bank being seized by authorities later in the week. The fact that Silvergate is liquidating instead of shopping the bank license which is generally worth its weight in gold shows the effect of regulators on this decision as opposed to be solely due to operational mismanagement. I don’t love seeing Senator Warren brag about a federal bank collapse she helped cause, but this is certainly a win for regulators trying to slow or stop the development of blockchain technology in America. Maybe the Silicon Valley Bank collapse (it is hard to not connect Silvergate and the banking FUD it caused being a contributing factor to SVB’s bank run) will cause them to cool their jets a bit. Or maybe that’s hopium on my part.
New York AG Claims ETH is a Security in Lawsuit
The New York Attorney General brought a lawsuit this week against cryptocurrency exchange known as KuCoin for failing to register as a securities broker or commodity broker-dealer as required under New York Law to sell those assets to New York residents. The lawsuit claims that, ETH is one of the “securities” that KuCoin sold to New York residents, without first obtaining registration as a securities broker/dealer. KuCoin claims to have not been served with the lawsuit yet.
Tl;dr– I put the chances of KuCoin, a foreign exchange and has a history of no-showing regulatory actions against it, actually showing up to defend itself at approximately 5%. In all likelihood, this ends in a default judgment with zero precedential value that NY uses as a threat to keep regulated exchanges in line. I also don’t think there will be an Ooki amicus pouring in because resources are currently being allocated virtually everywhere else. But it’s certainly worth monitoring if a fight gets put up.
Grayscale vs. SEC
This week, the United States Court of Appeals for the DC Circuit heard oral arguments over denial of Grayscale’s Bitcoin ETF conversion bid by the SEC. The oral arguments can be heard here. The original Petition for Review over the SEC’s denial decision can be found here.
Tl;dr– The general consensus is that Grayscale came out on top from these oral arguments, with the judges questioning the SEC’s rational on treating the Bitcoin spot market differently than the futures market, and what exactly Grayscale failed to provide in their application. Rejecting the Spot Bitcoin ETF has always been puzzling, and a key cite for people saying the SEC is anti-crypto just for the sake of being anti-crypto instead of any real investor protection motivations. No way to know how this will actually end up and if an SEC loss will result in continued refusal to approve the ETF and an attempt to withdraw prior approval of the Bitcoin Futures ETF. A Grayscale win would be a nice victory for the industry as a whole over seemingly arbitrary disparate treatment of all things crypto by US regulators.
The SEC brought an emergency action against BKCoin issuer. BKCoin was already in receivership, so this is seemingly the SEC doing its actual job of protecting investors against bad actors. But bless the heart of the poor receiver who now has this to deal with.
The Vice Chair of the Federal Reserve gave a speech titled “Supporting Innovation with Guardrails: The Federal Reserve’s Approach to Supervision and Regulation of Banks’ Crypto-related Activities.” In hindsight, this line the day before SVB imploded is probably something he wishes he could take back: “Stablecoin issuers seek to have—but don’t—some of the same characteristics as federally insured bank deposits…The banks we regulate, in contrast, are well protected from bank runs through a robust array of supervisory requirements.”
Two weeks ago I covered Ryder Ripps et al. requesting a delay in his upcoming trial against Yuga Labs. This week, Yuga responded. If it wasn’t obvious these proceedings are contentious, see the section titled “Defendants’ Appeal is Frivolous” on page 20. I was surprised to see Yuga continue to hammer home factual background for ~11 pages which I expect the Court is familiar with at this point, but I recognize the tactical decision behind it to take every opportunity they can to sway the judge to their side on the general merits even when briefing on limited issues.
The Voyager Bankruptcy Court continued to grace us with SEC bench slaps this week, apparently stating in response to the SEC objection to Binance’s purchase of the defunct companies assets “We can start the litigation today so that you ‘have’ to prove your agencies’ position. Are you seriously telling me that you haven’t provided any clarity, and want me to deny this plan because it ‘might’ be something you ‘think’ is something?” The Court ended up ruling in Binance’s favor and rejecting the SEC’s objection to the sale.
The SEC brought an action against a Utah crypto mining equipment seller. No, despite some online FUD, this case is about consumer fraud and not some claim by the SEC that mining equipment are securities.
Speaking of the SEC, Commissioner Gary Gensler wrote this opinion piece which is…certainly something. Apparently the only way to sell assets in a transparent and regulated way is to be registered as a security with the SEC? Dave and Busters has a lot of splain’in to do about my gamecards. While there is undeniably a need for consumer protection in crypto, the SEC’s job is also to “maintain fair, orderly, and efficient markets, and facilitate capital formation.” Those are jobs it is abjectly failing at in an over 1 trillion dollar industry that is increasingly moving overseas.
Kraken, the popular crypto exchange, is apparently on track to launch its own bank for digital assets. Operation Choke Point 2.0 faces a competent adversary.
In AI news, Kris Kashtanova (creator of AI assisted “Zarya of Dawn” graphic novel), announced attorneys from Morrison Foerster agreed to represent her for registration of her next AI assisted work.
If you want to understand the UCC changes as they apply to digital assets, I highly suggest watching this ~15 minute presentation from Jeff Karas on the subject from ETH Denver.
This is an interesting paper from an associate professor at WashU Law (what many call the Harvard of the Midwest, and by “many”, I mean basically just me) about the “wrapping” of property with contract rights to run with it. While the paper doesn’t focus on NFTs or digital assets, that is an obvious issue which emerges as we try to determine what rights to purchaser and obligation from original seller can be required run with a piece of digital property.
Polygon Labs released their “Policy Principles” this week with their approach to advocating on laws and regulations around Web3 technology. Maybe this is boot-licker-y of me, but Web3 would be FAR worse off if it wasn’t for the advocacy efforts of centralized and seemingly ethically beyond reproach actors in the space like Polygon and Coinbase. (Now I quietly wait to have one of them have bombshell nefarious revelations come out against one of them so I can lose hope in humanity once again).
This week there was a flurry of legislative hearings touching on digital assets, including the House Financial Services Sub Committee on Digital Assets hearing titled: Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem. Watch the whole hearing here. I watched and may do a full write-up like I did for the Senate Ag Committee hearing on the Digital Commodities Consumer Protection Act or the Ag Committee hearing following the FTX collapse. But I’m tired. So very tired. I get the wheel of justice rolls slow but grinds smooth. But can we just get ONE legislative bone thrown our way? At least Gensler seems to be the target of many-a-congressional official.
DraftKings was hit with a securities class action over its sale of NFTs going back to the summer of 2021. The lawsuit largely follows the playbook from the TopShot MTD ruling I covered a few weeks ago, so it looks like the Plaintiff’s bar got the memo it was open season on major businesses that sold NFTs on closed blockchains.
Biden’s proposed budget includes a 30% tax on energy used for Bitcoin mining, with 10% tax added over 3 year ramp up period. It also proposes trading the wash-trading loophole for crypto. Coincidence or coordinated?
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.