Off the Blockchain+, March 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.

Looks like it is a full court press, as the White House releases an Economic Report slamming crypto (except the CBDC crypto the White House wants the Treasury Department to issue) and the SEC issues a Wells Notice against Coinbase, a publicly traded company which the SEC approved to go public just two years ago, over the same actions it was taking when the SEC approved their public listing. More regulatory actions means more need for these well-funded businesses to rely on competent legal counsel. Speaking of competent counsel, I am giving a CLE on DAOs this week, and speaking at NFT/NYC in two weeks. Also, Rob Lamb is doing a separate CLE on the Utah DAO legislation immediately after mine.

Now that I am done with the shameless self-promotion, here’s everything that happened last week in crypto law:

Coinbase Received Wells Notice

Coinbase has confirmed it received a Wells Notice from the SEC stating there was a preliminary determination to recommend the Commission file a securities law violation enforcement action against Coinbase. Read Coinbase’s response here. The actual Wells Notice is available here. While Coinbase CEO Brian Armstrong tweeted this potential action will be focused on both “staking and asset listings” there is no way to know what is actually at issue until a formal proceeding is brought. Jason Gottlieb posted this Twitter Thread with a potential SOL defense Coinbase may have available against a potential action by the SEC.

Tl;dr– It’s hard to actually judge the importance of an action by the SEC against the largest and seemingly most compliant digital asset exchange in the US without seeing actual claims. The Wells Notice provides essentially zero details, and isn’t an actual suit filed. It could be ticky tack alleged violations that Coinbase is fighting out of principle. Or it could be bet the industry litigation. Either way, though, the SEC is going after a company with $4.4 billion in cash that has said they would vigorously defend against any SEC suit. This is a “shoot at the king, you best not miss” scenario. On the plus side, it’s hard to see the SEC having the resources to go after others with their hands full with Coinbase (billions in war chest); Justin Sun (billionaire); XRP (still VERY big trial/appeal); Wahi (clearly has funding backing); Grayscale (massive), and others.

White House’s Economic Report Slams Crypto

The White House released its Economic Report of the President for 2023 and it has an entire chapter dealing with digital assets. The Report is available here and the chapter on digital assets begins on page 237. This comes a year after the White House released its Executive Order on Ensuring Responsible Development of Digital Assets. It had some nuggets of good, such as the acknowledgement that “some crypto assets appear to be here to stay”, but was largely negative saying “crypto assets currently do not offer widespread economic benefits” while also acknowledging the potential benefits of a Central Bank Digital Currency (“CBDC”).

Tl;dr–  Anybody following the actions of executive agencies in the blockchain space the past 6-months or so have already gotten the not-so-subtle impression this administration is not a fan of crypto. It’s hard to take a report seriously when on one hand it says distributed ledger technology is valueless while also saying the fed is exploring the use of a CBDC for the US dollar. Also hard to take serious a report which explains ETH’s change to Proof-of-Stake with the note “Bitcoin has not announce plans to make a similar change” as if Bitcoin was a company reached out to for comment. Rebecca Rettig had a helpful thread on how this primarily negative report can still be used as a constructive path towards workable digital asset policy in the US.  

Other Stories

Senator Cynthia Lummis gave a profile interview to CoinDesk on her policy goals for crypto in DC.  Like I said last week, it’s great to see Republicans like Lummis and Emmer standing up for the industry, but it would be nice to see more bipartisan support (with the current administration/ legislators like Elizabeth Warren leading the way in the “kill crypto in the US” crowd).

In a post-Kraken staking-as-a-service settlement world, Coinbase has once against asked for SEC rulemaking stating that core staking services—those that serve as a pass-through for rewards—are not securities offerings. The arguments are sound. This is a service product, which involves no “investment” on money but instead is a fee-based service like an accountant or computer repair technician. As Coinbase’s attorney explains “The SEC has jumped to enforcement when it hasn’t yet done the necessary work. It hasn’t (1) identified a problem that securities laws can solve, (2) engaged the public, (3) solicited experts, (4) described the economic impact from its action or (5) explained the benefits.” Based on the above Wells Notice story, Coinbase maybe poked the bear enough to make the bear act?

This happened last week, and isn’t legal, but I need to at least cover the former Coinbase CTO Balaji Srinivasan bet with Twitter persona @jdcmedlock that the price of Bitcoin would exceed $1m within the next 90 days. Balaji claims this will come as a result of hyperinflation occurring in that period. Idk, I generally don’t like to place bets where to win the world has to basically implode? But that’s just me.

Polygon and Immutable are two of the largest companies in the NFT-gaming sector and announced a strategic partnership this week focused on making web3-enabled games faster, easier, and less risky for larger gaming studios and independent developers to get involved. This comes right after a popular gaming streamer previewed his blockchain complimented first person shooter to 22,000 people live. Might need to add a section to this newsletter specific to Blockchain Gaming since there seems to be 3-5 major stories on the area each week. Like Sony filing a patent over cross platform NFT transfers for gaming…

Ron DeSantis has proposed a law banning Central Bank Digital Currency (“CBDC”) from use in Florida if the US Central Bank decides to issue such a token. Ted Cruz has called for Texas to institute a similar ban. Not really how federalism works, Ron, but don’t hate to see him call out rampant hypocrisy as the fed has done everything in their power to slow down private crypto while exploring their own fed crypto.

The IRS is exploring issuing guidance regarding the tax treatment of NFTs as collectables (like art or stamps) as it explores a more permanent rule. I prefer to just watch my NFTs go to zero rather than selling and taking profits/losses, but to each their own.

Loved this article “Why Can’t We Just Have Safe, Boring Banks?” by the founder of Custodia, which has been trying (and failing) to obtain a “master account” with the federal reserve which is essential to provide most banking services. Offer pure custody services of fiat, with no lending or investing, for a higher fee.

Delphi Digital has entered the policy Thunderdome, releasing the first in a series that explores a new regulatory framework for public, permissionless blockchain-based networks. The proposal favors a disclosure based-model grounded in antitrust-like policies, with a heightened focus on regulating systemically important, vertically-integrated, centralized actors that dominate crypto-ecosystems. Certainly worth a read. Same with Paradigm’s part 1 and part 2 of a 4 part series on the myth of “come in and register.” Rodrigo Seira (counsel at Paradigm) when on the Law of Code podcast, and while I haven’t listened yet I know it will be a valuable listen for anybody who like to consume media through podcasts.

The Near Protocol has taken steps to organize its treasury through a Guernsey Non-Charitable Purpose Trust. I haven’t dug in yet, but apparently the template version of the trust document is in the Foundation’s Github for anybody looking for inspiration.

The lawyers in the class action lawsuit against various crypto YouTubers have filed a document claiming BitBoy is harassing them and including examples. If BitBoy wanted the judge to immediately hate him, mission successful!

SushiDAO was served with an SEC subpoena this past week. The DAO has already proposed selling treasury assets for use in a defense fund. We are about to find out if the benefits of limited liability outweigh the risks of entity wrapping a DAO.

Celsius custody account holders may soon be able to opt-in to receive 72.5% of their account’s crypto.  Considering it took 9 years for Mt. Gox repayments to happen, this isn’t the worst outcome.

The SEC brought a claim against Justin Sun and separate actions against various celebrity promotors regarding the promotion and sale of TRX and BTT. Considering every attorney in the space uses Justin as example 1 of what NOT to do when promoting a project, this isn’t surprising. But going from trying to buy Credit Suissee to this in a week can’t feel great.

Do Kwon is finally arrested in Montenegro with falsified documents. Now begins the fight of the 20+ countries who all want his extradited there.

The SEC’s Office of Investor Education and Advocacy issued a warning to “Exercise Caution with Crypto Asset Securities.” This would be helpful, if they would actually state with any level of detail what a “crypto asset security” is other than “not Bitcoin.” 

Tom Emmer has introduced a bill titled “Blockchain Regulatory Certainty Act” which seeks to clarify that miners, validators, wallet software providers, and others who don’t custody consumer funds are not money transmitters under federal law. Honestly, this would do a ton of good for the industry.

Last week I had a story in the update regarding Facebook/Instagram’s plan to drop NFT integration and how it never really made sense for Meta like it would for Amazon. This week, we got a preview of Amazon’s NFT platform plans and it’s certainly promising to bringing digital assets to the mainstream.

Already on Monday of this week there were major stories dropping about the CFTC’s Binance lawsuit and a fairly significant ruling in the bZx (aka, Ookie) DAO civil case, both of which will be covered in my update next week. So subscribe to stay up-to-date on all things Web3 legal.

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.