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.
It was a slow week in crypto law, with only one major exchange or service provider being hit with a regulatory action against them! Progress! Lots of smaller stories, though, as legislators who have been notoriously slow to address emerging industries seem to be stepping up their crypto agendas. Here is everything that happened last week in Web3 law:
CFTC Sues Binance/Founder CZ Alleging Commodities Exchange Act Violations
On Monday, the CFTC brought a complaint for injunctive and other relief against Binance and its founder Changpeng Zhao (“CZ”) alleging various violations of the Commodities Exchange Act and various CFTC regulations. The Complaint is available here. CZ has responded denying the accusations and insisting Binance is a compliant exchange. He also re-shared his detailed response to various Senate inquiries.
Tl;dr– The allegations/quotes in the Complaint are a great example to send to clients on the importance of picking up the phone rather than emailing things. Also, if you don’t want something in writing you probably shouldn’t email “don’t put this in writing”, generally. There is a great update on the potential criminal repercussions for CZ et al. here. If even half the alleged quotes are real, I could very much see Binance having a forced sale or shutdown of US operations. Which will basically leave Kraken and Coinbase as the last two major US exchanges standing. It’s no surprise those are also widely considered the most legally conservative as well.
Ticketmaster just did its first successful token-gated ticket sale, with owners of the Avenged Sevenfold NFT getting first dibs on tickets for an upcoming tour for the band. Token-gating highly botted things like concert tickets and sneakers is such an obvious use-case for NFTs, I am shocked it took this long. Even things that just need secure confirmations of ownership, like airline tickets, are going to increasingly move to NFTs. Read this article on the 7 real world use cases for NFTs for more background.
Fidelity is continuing to build out their crypto and token research team. I guess they didn’t get the White House memo that all crypto is worthless?
Last week I highlighted my belief that the SEC may be biting off more than it can chew with flurry of resource intensive crypto-related enforcement actions. This week, Chair Gensler used his actions against crypto companies to support his request for additional SEC funding. However, the same congressional backlog which the SEC has used to its advantage in its regulation by enforcement also may prevent him from getting the funding he wants.
In my 1/30 update, I covered the LBRY remedies hearing and the reported SEC concession that it could not seek injunctive relief on secondary sales under their Complaint. The actual transcript from an earlier hearing just dropped and it’s a good read with some passionate statements from LBRY’s founder. The SEC’s statements about secondary sales takes place around pg. 32, and as I previously suspected the SEC didn’t say secondary sales of LBRY were not securities transactions, but merely those sales were beyond the scope of this particular proceeding. We will need to wait to see the January hearing transcript to see if the SEC’s position changed in the transcript.
Fairly significant ruling in the bZx (aka, Ookie) DAO civil case, with a judge refusing to dismiss token holder who did not vote as members of a general partnership which harm is alleged against. Compare against the MakerDAO “Black Thursday” lawsuit dismissal and we are going to be dealing with these sticky MTD issues for years to come as people try to determine potential liability against participants and others with ownership interests in these new organizations.
The SBF indictment has been updated to included charges regarding bribing Chinese government officials to unfreeze certain accounts. Because why not keep adding superseding charges?
Patrick McHenry has announced the House Financial Services Committee will question SEC Chair Gary Gensler on April 18th “about his rulemaking and his approach to digital assets.” I know last hearing I said I was burnt-out from watching hearing theater which seems to go nowhere, but I may need to watch/write up a summary of this hearing for the BitBlog.
D.C. law firm Cooper & Kirk PLLC release a whitepaper claiming Operation Chokepoint 2.0 isn’t just a conspiracy theory. They must be reading my Last Week in Crypto updates. The FDIC chair faced some tough questions on this topic in his recent congressional testimony.
Chicago-based cryptocurrency exchange Beaxy was hit was charges from the SEC for operation of an unregistered exchange, broker, and clearing agency. Interesting, the Complaint indicates that fungible nature of certain tokens satisfies vertical commonality under a securities law analysis. Also, the Complaint shows how counsel opinion letters about security status (or non-security status) of tokens do more harm than good, as Dragonchain’s opinion letter is specifically cited in the Complaint.
In 2017, +40% of cryptocurrency developers were in the US. Now that number is around 29% and shrinking. Blockchain technologies aren’t going away, but the US is losing market share on the development of these technologies. Just this week, Bittrex announced it would be winding down US operations and focusing on international operations. Seems suboptimal to make taxed and US controlled entities not taxed and US controlled.
Tom Emmer went on Bankless Podcast to discuss his digital asset legislative agenda. His passion and understanding for the ethos of digital assets, true ownership, and independence from intermediaries is a refreshing break from my regular updates on Elizabeth Warren and her platform of building an “Anti-Crypto Army.”
While Congress fights over privately developed digital assets, I expect CBDC and/or Stable Coin legislation to be the only things actually passed in the near future. This Chainalysis article about CBDCs is something anyone unfamiliar with the topic should read up on.
A new tokenized/fractionalized art platform was recently cleared SEC scrutiny as a Reg 2-A offering for selling shares of famous artworks. And it only took them…*check notes*…6+ months and loss of primary functionalities of tokens in that they “will not be able to be sold, transferred, staked or exchanged on any external platform such as a decentralized exchange…”
Fairly active week in the Yuga trademark infringement case, with Defendants’ motion to stay pending appeal being denied, Yuga filing their application for $188k in fees the Court awarded in a prior decision against Defendants, and both Yuga and Defendants filing motions related to confidentiality designations/filings. Discovery closes on April 3, and trial is set for June 27th. It’s looking increasing likely this will go the distance, either ending with an MSJ ruling or a trial on the merits.
It’s fairly ironic that the US Government is using Coinbase to sell the Bitcoin they seized in the Silk Road case, while the SEC issues a Wells Notice against the exchange. Speaking of Coinbase, that notice hasn’t stopped them from issuing a scathing public comment to the SEC’s proposed “best execution” rules.
In the weekly “crypto gaming is going to be huge” update, The Yuga Labs CEO (formerly an executive at Activision/Blizzard) stepped into his new role the a week after 7,000 users tested out the Otherside open world interface. I also thought this was a good piece explaining providing user ownership of assets in games doesn’t require complete decentralization to succeed. Hypersonic also launched their $100K Alpha 2 tournament for certain modes of their HELIX metaverse game.
This was a nice law review article on the origins and legality of regulation by enforcement and its more recent incarnations. I still need to finish, but through the first few pages I feel like it is worth sharing.
Lots of lessons to learn from the Arbitrum governance proposal drama. Makes you question how much longer the “offshore foundation” which doesn’t act like a true foundation house of cards can last.
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.