Off the Blockchain+, April 17-24, 2023

Intro/Disclaimer: In late 2022 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.

A busy week in crypto law as two very important congressional hearings happened, and the EU passed their long awaited comprehensive digital asset regulatory framework under MiCA. Oh, and as icing on the cake, the biggest ongoing NFT litigation was largely decided on summary judgment.

All this ahead of Consensus, one of the bigger digital asset conferences in the US, which is happening this upcoming week. I will be there along with five other members of my firm’s digital asset group, so if you want to meet up with myself or any other members of our digital asset team let me know! In the meantime, here is everything that happened in Web3 law last week:

Gary Gensler Testifies to House Financial Services Committee

On Tuesday the House Financial Services Committee held a hearing titled Oversight of the Securities and Exchange Commission. Gary Gensler, the Chair of the Securities and Exchange Commission (“SEC”), testified at the hearing. Committee Chair Patrick McHenry previously stated the hearing was “about his rulemaking and his approach to digital assets.” In prepared testimony, Chair Gensler reiterated his views that “[n]othing about the crypto markets is incompatible with the securities laws.” Directly before the hearing, all Committee Republicans signed a letter directly refuting that view.

Tl;dr– I watched the entire hearing and you can read my entirely over detailed notes on the proceeding here. My biggest takeaway is that, by my count, all 13 Republicans who questioned Gensler on his crypto enforcement efforts were critical of those efforts. Of the Democrats who touched on crypto, 3 supported the SEC’s crypto enforcement actions, 3 were critical of those efforts (Torres, Meeks, and Gotheimer) and 2 asked seemingly neutral questions (Foster and Sherman). Unclear if this means there is more bipartisan condemnation of the SEC’s crypto policies than previously thought, or if this committee’s Democrats are outliers on this issue. Jason Gottlieb went on unchained podcast which is worth the ~30 minute listen if you don’t want to read my overly comprehensive update on the hearing. Also, this Blockworks compilation of various government officials classifying ETH as a security and commodity shows the understandable confusion even amongst regulators. 

EU Passes Comprehensive Digital Asset Legislation

The long-awaited passage of EU’s Markets in Crypto Assets (“MiCA”) happened this week, with the European Parliament voting through the landmark legislation on cryptocurrency with 517 votes in favor and 38 against. While this vote was expected to occur months ago, there are still a lot of details to be worked out through by the EU and local regulators on its implementation in practice. This also doesn’t make it officially law until there is another vote and after it is published in the official journal. This means implementation of the law is likely going to happen around June.

Tl;dr– The bill gives fairly wide latitude to local authorities to adopt policies which fit their specific jurisdictions, so it’s too early to say MiCA is a success, but it seems to be largely seen in Web3 as common sense and not overly burdensome regulation. Many believe this also allows EU banks to get more involved in the space where previously the regulatory uncertainty prevented highly regulated banks from providing banking services to Web3 participants or offering Web3 focused offerings themselves. It is clear from these actions and others that the US is falling behind in the regulatory space, which might explain a seemingly split Democratic party on the issue.

Yuga Labs Wins Trademark Infringement Case on Summary Judgment

On Friday, the Court in Yuga Labs v. Ryder Ripps entered Summary Judgment in favor of Yuga Labs on a vast majority of their claims for infringement. Yuga Labs is the creator of the Bored Ape Yacht Club (“BAYC”) NFT project, and Ryder Ripps et al. are the creators of the RR/BAYC NFT project, which the defendants claimed to be a social commentary on the allegedly racist imagery embedded in the BAYC NFTs and associated lore. There will still be a trial on the remaining claims and the damages portions of Yuga’s claims, but this is a win for Yuga for now. It is expected the Defendants will be appealing just as they appealed the Court’s ruling on their state law affirmative defense denials.

Tl;dr– This was largely expected, especially after the Court denied Defendants’ artist expression/Rogers test defenses in an earlier ruling. My friend Jessica Neer McDonald provided a great breakdown of the Court’s ruling on her blog. Ripps is represented by Wilmer Hale, and Yuga is represented by Finwick West, so sophisticated legal teams on both sides of the case. There is still going to need to be a trial on damages, but if there was ever a time to settle for the Defendants it would likely be now before there is a trial locking in damages with the only chance of relief from the 9th Circuit Court of Appeals. But knowing these Defendants, that seems unlikely.  One important aspect of the ruling is the Court agreeing with the court in the MetaBirkins litigation, holding that NFTs are not intangible assets, and can be protected under US trademark law.

Other Stories

Speaking of Gensler in the hotseat, a video recently surfaced of Gary Gensler touting Algorand and calling it a currency which is awkward considering it is one of the tokens listed as an unregistered security sold by the Bittrex platform in a recent SEC lawsuit against the platform. Bittrex US already announced weeks ago it was winding down US operations, so this lawsuit appears to be consistent with SEC practice of kicking people on their way out of the US. Apparently Bittrex Global is gearing up to fight, but that does nothing to help US citizens that want to buy tokens in the future.

Data suggests that the solid long-term performance of blockchain companies and crypto miners has kept investors and M&A activity in the sector high. AI companies are the shiny new objects, but investors are still staying active in the blockchain space to maintain and expand exposure in the technology.

Nike launched their 1st Digital Shoe Launch with .SWOOSH this past week. About 1/3 of people who signed up for early access (330,000 members) got air dropped a mint pass to purchase the first digital Nike sneaker for a low $20 price point. It looks like Adidas is going with the exclusivity of Web3 while Nike is targeting the masses with their Web3 strategy.

As much as I love watching congressional hearings (sarcasm) there was an additional important hearing this week on stable coin legislation. The hearing link is here. You can read the written testimony of the Blockchain Association Chief Policy Officer here. Another solid read was Austin Campbell from Columbia Business School’s prepared statement. As I said in last week’s update, this seems like an issue with bipartisan support, but I am afraid partisanship around a proposed CBDC gets in the way.

There were a few stories this week about Coinbase, the largest digital asset exchange in the US, exploring shutting down US operations. While I think the chances of that are slim-to-none, any such move would undoubtedly set back digital asset development in the US by years and move virtually all development overseas.

Maple Finance, the institutional capital network that provides the infrastructure for credit experts to run on-chain lending businesses, has announced an on-chain treasury management product targeted toward DAOs. Maple Finance said it will open the offering to all non-US investors. Those who wish to deposit loans must pass a 15-minute know-your-customer and anti-money laundering onboarding process.

While the EU passed its comprehensive digital asset regulation titled MiCA, the UK is also expected to move quicky towards a regulatory framework for digital assets. Really looking forward to Zoom calls with barristers in wigs across the pond.

A danger of self-custody is things like this happen where a hacker has been targeting crypto-native individuals with seemingly sound digital security practices. The hacker (or group of hackers) has gotten $10 million and there is still no information on the common vulnerability being exploited as it happened across multiple digital wallet providers and multiple chains. There is expected to be a rise in litigation on these issues as digital forensics are increasingly sophisticated and blockchain data doesn’t spoil.  

Taylor Swift’s legal team is getting their flowers for being the only celebrity legal team that actually did due diligence on FTX and turned down an FTX endorsement prior to its collapse. Reminder: get attorneys who don’t just know contracts but know the red flags in any deal with a blockchain business.

People can now buy .eth domains in fiat using Moonpay. Not sure who is buying a .eth domain that doesn’t have any ETH to buy it, but every step towards making ease of access to crypto is a step in the right direction.

Gabriel Shapiro, GC of Delphi Labs, is known for his direct and often brash Twitter legal takes. He is also known for being an unquestionable expert on corporate laws as applied to blockchain entities, and has one of the deeper technical understandings of any lawyer in the space. That makes his recent article on DAO corporate structures a must read.

Similarly, Rodrigo Seira over at Paradigm has been putting out great work summarizing exactly why crypto doesn’t work under the existing regulatory structure. The latest in that series is available here.

This article regarding the legal conundrum Web2 platforms are facing when they encounter AI created music being posted on their sites. On one hand, it is possible the music does violate an artists’ Rights of Publicity and should be removed. On the other hand, it may not involve strictly copyright which can be handled through an established DMCA procedure. 

Former SEC Chair Jay Clayton did an interview this week stating, in part, that courts are not the proper place to give information as to what digital assets are commodities vs. securities. This is the same Jay Clayton who instituted the Ripple litigation with one foot out the door. So maybe a pot vs. kettle situation.

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.