Off the Blockchain+, May 15-22, 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.

Nothing groundbreaking this week, as the news was primary dominated with updates in prior reported stories like the Coinbase mandamus petition and the House’s ongoing efforts to establish a digital asset regulatory framework in the US. But lots of one-off updates showing continued investment and development in the space as it moves toward more mainstream adoption. Also, I expect a decent amount of news to flow out this week from meetings which happened at Bitcoin Miami last week.

Here’s everything that happened last week in Web3 law:

SEC Responds to Coinbase Petition for Mandamus

The SEC filed its response to the Coinbase request for mandamus relief regarding the Commission’s failure to promulgate rules for digital asset issuers and exchanges. The SEC argues that the ten-month period between Coinbase’s request for rule making and filing of this mandamus action is not sufficient to justify the extreme relief requested. They argue there is no support for the Coinbase’s claim that the delay by the SEC is anything other than the SEC taking necessary time to analyze a complex topic before responding.

Tl;dr– As I predicated, the SEC’s response is that it neither intends to/does not intend to make specific digital asset rules, but rather it is a complex topic which requires time for the SEC to respond to. I anticipate Coinbase is ready to push back at the “there is no pretext” argument by the SEC, including the SEC canceling meetings with Coinbase last minute and with no notice and other actions making it clear the SEC has no present intent to seriously consider rulemaking. The cherry on top is statements by Chair Gensler that the rules are fine and clear as is. That said, the SEC’s points are solid and Coinbase may have created a strategic error by asking the SEC for rulemaking/clarification on 50 questions plus 60 sub-questions. I don’t think Coinbase intends to win this, but rather is attempting to gain favor in judicial hearts and minds for future fights.

Competing Digital Asset Regulations Proposed in Senate and House

This week, House representatives Tom Emmer (R) and Darren Soto (D) introduced the Securities Clarity Act, which seeks to clarify the regulatory classification of digital assets. The bill has the support of the blockchain Association, the Digital Chamber of Commerce, and other industry groups. In the Senate, it has been reported that Senator Elizabeth Warren (D) is planning to reintroduce a version of the Digital Asset Anti-Money Laundering Act which she previously introduced in 2022 with Senator Roger Marshall (R).

Tl;dr– As of writing, I haven’t seen the new Warren bill which was previously reported as delayed due to lack of sponsors. But I can already tell you the gist of it based off her previous statements/actions against the industry. I expect it to be an effective ban on crypto as it currently operates in the US. It is nice to see the Emmer bill (which provides clarity as to the distinction between the original issuer’s sales of cryptocurrencies and the tokens themselves on the secondary market) has a Democrat co-sponsor, but there is no way to know if it has any real bipartisan support. This continues the general theme of the Republican controlled House pushing for regulations to foster the industry with the Democrat controlled Senate pushing for regulations that cripple the industry.

Other Stories

I learned an article I wrote about NIL issues in NFTs with my friend Jessica Neer McDonald got published a few weeks ago in the St. Thomas Journal of Complex Litigation. While the article focuses on NFTs, right of publicity claims are likely going to rise with the increased availability of AI to create deep fakes and otherwise use the images of others without their consent.

Worldcoin, a crypto project led by OpenAI CEO Sam Altman, is in advanced talks for a new round of financing worth around $100 million, backed by both existing and new investors. A16z was involved in its initial funding, because its crypto so of course a16z was involved, but others are expected to join this round for the ETH layer-2 scaling solution, which includes a separate wallet and ID protocol. This comes the same week as Sam called for AI regulation in his testimony before Congress.

The SEC has lowered its requested damages in the LBRY case from $44 million to just over $100,000. LBRY has already said it is broke and winding down its business, so this is more about allocating SEC resources elsewhere rather than further litigating a matter it has already won.

U.S. Prosecutors dropped extortion charges against Steven Nerayoff. Nerayoff claims to be a co-founder of the Ethereum Network, and in his Motion to Dismiss alleged these charges were knowingly false in an attempt by the FBI to get Nerayoff to testify against other major individuals in the crypto industry such as Vitalik Buterin and Caitlin Long.

The SEC lost its request to keep the “Hinman Speech Documents” sealed in its litigation against Ripple (the issuer of $XRP tokens). After these documents were found to not be privileged by the Court in that case it was only a matter of time until the public got to see them. It will be a fun read when they are unsealed, but largely irrelevant for how the current SEC approaches crypto.

While speaking of Ripple, the company is piloting a program that would allow central banks, governments, and financial institutions to issue their own digital currencies through the Ripple platform and purchased Switzerland-based custodian Metaco for $250m. Crazy to think where the token would be but for the ongoing litigation by the SEC against the company/founders.

Robinhood has moved to dismiss a lawsuit alleging it failed to disclose material information leading up to its IPO including details regarding its crypto trading options.  The crypto claims are seemingly a last-ditch effort by this plaintiff’s firm that has spent a large amount of resources trying to keep this case alive, so I expect Robinhood wins this like it won prior dismissals in this case.

SEC staff issued a letter stating their belief that Filecoin meets the definition of a security, and requested Grayscale withdraw its registration statement for Filecoin Trust. Seems potentially punitive for Grayscale pushing the issue on their Bitcoin ETF? But maybe I am just being paranoid…

Bancor/BProtocol Foundation was hit with a class action lawsuit for allegedly failing to protect against impermanent loss. The lawsuit also challenges the degree of control the defendants maintained over the operations of the platform, contradicting the decentralized ethos of a DAO. Valuable but potentially costly lesson in under promise, over deliver.

In Stablecoin news, Circle doesn’t believe the US government will avoid defaulting and industry players are hopeful for near-term legislation on the topic and publicly criticizing regulators trying to step-in this late in the game with pending congressional legislation on the issue. Just don’t expect a federal digital dollar and time soon.

Axie, one of the OG NFT centered games which had a meteoric rise and fall during peak NFT hype, launched on the Apple App Store in certain markets. It is the first of many NFT games which move to mobile integration in the coming months/years.

The French are openly courting US digital asset businesses looking for a new home after the increasing regulation by enforcement in the US on the industry. Just don’t tell Rep. Brad Sherman who compares the EU and others being ahead in crypto regulation as the same as being ahead in “cocaine production” and “organ harvesting.”

Red Beard Ventures closed on a $25m funding round to invest in early-stage DeFi and Web3 gaming projects and to launch a tokenomics accelerator. Now please make my Knights of Degen NFTs worth millions, please and thank you.

Cold storage device provider Ledger got itself in hot water after releasing a firmware update which included optional features that allows Ledger to access the user’s seed phrase/private keys. This is a nice feature for non-native users who haven’t built up necessary redundancies to protect their access information, but is also why I generally recommend using a cheap laptop as a cold storage device rather than a device reliant on firmware updates to access new/different digital assets as they are developed. Or maybe even your old Gameboy.

A few meme coins were airdropped C&D letters this past week as well as a settlement demand airdropped letter to Ben.eth. I can’t wait to have a certificate of service someday listing “ChadBroLawyer420.eth” as the recipient.

I have no idea how Rodrigo Seira, counsel for Paradigm, does it but this week he filed an amicus brief in the NY AG’s lawsuit against KuCoin to rebut the lawsuit’s assertion that ETH is a security, and wrote a Twitter thread dismantling the Bank Policy Institute’s brief in the Tornado Cash lawsuit.

Biden spoke at the G7 conference and made a point to explicitly call out “wealthy tax cheats and crypto traders” as people he opposed benefiting in any debt ceiling deal. As previously clarified in Twitter context, virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency. There is no evidence of “loopholes” to avoid this. But also shows how far the asset class has come. “Fans don’t boo nobodies. -Reggie Jackson” -Birdnals.

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.