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.
It’s hard to focus on other stories when Coinbase and Binance are hit with SEC lawsuits the same week as the House Ag. Committee holds a hearing to discuss the Digital Asset Market Structure Discussion Draft. Even in crypto where legal developments move fast and often, this has been a whirlwind two weeks. How these cases are decided/legislation turns out will likely govern the digital asset industry in the US for decades to come. But on top of those major stories, there were lots of other developments in crypto-law worth keeping up on.
Here’s everything that happened last week in Web3 law:
Coinbase SEC Lawsuit
The SEC has finally brought long threatened charges against Coinbase for operating as an unregistered securities exchange, broker, and clearing agency. Complaint available here. Coinbase’s CEO Brian Armstrong responded in a tweet here. The Complaint alleges the following tokens as being securities: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. The 13 tokens named in the Tuesday suit against Coinbase have a combined market value of $37 billion.
Tl;dr– Sometimes it sucks being right, as I was right that the Wahi settlement seems to have been motivated (at least in part) to save resources/arguments for the pending Coinbase lawsuit. The token allegations name a few new tokens, but are largely similar to the ones in the Binance and Wahi lawsuits. The interesting allegations revolve around the allegations that the Coinbase non-custodial wallet and staking-as-a-service offerings are unregistered broker/dealer services/products. State actions are expected to follow. This has been the big boss battle the industry has been waiting for, so expect early fireworks followed by likely a long drawn-out battle in court. It would be interesting if Coinbase is able to win ever partial dismissal at the Motion to Dismiss stage.
Binance SEC Lawsuit
The SEC has brought 13 charges against Binance (both Binance.us and the flagship Binance) along with its founder Changpeng Zhao (“CZ”) and some other affiliated companies. Complaint available here. Binance has denied the allegations and stated their intention to defend against claims in court. The Complaint contained many of the less-than-flattering internal communications that the previous CFTC lawsuit did, plus an extra quote where allegedly the Binance Chief Compliance Officer in 2018 said “we are operating as a fking unlicensed securities exchange in the USA bro.” The SEC is also requesting the Court order Binance.us’s funds be deposited in a US bank so they can be frozen during the pendency of the suit.
Tl;dr– Ever since the communications in the CFTC lawsuit were revealed the industry has been waiting for the SEC/DOJ charges to follow. It was always puzzling why the SEC seemed focused on the seemingly buttoned up US public company Coinbase rather than foreign wild west exchange Binance which has been under investigation since 2020. It is also well known that Binance split Binance.us off, in part, as a sacrificial lamb if the enforcement actions ever happened to insulate Binance international from SEC’s wrath. We will see if that strategy pays off. The SEC named ten tokens as securities in the lawsuit: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI. It is hard to see Binance.us continuing operations in the US unless there is a complete divestiture by Binance. Especially with civil class action claims also coming.
House of Representatives Committee on Agriculture Hold Hearing on Digital Assets Bill
On a busy Tuesday morning, the House Committee on Agriculture held a hearing titled The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets. The purpose of the hearing was discussing the Digital Asset Market Structure Discussion Draft which was summarized in last week’s update. The link to the hearing is available here and the hearing materials including the written versions of the opening statements by the witnesses are available here.
Tl;dr– This two-part hearing had a powerhouse of witnesses including CFTC Chairman Rostin Behnam (during Part 1), Coinbase CLO Paul Grewal, Robinhood CCO Dan Gallagher, and others(during Part 2). The Committee Chair Glenn “GT” Thompson (R-PA) opened with the statement “I do want to address one more elephant in the room. Earlier today, the SEC filed a Complaint against one of our witnesses: Coinbase. While I will not and cannot speak to any of the specific allegations against the company, I do want to note that this action is exactly why we are holding our hearing here today. Regulation by enforcement is not an appropriate way to govern a market, adequately protect customers, or promote innovation.” I did not watch the entire hearing, but from what I saw it seemed to be universally agreed upon that legislation was needed for the industry and was a conversation on what that legislation should look like. Next up is the Finance Services Committee hearing on Tuesday the 13th.
Other Stories
While Coinbase took an L with the lawsuit filed against them, they got a seemingly significant win in their Mandamus action with the 3rd Cir. Panel essentially agreeing with Coinbase and ordering the SEC either go on record as denying Coinbase’s petition for rulemaking or show cause on why the Court shouldn’t set a deadline for that decision and/or retain jurisdiction to babysit the SEC in the process. Certainly, a more positive development than I considered likely.
Robinhood has removed some of the tokens alleged to be securities in the Coinbase/Binance suit from the Robinhood crypto trading platform. During his Congressional testimony, Robinhood’s CTO gave a pretty damning explanation on why they couldn’t now shift those token sales to the Robinhood SEC registered broker/dealer trading platform and how the SEC is looking to largely kill the industry rather than bring it into compliance.
SEC Chair Gary Gensler went on CNBC to discuss the recent lawsuits filed by the SEC against Binance and Coinbase and restate his claim that “there’s been clarity for years.” So, as usual, what Gray is saying now is right and what Gary was saying two years ago is wrong. Because, you know, reasons.
Gamestop has partnered with AAA digital asset game developer Illuvium for its inaugural playable avatar NFT collection. Do I mentioned Illuvium in these updates a ton because I have a bunch of $ILV and land plots for the game? Maybe.
Twitch co-founder Justin Kan’s company Fractal has announced a planned a three-part product to help game developers integrate digital assets into their games. Considering popular game CS:GO has more trading volume in a single game than the top 5 NFT collections combined, we have only touched the surface of what the market will look like with interoperable and fully owned in-game assets.
Bloom is back! I recently saw they made their required filing with the SEC after previously agreeing to a settlement with the SEC. It’s an uphill battle at this point and it looks like the plan is to swap outstanding tokens with SEC compliant tokens? I wish them nothing but the best of luck.
The Consensus at Consensus Report seems like one of those things I print and keeps working its way down the “to-read” list with all the other developments/scholarship that comes out. But had to include it in the update so you all can do the same or, better yet, prepare a tl;dr for ME for once!
Louis Vuitton have entered the phygital sales industry, gearing up to release a new physical-linked NFT collection called Via Treasure Trunks. At the low price of $42,000, you almost can’t afford NOT to buy it, right?
While not as heavily publicized, the House Energy and Commerce Committee Subcommittee on Innovation, Data and Commerce also met to discuss digital assets last week. At minimum, it is worth watching the opening statement from Polygon’s Ryan Wyatt.
TWIST: While it has long been known that Gensler was courted to come on as an advisor at various exchanges such as FTX and Binance when he was a professor at MIT, new reports are that he was the one approaching those entities in some instances and not vice-versa. To think, in an alternate reality he could have helped them with the easy task of just filling out a form on a website and avoiding this litigation mess (joking, obviously).
If you wanted to see some positive out of the above doom and gloom SEC litigation, perhaps it will get people who have dipped their toes into digital assets to actually take seriously learning self-custody and DeFi as alternative options to centralized exchanges. Both centralized exchanges and DeFi need to have a place in our system for it to thrive.
Curve Finance was sued by a group of its early VC investors for misappropriation of trade secrets? I missed this until news of the MTD dropped this week. Not going to lie, I’m not sure how methods to “maintain a cap table” could possibly be trade secrets, but something had to have gone down for these VCs to sue a portfolio company. This is the VCs’ second bite at the apple after losing the first in Swiss courts, so the claims seem dubious at best.
The putative class action lawsuit filed in 2021 against DeFi startup PoolTogether alleging violation of gambling laws was dismissed this week on standing grounds. It is just a standing win, so it may be brought again if the firm can find a better class representative (this one was a former Warren staffer who deposited a tiny amount for the sole purpose of being a class representative) or brought in state court, but it was nice to see the good guys win this one.
The Fed’s Motion to Dismiss in the Custodia lawsuit was denied, meaning the case is moving forward. It’s a fascinating legal fight to watch during Chokepoint 2.0. On one hand, Custodia DID get a state charter; on the other hand, the state charter was a special purpose charter specifically for them so it’s not like they are the exact same as every other Wyoming-chartered bank. Regardless, it looks like Custodia is going to get the day in Court they desire unless something unexpected happens in discovery.
Kraken is taking advantage of being off the hot seat for once and launched their NFT marketplace this week. I can’t see them being a major player in the NFT marketplace game anytime in the near future, but it is nice to see them expanding their services.
Binance.us has suspending USD deposits and has advised users to take USD off their exchange due to the SEC’s aggressive tactics trying to freeze their assets during the pending litigation. Moving to all crypto makes sense and maintaining custody of USD funds for clients does nothing for Binance’s business.
There was a new stablecoin draft bill released which appears to be a compromise between House Republicans and Democrats. In any other week this would be a major story, but this week it is just another thing to add to the “Other Stories” section of the update. The CFTC predictably got a default judgement in the OokieDAO case after nobody form the DAO showed up to defend itself. @lex_node had as good of a breakdown of the decision and its industry implications as I have seen, available here. Long story short: the sky isn’t falling, and members of the DAO are likely OK for now.
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.
The NFTtorney 
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