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. The firm has started turning these into 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. But for more comprehensive and unfiltered thoughts, I have been 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.
Last week, the Hinman speech documents were finally published, there was a hearing on the motion to seize Binance’s assets, the SEC filed their response to the 3rd circuit panel’s letter in Coinbase’s mandamus action, and the House Financial Services Committee had a hearing to discuss draft digital asset and stable coin legislation. Oh wait, that was just Tuesday of last week. The rest of the week had a lot of developments as well. I expect another week or two of chaos until things to cool down while Binance/Coinbase prepare their motions to dismiss, and Congress goes on break from June 24-July 9. Then it will be back to 100 MPH legal developments for a few weeks.
Here’s everything that happened last week in Web3 law:
House Financial Services Committee Holds Hearing on Stable Coin and Digital Asset Market Structure Draft Bills
On Tuesday of last week the House Financial Services Committee held a hearing titled The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem to discuss both the Digital Asset Market Structure discussion draft bill and the new stablecoin bill which has incorporated the comments of some of the Democrat members of the committee. The details on the hearing, including opening statements of the witnesses and committee memorandum are available here.
Tl;dr– Last week it was the Committee on Agriculture; this week the Financial Services Committee got their chance to analyze the Digital Asset Market Structure discussion draft bill. From what I saw, Coy Garrison (former counsel to SEC Commissioner Hester M. Peirce) was the star of the show answering a wide range of questions from both sides of the aisle cogently. Chairman McHenry’s opening statement and witness questions are worth watching as was this takedown of the Prometheum CEO. Representative French Hill also pointed out that now both the Secretary of Treasury and the Chairman of the CFTC have pointed out the need for Congressional action to plug regulatory gaps over the market. It seems like there is a growing tide of Democrats (including Ritchie Torres/Josh Gottheimer and others) moving away from “ban or ignore crypto” to now acknowledging the industry isn’t going anywhere so common sense regulations need to be enacted to protect consumers and allow for development to occur in the US. Even if legislation is somehow passed in this Congress, there will still be a long road ahead to true regulatory certainty.
SEC and Coinbase Provide Further Briefing in Coinbase Mandamus Action
Back in April, Coinbase filed a mandamus action asking the Third Circuit to Order the SEC to respond to Coinbase’s Petition for Rulemaking either agreeing to provide a regulatory framework from digital assets through tailored rulemaking, or denying Coinbase’s request and standing by the Chair’s talking points that the rules are clear as is. The 3-judge panel issued a letter order asking for answers on three questions from the SEC, and both sides have now responded. The SEC’s response is available here, while Coinbase’s rebuttal to that response is available here.
Tl;dr– The SEC’s response to the Coinbase mandamus action took an…interesting tone. After the panel asked the SEC for clarification on issues which they apparently felt had merit, the SEC doubled down and said there was no merit to those issues and asking for essentially a 120 day stay for SEC staff to further consider the Petition for Rulemaking. Not the tone I would have personally taken. Coinbase hit back, filing their response before their deadline and asking the panel to deny the SEC’s request or, limit the stay to 60 days after which the SEC would need to have a firm yes or no answer to the Petition for Rulemaking. One can’t help but notice that under the SEC’s request they likely would not have to file anything until after the expected Coinbase motion to dismiss is fully briefed in the separate action by the SEC v. Coinbase, while the Coinbase requested deadline would fall in the middle of that briefing. Certainly some gamesmanship from both sides.
Other Stories
This is an awesome effort spearheaded by Polygon labs to start preparing a list of real world positive use cases that are currently utilizing blockchain technologies to fight against the “crypto is only used for illegal reasons” narrative. I highly suggest you encourage your clients in the space submit their use cases to the list. It increases exposure to the client and serves a valuable need for the industry as a whole.
The long awaited Hinman Speech documents were released this week. There were some nice tidbits in there like admission to “regulatory gap[s]” in the space regarding decentralization, and the SEC staff not believing an issuer holding a large amount of tokens is of any significance in a Howey analysis (an issue which LBRY got dinged on in dicta). But largely, these were the types of comments expected from the SEC staff at the time and I do not believe it significantly changes anything from a regulatory or legal standpoint.
Big talk this week around the Sotheby’s “Grails” auction which was selling off some the prize NFTs in the Three Arrows Capital wallet being liquidated to satisfy bankruptcy debts. Dmitri Cherniak’s Ringers #879 NFT, also called “The Goose,” sold for $6.2 million. In total, almost $11 million in sales took place, many to individuals known more for their traditional art collections. So far, the Grails collection liquidation sales have brought in nearly $17 million.
The judge in the SEC v. Binance case had a hearing on the SEC’s motion to freeze the exchange’s funds, and gave them a 2 day time out to work it out amongst themselves before she made any decisions. It looks like they reached an agreement as to the handling of the platform’s assets for the immediate future while expedited discovery is conducted over the next ~90 days. Both sides are claiming this as a win, which means it is probably a fair deal.
Because they don’t own everything quite yet, BlackRock filed for a spot Bitcoin ETF. Apparently, BlackRock’s record of getting ETFs approved by the SEC is 575-1. Honestly, I would have to respect the audacity if the SEC approves BlackRock before it approves the Grayscale spot Bitcoin ETF. Just go full heel for big banks/institutions entering the space now that regulatory guidance appears to be on the horizon.
Uniswap labs has released its plan for V4, and there was something in there about taxes which had lawyers in the space in a tizzy? Not going to lie, I don’t follow the payment schemes or governance structure of Uniswap close enough to add much to the commentary, but worth mentioning since it was a hot topic this week.
I expected Binance.US to put up a fight in what is likely a losing battle on many issue against the SEC/CFTC, but between the recent hire of George Canellos and their opposition to the SEC’s motion to freeze/seize their assets, it is understandably throwing everything it can against the regulators coming after it. They are treating it like bet the company litigation and not a sacrificial lamb, which is good to see.
I missed this last week, but the SEC has denied an attempt by a registrant (CryptoFed) to dismiss an in-house proceeding against them by withdrawing the proposed registration that the proceeding was based on. Commissioners Peirce and Uyeda dissented saying “the new rule announced in the order both appears inconsistent with longstanding Commission practice and invites confusion by raising unanswered questions for companies seeking to register classes of securities under the Exchange Act…” Yet another case of the SEC saying “come in and register” only to use it against the attempted registrant.
Two weeks ago, six crypto firms collectively raised just short of $57 million. Focus seems to be on crypto gaming and social media, where scarcity of digital assets could be used to drive engagement and reward contributors/supporters.
A16z announced they were opening a UK office to invest there due to UK’s pending legislative clarity and seeming openness to supporting the industry. Seems like US capital allocators moving operations and capital allocation to “not the US” is against the SEC’s missions of maintaining fair, orderly, and efficient markets and facilitating capital formation in the US, but that’s just my opinion.
It makes sense that AI, which is about creating digital abundance, would pair well with Web3, which is about creating digital scarcity. This was a good article explaining the potentials for interplay between the technologies.
BlockFi has said customer withdrawals could resume as early as this summer. With the ongoing bankruptcy issues, this was an unexpected win for people with crypto stuck in their BlockFi Wallets.
Republicans are trying to limit the power of the SEC Chair and remove Chair Gary Gensler with new legislation. Rep. Warren Davidson had previously discussed this proposal so it’s not shocking, but it also is largely a publicity move that has no real chance of passing. But considering the last Chair also thinks a vast majority of digital assets are securities, it’s hardly certain that whoever replaces the current Chair will be any more reasonable in his or her views towards digital assets.
Republicans on the House Financial Services Committee also unanimously opposed the SEC’s proposed rulemaking to change the definition of “exchange” to cover DeFi and other activities.
Old but good article that passed my desk that explains how DeFi “lending” works and what it really should be classified as from a legal perspective. Spoiler: it’s not lending.
People are digging into Prometheum after the no-name upstart went from unknown to the SEC’s exemplar for digital asset regulatory compliance. Mike Flood isn’t the only one questioning the credibility of a company with basically no exchange activity claiming to be a compliant digital asset exchange.
I’ll be interested to see how the implementation of ERC-6551 standard (which essentially allows individual NFTs to “own” assets and serve as a separate wallet) can improve gaming and DeFi to organize entire accounts on specific platforms in one place like a folder in a digital wallet.
So this was an, um, interesting interview from one of the main attorneys for Polkadot. I don’t think she is being malicious in her comments, but also think the tone would be much different if DOT was named in the Coinbase/Binance lawsuits instead of the coins named which raised capital and worked towards decentralization in substantially identical ways to what Polkadot did. In fairness, she says her quotes were taken out of context which CoinDesk has an alleged history of doing.
This was a good breakdown of the legal implications (and lack of implications) of the Ooki DAO default judgment.
Speaking of, it will be interesting to watch as digital assets indirectly attacked in the SEC’s actions against exchanges begin to mount their own legal defenses. One of the issues with DAOs and other decentralized governance models is it is difficult to retain legal counsel with protections over privilege when control persons are hard to identify.
I really enjoyed this Mark Cuban tweet dunking on “Crypto Derangement Syndrome” main character John Reed Stark. Everybody knows that, like early internet, a vast majority of companies/uses will fail. But the efforts that succeed will be transformative changes to how the internet we know today works. And the SEC shouldn’t be the one deciding what industries or uses of money are valid. Their job is to make sure people get the information they need and let those people make their own decisions.
Prominent crypto sleuth @ZachXBT was sued related to some statements he made forensically tracing various digital assets to Jeffrey Huang (AKA, “Machi Big Brother”). Experienced attorneys have already come to his defense including Stephen Palley and others and funds have been raised to pay for such a defense. There are very few individuals as universally respected as Zach, so going after them in such a small industry seems like a recipe for disaster.
I haven’t been following it as closely because Terraform Labs is such an obvious case of compliance failures, but the SEC has made some interesting statements in that case worth following along with for how those are brought up in other cases. Add it to the never-ending reading list.
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 