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.
And we are back to the races! This past week was a flurry of developments, the most important of which was the decision in SEC vs. Ripple which ruined the SEC’s previously perfect record against digital asset issuers and overnight changed the regulatory landscape in America. This is on top of the long-awaited submission of the revamped bipartisan digital asset legislation in the Senate, the Celsius founder being arrested (among other arrests out of a busy S.D.N.Y. U.S. Attorney’s office), and a ton of other developments. Oh, and as cherry on top, Polsinelli’s very own Jeanne Solomon and William Quick authored an awesome and important article on the CTA’s applicability and challenges for DAOs.
Here’s everything that happened last week in Web3 law:
Ripples Wins (Mostly) on Summary Judgment in Case Vs. SEC
Over six months after the issues were briefed, the MSJ ruling in the SEC v. Ripple case was released, with a ruling many in the industry have been advocating for: “XRP, as a digital token, is not in and of itself a contract, transaction, or scheme that embodies the Howey requirements of an investment contract.” (internal quotes omitted). This wasn’t a complete win for Ripple, as over $700 million in contractual sales to institutional investors was ruled to be unregistered securities transactions. But for “programmatic sales” through digital asset exchanges, the Court ruled that there was not an objectively reasonable understanding that some amount from those sales would go to Ripple to increase the price of XRP, so those were not deemed to be securities transactions.
Tl;dr– The Court rejected the Ripple “essential elements” arguments and fair notice defense (for institutional sales) which many thought was their best hope. But in what probably is better positioned to survive on appeal, the Court used the Howey transaction-by-transaction analysis to determine some transactions were securities sales in their totality and some were not. The SEC, in typical SEC fashion, has claimed this as a win despite objectively being a huge blow to their case not only against Ripple but in other cases against the industry at large. Exchanges like Coinbase and Kraken have already announced they would relist XRP in light of the Court’s ruling while Congressman Tom Emmer has called the ruling a “monumental development” and the Chairs of the House Financial Services Committee and Agriculture Committee released a statement saying this ruling shows the need for Congressional action. My firm will have a longer form breakdown on the BitBlog later this week similar to how we broke down the LBRY decision, but this was a seismic shift in digital asset regulation and policy in the U.S.
Senate Crypto Bill
The Lummis-Gillibrand Responsible Financial Innovation Act was re-introduced into the Senate this past week, after failing to go past committee last Congressional session. Senator Lummis tweeted out an infographic describing what is new in this version of the legislation. The revised bill maintains much of the broad scope of the 2022 version, but is updated to reflect developments since then like the collapse of FTX.
Tl;dr– At 274 pages, I cannot say I have gone through this bill in its entirety, but from what I have seen it leaves a lot to be desired and would leave the industry with many regulatory gaps that still need to be filled. It is a bipartisan effort, though, which is an improvement on the McHenry /Thompson bill in the House. It seems like all the momentum is in the House, and this bill is just to show the Senate is in the game. If anything, I expect this bill to die yet again, but for some of its unique features to be implemented into the next turn of the House bill. The good news is the chances of SOME bill being passed this year just went up exponentially due to the Ripple decision and the SEC no longer having an undefeated record in crypto litigation.
Other Stories
Coinbase filed its letter response to the SEC’s intent to strike Coinbase’s affirmative defenses, and the parties had a hearing with the Court for over 2 hours as well. While the Court seemed to express some doubts around the SEC’s theory of the case, it’s important to note these are just surface level discussions and the Court likely hasn’t dug into the substance of the legal arguments at this point. Next week, it is expected the parties will submit a proposed case management plan, and a letter stating the parties’ respective positions on moving forward with their anticipated motions and proposed briefing schedule.
Back when I first started this blog, I talked about the inevitability of class actions against NFT project ruggers, and specifically called out Boneheads as an exemplar target. Well it looks like I was once again a genius prognosticator, as the Boneheads team has been named in a class action lawsuit! Great to see people being held accountable for their bad acts. But I don’t think this new “pay-to-dox” service is a positive development.
It’s a major crypto litigation, so of course Paradigm filed an amicus brief in SEC vs. Bittrex. Its authors include Kayvan Sadeghi, Lewis Cohen, and Rodrigo Seira, so you know it is worth reading. You can also be lazy and get the gist of the filing from the 1 page blog post here.
The SEC has accepted for review the amended BlackRock spot Bitcoin ETF filing after the firm added a “surveillance sharing” clause that would involve Coinbase monitoring and reporting possible illegal activity. Considering the SEC’s ongoing litigation against Coinbase, that must be awkward…
Grayscale informed the US Court of Appeals hearing its Bitcoin Spot ETF SEC denial that the SEC just approved a leveraged Bitcoin futures ETF. With TradFi now also rushing to offer their own Bitcoin Spot ETFs, it is confusing why the SEC is still fighting this seemingly losing battle.
The trademark dispute between Yuga Labs and the creators of RR/BAYC NFTs had its trial kicked to July 31. Yuga previously withdrew its false advertising claim to streamline the trial process, so only thing remaining is a determination of damages for claims Yuga won on summary judgment. It will be interesting to see the number and potentially follow the appeal, but there won’t be the fireworks a full merits trial might have. Wonder how much of the damages will go to Ape Fest in Hong Kong this year.
Prometheum has some explaining to do after the testimony of its Co-CEO in front of Congress made waves. Even Democrats like Richie Torres are joining in the fray. The Blockchain Association is also asking for regulators to dig in deeper to Prometheum’s business. If you are going to be an SEC mouthpiece about compliance, better have your house in order.
MultiChain was hit for $130 million in one of the biggest crypto hacks on record. Chainalysis dug into the hack, which appears to have been either an inside job or an action by foreign government(s). Reminder to regularly revoke permissions for any hot wallet you control.
This was a good interview with Immutable’s co-founder Alex Connolly on his vision to convert Web2 gamers to Web3 functionalities.
As my Twitter PFP shows, I love the spaceman imagery, so it is cool to see Starbucks teaming up with popular artist Micah Johnson for an Aku collection Starbucks NFT rewards stamp.
As was fairly predictable, LBRY got hit with the fine requested by the SEC after the SEC won its case against the YouTube-For-Crypto company. What is interesting, though, is comparing how the SEC classified the decision in the Coinbase case vs. what the Court says in this damages order. Spoiler alert: they don’t match up.
The EU is exploring use of a regulatory sandbox as a part of its metaverse regulatory strategy. SEC Commissioner Hester Peirce has been proposing use of a safe harbor rule for digital assets for years now, but those have largely fallen on deaf ears despite industry support.
The Senate Financial Services Committee has requested input regarding many aspects of taxation crypto and other digital assets from members of the digital asset community and other interested parties. Jason Schwartz broke this down better than I ever could.
A group of “progressive industry watchdogs” (AKA, Senator Warren donors) wrote a letter to the House Financial Services and Agriculture Committees voicing their opposition to the McHenry/Thompson digital asset discussion draft. Do they offer any alternative solutions other than continuing under the broken system we are currently operating under? Of course not. That would be silly.
The U.S. Attorney’s Office for the Southern District of New York announced its “first criminal case” involving an attack on a smart contract. Turns out, fraud is illegal and it’s exceedingly difficult to laundry money on immutable and public blockchains? Who knew? This was just one of multiple digital asset related criminal charges brought this week.
I could see this physical item backed loan system for digital assets replacing pawn shops in the future. Tapping into global liquidity versus local liquidity will always eventually land at the best rate in a mature market.
There’s a certain amount of irony in the DOJ continuing to move around and sell seized Bitcoin on Coinbase while the SEC sues Coinbase for allowing people to buy and sell cryptocurrency on its exchange.
Digital toy company Cryptoys has announced an integration of kid-friendly AI chatbots into NFTs. Any news about combining Web3 and AI is going to get posted in this update. Especially when I own a bunch of the assets in question and want to pump my own bags (as is the case with Cryptoys).
A new Chainalysis report has found that industry as grown in market cap from 2019/2020 to around $1.18 trillion. It also provides stats to rebut the “crypto is for criminals” narrative that is somehow still a thing despite all evidence to the contrary.
The CFTC got another default judgment in a cryptocurrency futures violation case, this time against Florida resident Adam Todd and four companies he allegedly controlled – Digitex LLC, Digitex Limited, Digitex Software Limited, and Blockster Holdings Limited Corporation. Not sure why that guy would lawyer up to prepare a bunch of operating entities but not show up to Court to get the benefit of personal liability protections.
The SEC settled with Rally Rd. over charges of operating an unregistered exchange. The settlement regarding failure to properly use a third-party alternative trading system for secondary sales of its fractionalized car and memorabilia assets until 2021. It is clear that Rally was trying to be compliant, so it sucks to see the SEC continuing to go after seemingly good faith actors over foot fault violations.
Bankrupt cryptocurrency platform Celsius Network settled with the FTC as its founder Alexander Mashinsky and others will go to trial on FTC charges of consumer deception and false promises. He also has other issues, as he was arrested and charged with criminal fraud and facing a SEC lawsuit as well.
Google Play reverses ban on NFT purchases and will allow application developers to integrate digital assets like NFTs into their games through its app store. NFTs are back, baby (but not really; but maybe? But not really)!
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 