Off the Blockchain+, July 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. 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.

Another fairly busy week on both the regulatory and litigation fronts, as both the Senate and the House have proposed bills/amendments directed to the digital asset industry, and people are still digesting the Ripple ruling fallout. It has become increasingly clear that industry regulation is coming sooner than many anticipated, but it is still unclear what that regulation will look like and if it will be a boom or hindrance to Web3 development in the United States. There still appears to be a partisan divide which is bogging down the legislation that both sides agree there is a need for.

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

House Comprehensive Digital Asset Bill Released

After hearings in both the Agriculture and Financial Services Committees in the House, the proposed digital asset market structure law, titled the Financial Innovation and Technology for the 21st Century Act, is finally here. While the Discussion Draft was a comprehensive 162 pages, this checks in at 212 pages. You can read the Agriculture Committee’s press release and all associated document (including a fact vs. myth breakdown) in those links.

Tl;dr– It is slightly disappointing there isn’t any Democrat co-sponsors on the bill. I know many in the House Financial Services Committee take their marching orders from Representative Waters on this subject, but with statements from Representative Torres I was hoping there wouldn’t be a partisan divide on this bill. While this bill seems to have implemented many industry advocated improvements, it also has some potentially problematic changes regarding Defi and lack of sufficient CFTC funding. With house Democrats on the Agriculture Committee coming out and calling this a “a handout to #crypto exchanges, Wall Street, and Silicon Valley venture capitalists” it looks like this bill is going to face an uphill battle to get in any shape to be passable by the Democrat controlled Senate. The first markup of the bill in the House Financial Services Committee is tomorrow so there may be more clarity on the bill’s chances of passing after that.

Senate Bill Seeks to Apply Compliance Regime to DeFi:

The Senate released a bipartisan bill directed at AML compliance obligations for decentralized finance applications. Senators Jack Reeds/Mark Warner (D) and Mike Rounds/Mitt Romney (R) are sponsors of the bill which seeks to subject DeFi protocols to the same rules as other US-regulated financial intermediaries. 

Tl;dr– The big news out of the bill is the attempt to apply compliance requirements on any individual or entity with more than a $25 million stake in any particular protocol. Which seems like not a big deal until you realize these protocols’ tokens are often multi-billion market cap assets and there are many entities which passively own $25 million+ stakes in those tokens. Coin Center has already come out and blasted the bill as unconstitutional, so we will see what comes of it. There are going to be lots of tricky issues when it comes to decentralized finance meeting accepted AML/KYC regimes (often involving both criminal and civil sanctions) which traditional finance has grown into.

Other Stories

Everybody in Web3 law is still very much focused on the Ripple ruling. I figured I would have an “other story” which just a collection of good blogs/articles/podcasts I have seen this past week breaking down the decision. So click on any of the links in this paragraph for some insightful commentary or hopium that this means more work for Web3 lawyers.

With a collective industry sigh, I must inform you that SEC Chair Gary Gensler has stated his intent to have the SEC step in as a regulatory body for the artificial intelligence. While “Web3 bro pivoting to AI bro” has become a meme, his remarks are being flagged as significant by the Executive VP of major financial reform group Public Citizen. This should concern AI developers.

Speaking of Ripple, the SEC has filed a response in the Do Kwon lawsuit stating in part: “[t]he SEC respectfully avers that Ripple conflicts with and adds baseless requirements to Howey and its progeny. Respectfully, those portions of Ripple were wrongly decided, and this Court should not follow them.” While some believe this hints at an SEC intention to appeal Ripple, only time will tell if this is an indication of a fight to come, or posturing for a separate judge in a separate matter.

It’s not a real crypto litigation until a crazy intervention motion is raised. Which means the Binance litigation has officially begun, as proposed intervener “Eeon” requested to enter the case to represent Binance customers and sue the U.S. Government and Binance jointly and severally for any damages to customer as a result of the lawsuit.

Coinbase’s CEO is set to meet with House Democrats to discuss digital asset legislation. This is good news, because Brian is a phenomenal industry representative, and any digital asset legislation in the House will need heavy Democrat support to pass the Senate and eventually be signed into law by this Executive.

Speaking of House Democrats, Richie Torres has been one of the outspoken leaders of that side of the House calling for regulatory reform and rulemaking instead of regulation by enforcement from the SEC. With both sides coming after him, Gensler seems to have used up most of his political goodwill at this point.

U.S. authorities seized millions from accounts controlled by Deltec Bank and that authorities claim were involved in a major fraud ring centered around digital assets.  The Secret Service was authorized to seize over $100 million in three separate actions regarding a “pig butchering” scheme, and the seizures took place on June 13 and June 15. This again shows if you use crypto for crime at any sizeable scale, it’s not a matter of if you will be caught but a matter of when.

This is a deep dive, but super interesting read on ERC-4626 Vaults and how they fit under proposed MiCA regulations. It’s a complex topic, but the author does a good job breaking it down for even less crypto-savvy people to understand.

Senators Warren/Marshall (anti-crypto), and Lummis/Gillibrand (pro crypto) proposed a crypto-focused amendment to pending national security legislation. It does things like put AML reporting burdens on crypto kiosks and some obligations on FinCEN and Treasury to come up with compliance regimes for stablecoins/mixers. Actually a seemingly reasonable proposal.

The New Silver securitization/restructuring proposal has been posted to the MarkerDAO Strategic Finance Core Unit forum. This restructuring was originally proposed in November of 2022, so it was a long road to get to this late stage. Great work by the legal team on this. I’ve been a big fan of what the team at Maker is doing ever since the Endgame update was put into motion.

As expected, the SEC is refusing to even participate in the digital asset legislation process, allegedly meeting with Democratic members of the House Financial Services Committee where it was reported “[t]he general message was this bill is not fixable and we’re not giving you technical assistance to try to fix it,” according to a financial lobbyist familiar with the briefing. This comes at the same time as the SEC refused to weigh in on Second Circuit case involving syndicated loans. It seems like the agency is more interested in preserving enforcement powers under unclear regulatory regimes rather than providing market clarity. 

Wait, the FedNow instant payment system which went live this week is just an Avalanche blockchain fork with Bank Secrecy Act compliance built in? OK, maybe that is just one of the payment processors, but still, good to know Treasury is embracing some aspects of blockchain tech for banking.

This is by far the best and most understandable and comprehensive breakdown on the myriad of currently pending AI lawsuits. While not blockchain, the link between AI and Web3 is significant enough that practitioners in the space should probably have at least a basic understanding of both. Also, Franklin regularly puts out great content so his LinkedIn blog is worth a subscribe.

While Congress is debating cryptocurrency as the potential future of the internet and finance, one corner of the crypto space was betting on hamster racing streams. While blockchain technology needs regulatory guardrails for any level of industry legitimacy, I am going to miss degen stuff like this when it happens.

Interesting filing to quash the SEC’s subpoena to the LGBcoin issuer. Without touching on the political issues, it is interesting to watch this jurisdictional challenge against the SEC’s wide ranging subpoena powers, which the current agency has used liberally against digital asset industry participants.

The DOJ is doubling its staffing of crypto crime enforcement team and focusing on ransomware crimes. This comes the same week as the couple arrested in February 2022 and accused of laundering over 100,000 Bitcoin ($4.5 billion at time of arrest) from the 2016 Bitfinex hack entered a plea deal. If you don’t know the background, you should read this story about Bitcoin’s Bonnie and Clyde.

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.