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 was filled with legislative drama, with the FIT for the 21st Century Act passing through the House Agriculture and Financial services Committees with bipartisan support, and the Clarity for Payment Stablecoins Act nearly snatching defeat from the jaws of victory due to lack of Whitehouse support. Combine this with the ChatGPT founder’s controversial token launch (with required retinal scan) and Binance moving to dismiss the CFTC lawsuit against it, and it ended up being another busy week in Web3 legal updates. That’s without even getting into the Sunday night Curve hack drama (which I will cover along with the ongoing fallout next week).
Here’s everything that happened last week in Web3 law:
House Financial Services/Ag Committees Advance Digital Asset Legislation After Markup
On July 26th the House Financial Services Committee held a hearing to markup the Financial Innovation and Technology (“FIT”) for the 21st Century Act and the Blockchain Regulatory Certainty Act. The July 26th hearing materials are available here. After an over seven hour hearing in Financial Services and a two hour hearing in the Agriculture Committee, the bill passed and will now proceed to the full House for consideration.
Tl;dr– The Financial Services Committee members voted through the FIT for the 21st Century Act with a 35-15 majority. 6 Democrats of the 23 on the committee voted in favor of the bill. The average age of the Democrats who voted for the bill was 46, while the average age who voted against was 61, marking a stark generational divide on the issue among Democrats. The Agriculture Committee also passed the effort with less fanfare by voice vote. The Financial Services meeting had some interesting moments. Representative Sherman said “Saratoshi Nagamoto” was not innovative (I believe he was trying to refer to the pseudonymous inventor of Bitcoin, Satoshi Nakamoto), Representative Torres came out in strong support of the FIT for the 21st Century Act from the Democrat side, there was expected support from Republicans like Representatives Emmer, Hill, and McHenry, and hem hawing from both sides of the aisle. Time will tell if it has enough support in the House to pass a Democrat controlled (and demographically older) Senate.
House Financial Services Members Throw Verbal Haymakers at Stablecoin Legislation Markup
The House Financial Services Committee followed up on July 27th to markup the Clarity for Payment Stablecoins Act of 2023 and Keep Your Coins Act of 2023 (among other unrelated bills). The July 27th hearing materials are available here. After a last-minute breakdown in negotiations due to Whitehouse concerns regarding the lack of Federal Reserve oversight over state and non-bank issuers, the bill proceeded to markup as the original Republican drafted bill which the Democrats on the Committee strongly objected to.
Tl;dr– I was just going to break down both the markups in a single post expecting the Stablecoin markup to be largely bipartisan and uneventful. I was WRONG. Here is what happened: McHenry submitted his Republican-only bill a while back. Waters/McHenry had negotiated 99% of issues to make it a bipartisan bill for markup. The Whitehouse (i.e., mid-level staffers) dragged its feet and killed the bipartisan bill, so Republicans went forward to markup the original Republican-only bill (any major changes without Democrat buy-in would be procedurally improper, so couldn’t go with 99% agreed on bill). Democrats on committee (including crypto proponents like Torres) got pissed because their drafted amendments were to the expected bipartisan bill, not original bill. Democrats got obstructionist, and tried to walkout to destroy quorum, but markup went forward. While the bill did pass committee with some Democrat votes, it was certainly a step back in the process while also being a step forward.
Other Stories
Worldcoin Protocol launched to mainnet this week, with the Sam Altman lead cryptocurrency available to people who scan their eyes into a Worldcoin Orbs to get their iris registered to a World ID. If this sounds creepy and dystopian to you, it’s only because it is. This is a pretty good Twitter post breaking down the tech behind the scan, but weird eye orb is still weird.
As expected, Binance intends to move to dismiss the CFTC Complaint against it currently pending in the Northern District of Illinois. Apparently Binance intends to both answer and move to dismiss? So pulling a trick out of the Coinbase litigation playbook potentially. They filed the Motion to Dismiss on Thursday, but hard to be motivated to read it at this stage. I’ll probably read it and break it down when the CFTC responds. From reading the Complaint, there are enough particular allegations of fraud explicitly directed to U.S. users that dismissal seems unlikely.
House Democrats on the Agriculture Committee have positioned the Financial Innovation and Technology for the 21st Century Act as a “a handout to #crypto exchanges, Wall Street, and Silicon Valley venture capitalists” signaling an uphill battle for Republicans to gain any level of Democrat support for the bill in the larger House. It apparently passed the Agriculture Committee with enough Democrat support to be a voice vote, so hard to tell what this means for Democrat leadership positioning for the bill.
Central Bank Digital Currencies (“CBDCs”) are hot right now, with Russia looking to pilot a digital ruble, and multiple state and federal agencies looking to hire for roles connected to a potential United States CBDC. Republicans are none too pleased with this development.
The Senate AML amendment to the military spending bill made its way into the final bill. The actual Amendment ended up just requiring Treasury to create an examination process for financial institutions to assess KYC/AML sanctions reporting regarding digital assets and to research illicit finance in crypto/report findings to Congress.
SEC registered companies will need to report cybersecurity breaches. It honestly make sense as that does seem to be a material event for companies which frequently face litigation after data breaches. But it raises interesting issues on what a “breach” is in crypto where an exploit could be token specific.
Honestly, it will be interesting seeing the challenges to the use of crypto forensics like those used by Chainalysis in the many pending cases. There have been obvious advancements but showing with a reasonable degree of scientific certainty that any particular amount of funds sent through a mixer ended up in a particular wallet is going to be a high bar for experts.
In a “no, duh” moment, the U.S. Government Accountability Office says legislative and regulatory clarity is needed to ensure oversight of crypto assets. Looking forward to their next report that water is wet.
Mobile advertising and blockchain company Phunware filed a securities fraud lawsuit against UBS Securities accusing the defendant of conducting an unlawful ‘spoofing’ scheme by placing orders to sell Phunware shares with no intent of actually selling them. Mostly just including this because I never heard of that company before now so it’s on my list to check out now.
The DOJ was given until October 3 to gather discovery in its case against former Celsius CEO Alex Mashinsky. I am shocked the DOJ doesn’t have enough evidence already with all the bankruptcy trial information out there, but here we are.
Quantstamp settled with the SEC over its 2017 ICO. Without admitting or denying the SEC’s findings, the company agreed to pay nearly $2.5 million in disgorgement and prejudgment interest in addition to a $1 million civil penalty. Which is a drop in the bucket compared to funding a litigation defense.
Reddit released their Gen 4 digital collectables. I always use Reddit as an example of how to onboard people into NFTs who aren’t crypto-native. With almost 10 million holders, they are an unquestionable success.
Presidential candidate RFK Jr. went on Twitter spaces and confirmed his Bitcoin support. I have no idea his chances in an election, but it would be nice if he could push other Democratic presidential candidates towards embracing this technology.
Flashbots became the latest crypto unicorn, raising $60 million in a Series B round at a $1 billion valuation. Looking forward to seeing how they pivot as many of their current business practices front-running ETH transactions could be deemed market manipulation under proposed legislation.
The fact that Craig Wright is still saying he is Bitcoin founder Satoshi Nakamoto is fascinating even when a UK Court reduced his libel damages to 1 British pound and outright called him a liar.
This is a great article from our friends North of the border on what the Ripple ruling means for cryptocurrency in Canada. I also didn’t know Canada had laws around anything other than maple syrup and moose hunting, so you learn something new every day.
Not directly related to crypto , but SEC Commissioner Hester Peirce issued a blistering dissent against proposed SEC rulemaking on use of AI stating in opening: “Thank you, Chair Gensler. The best thing I can say for this proposal is that it serves, perhaps unintentionally, as a mirror reflecting the Commission’s distorted thinking. In that mirror, you will see the Commission’s attitude toward technology, which is not neutral, but hostile.” Looks like she is not pulling any punches.
Zuck is back in on the Metaverse. With Meta’s stock price recovering, he has more power to pursue his expensive long-term plans for AR/metaverse expansions.
Representatives Gus Bilirakis (R-FL) and Jan Schakowsky (D-IL) sent a letter to Apple CEO Tim Cook asking about Apple’s use of App Store guidelines to potentially restrict emerging technologies like blockchains, nonfungible tokens (NFTs), and other distributed ledger technologies. The more legislators understand that distributed ledger technology is the antithesis of the tech giants they all hate, the better things will be for the industry.
This was a solid article breaking down the dismissal of the Coin Center challenge to the JOB’s act classification of digital assets as “cash” under section 6050I of the IRS Code which requires report for transactions over $10k starting in 2024.
SBF is accused of witness tampering in the latest attempt to get his bail revoked. Certainly, an effective altruist like he claims to be would never do something like that, right? (Heavy sarcasm).
The SEC has warned accounting firms about the dangers of performing crypto audits. Seems like a continuation of the agency’s efforts to cut off the industry from access to qualified professionals. Hester Peirce pointed this issue out in her continued support for the industry.
According to the financial times, Coinbase was told by the SEC to stop selling anything other than Bitcoin before the agency sued that popular cryptocurrency exchange. Considering even the most conservative exchanges sell Bitcoin, ETH, Litecoin, and Bitcoin Cash, this is essentially an admission by the agency that they don’t view any cryptocurrency except Bitcoin to be a tradable commodity.
Conclusion
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