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.
When Congress goes on break, the litigators come out to play. Just a flurry of litigation updates last week which as somebody who has his feet half in the litigation world and half in the corporate world, has been a welcome change of pace. I imagine all the people getting sued would disagree with me on that, though. Congress doesn’t get back until Labor Day and I imagine the last thing the primarily 60+ year old elected officials will be doing is focusing on magic internet money, so expect litigation to dominate the news cycle until then.
Here’s everything that happened last week in Web3 law:
Coinbase Files Motion for Judgment on Pleadings in Case Against SEC
As Polsinelli covered in a prior update on the BitBlog, on June 28, Coinbase filed its Answer early and a letter of intent to move for Judgment on the Pleadings in the SEC’s lawsuit against the popular cryptocurrency exchange. Even the smartest attorneys in the space were surprised by this early sneak attack action by Coinbase. On August 4, Coinbase filed their Rule 12(c) Motion for Judgment on the Pleadings. Amicus briefs in support of Coinbase’s motion are due on August 11, and the SEC has until October 3 to respond.
Tl;dr– Coinbase’s arguments predictably focused on the Coinbase claim that none of the digital assets sold on its exchange are “investment contracts” under Howey and thus are not securities. While Ripple presented an “essential ingredients” argument in its litigation, Coinbase took a more subtle approach arguing that an “investment contract” requires both an investment and a contract, and the SEC’s attempt to read out “contract” from the test is an impermissible expansion of Howey. Coinbase also raised a Major Question Doctrine defense, which I personally think is a loser at the District Court level, but is teed up for appeal with a current waiting SCOTUS that loves smacking down administrative overreach. It also appears to be a part of Coinbase’s same strategy when it brought its separate mandamus action against the SEC asking for either approval or denial of the exchange’s request for rulemaking for digital assets. It can be expected that many of the mandamus amicus filers will similarly focus on the investment contract and Major Question Doctrine arguments in their amicus on August 11 rather than Coinbase’s other arguments regarding its digital wallet and staking services.
Richard Heart/PulseChain Sued by SEC
On July 31, Hex Founder Richard Heart and three unincorporated entities that he allegedly controls were charged by the SEC with conducting unregistered offerings of crypto assets that allegedly raised more than $1 billion from investors. The SEC’s press release announcing the case is available here and the SEC’s Complaint is available here.
Tl;dr– Richard Heart (real name, Richard Schueler) is known for his public displays of wealth such as his purchase of a rare ‘Enigma’ black diamond and displays of wealth in social media posts. The SEC alleges that “Heart called on investors to buy crypto asset securities in offerings that he failed to register. He then defrauded those investors by spending some of their crypto assets on exorbitant luxury goods.” Interestingly, this case is brough by the SEC’s Fort Worth regional office but was brought in the Eastern District of New York. The SEC trying to use the fact that PulseX is a Uniswap fork as an E.D.N.Y. forum hook has been widely criticized. That’s like saying the proper forum for any alleged improper code based on Linux is Helsinki. Maybe discovery in litigation will reveal whether Heart named the underlying protocol “PulseX” because of his grimy nature or if he is just an Elon fanboy who wants to add “X” to everything.
Terra/Luna Loses Motion to Dismiss Bid While Judge Bashes Ripple Ruling
On July 31, Judge Rakoff in the District Court for the Southern District of New York denied Terraform Labs and its founder Do Kwon (“Defendants”)’s Motion to Dismiss. The Opinion and Order can be found here. The SEC has brought civil claims against Defendants for alleged fraud and sale of unregistered securities in the form of cryptocurrency LUNA, stablecoin UST, and three other types of crypto assets.
Tl;dr– Many commentators have focused on the Order’s seeming dissent from the reasoning of fellow Southern District of New York Judge Torre’s ruling in her Ripple Summary Judgment Order which we broke down on the BitBlog here. While that is certainly something worth pointing out, the Defendants in this case brought their Motion to Dismiss under Rule 12(b)(6) as opposed to a Motion for Summary Judgment, so at this stage Judge Rakoff had to accept all of the SEC’s allegations as true and the Howey standard for investment contracts is an inherently fact intensive standard for dismissal. However, a less discussed portion of the ruling is the Court’s denial of Defendants’ Major Questions Doctrine defense. In it, the Court held the Major Questions Doctrine only applies if the industry in question resembles in political and economic significance of prior Supreme Court cases on the issue such as the tobacco industry at issue in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000). With proper factual record, Defendants may be able to establish that digital assets in the United States are as economically significant today as tobacco was in the United States in the early 2000’s.
Other Stories
This is a pretty awesome paper on the use of large language models to determine contractual meaning of terms. It makes sense that AI could be in a solid position to help factfinders ascertain ordinary meaning in context, quantify ambiguity, and fill gaps in parties’ agreements assuming the language model is properly trained with the relevant statutory and case law which are the reasons behind the phrasing of certain terms.
You can now sort the top cryptocurrencies alleged by the SEC to be securities on CoinGecko, which is both hilarious and useful. “The Alleged SEC Securities market cap today is $91.2 Billion, an 8.2% [increase] change in the last 24 hours.” Amazing.
The industry spent lots of early this past week dealing with the Curve exploit. Curve is one of the few true DeFi protocols out there (along with UniSwap), so it is suboptimal for this to happen as Congress weighs the value (or lack of value) that DeFi represents. The exploiter has begun returning funds after being threatened with bounty for nerds to come after him or her.
In a you can’t make this up twist, disgraced founder of FTX, SBF, has been linked of “rugging” (i.e., draining the liquidity) from a popular meme coin on Coinbase’s new layer 2 Base. Combined with the Curve hack, we are just lucky Congress is on break until September.
The IRS has issued long awaited guidance that confirms staking rewards are considered income at time they are earned. This is a great thread breaking it down. While the industry is upset that this will force people to sell to meet tax obligations, it probably makes more sense to treat it as income when it is earned rather than waiting until it is exchanged for fiat. This guidance was released before Senate Democrats sent a wag of the finger to the IRS for delaying their crypto tax policy proposals.
USDT issuer Tether reported $850 million in Q2 profit. Which would be awesome, but they reported $1.5 billion in Q1. With interest rates on their treasury bonds increasing in that period and growing supply of USDT over that period their downward profits don’t make sense at first glance? But Tether’s CTO seemed to claim this was because they put what would be profits towards strengthening its reserve. Either way, Tether now owns more U.S. debt that most nation-states including the UAE, so that seems suboptimal for America…
Speaking of stablecoins, read this article about why the stablecoin bill is essential for American consumer protections, then send it to your elected representatives. Please. I thought this was a good and comprehensive rundown of the status of various legislative efforts surrounding crypto if you want background.
Sorare (crypto fantasy sports/NFT company) is now accepting fiat. Smart. Target crypto natives to grow and later onboard people without digital wallets who also want to participate. I will need to check out their onboarding process for people who chose to use fiat, as that is a hurdle many digital asset companies have difficulty overcoming in trying to onboard outside of crypto communities.
Gamestop is pulling support for their native wallet? Non-custodial wallet provider services are pretty established as being OK from a regulatory standpoint (minus the SEC suing Coinbase for theirs), so Gamestop’s excuse about regulatory uncertainty seems like a cop-out.
The race for ETH futures ETFs has begun! First BlackRock kicked off the frenzy in TradFi for Bitcoin futures ETFs which was joined by Fidelity and others shortly thereafter. Now 6 separate firms have filed for an ETH futures ETFs. Bitcoin Cash/LiteCoin (the other major crypto currencies widely accepted as commodities) next?
KPMG produced a report this week highlighting the positive environmental impacts of Bitcoin mining. Because mining machines (unlike factories) can be turned on and off during high and low electricity demands, they are well suited for renewable energy like wind and solar which often produce energy overflows during certain times with nowhere to send that excess energy.
Good luck to Three Arrows Capital founder Kyle Davies who claims he doesn’t have to comply with a bankruptcy subpoena because he isn’t a U.S. citizen while also using U.S. courts to file a defamation lawsuit against Mike Dudas. The audacity of these alleged scumbags never ceases to amaze me.
The DOJ is considering the effect criminal charges would have on innocent Binance user/investors in its determination on whether to charge the company and founder/CEO Changpeng “CZ” Zhao with fraud or other criminal charges. Wait, a regulator trying to avoid harming innocent consumers with its decision? Those exist?
New York is going to New York, and a crypto policy town hall diverged into an environmental debate. I have no idea about New York mining/power, but as discussed above in areas where renewable energy is trying to flourish having readily available cryptocurrency miners ready to pay for excess energy is key to keeping these renewable sources profitable.
Opensource fight! Polygon Zero is big mad at Matter Labs over alleged appropriation without contribution of Polygon Zero’s zero knowledge proof coding. This comes the same week as there was an alleged unnecessary takedown request from counsel for Uniswap. These types of fights can be expected as many coders in crypto are newish and not as familiar with code licensing as more experience developers may be.
So it turns out Ilya Lichtenstein wasn’t just laundering funds from the Bitfinex hack but was actually behind it as well? Others have questioned his admission due to the complexity of the hack but the sloppiness of the laundering.
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 