Law enforcement was busy last week, with an arrest and charges connected to the Tornado Cash privacy/mixing protocol, and the OpenSea “insider trading” case coming to a close with sentencing. Treasury also finally released their crypto reporting guidelines and they are a doozy, potentially requiring even websites like Etherscan to report identities of individuals it has no realistic way of knowing and spurring debate on how helpful a user interface can be before crossing the line from information publisher into broker.
Also, I had an article published a few weeks ago in the ABA SciTech Magazine about the Sec v. Wahi litigation, which is pretty cool.
Here’s everything that happened last week in Web3 law:
OpenSea “Insider Trading” Defendant Gets Sentenced to 3 Months in Prison
Nathanial (“Nate”) Chastain, the former OpenSea employee accused of front running purchases of NFTs prior to those NFTs were featured on the OpenSea featured page, was sentenced to three months in prison after being convicted of fraud and money laundering. According to the FBI, Nate made roughly $50,000 “using his knowledge of confidential information to purchase dozens of NFTs in advance of them being featured on OpenSea’s homepage…”.
Tl;dr– We wrote about this story when Nate was first charged back over a year ago. Despite it being labeled an “insider trading” charge, he was not charged with actual insider trading under Securities Exchange Act Rule 10b-5 or other applicable securities laws. The sentence is a slap on the wrist considering the DOJ was asking for 21 to 27 months, but his conviction and sentence at all is a bummer. The guy was in charge of picking out NFT art he liked to feature on OpenSea’s home page. He bought that art he liked before it was featured, and sold it when it reached a price he thought it was worth. Was it wrong? Probably; which is why he was forced to resign for it. But going to prison, even just for a few months, for buying and selling .jpgs for less than $50,000 in profit is not the highest/best use of the judicial system, in my opinion.
Criminal Charges Brought Against Tornado Cash Developers
The U.S. Attorney’s Office for the Southern District of New York has brought criminal charges against Tornado Cash developers Roman Storm and Roman Semenov for the protocol’s role in allegedly “more than $1 billion in money laundering transactions” including transactions by North Korean hackers known as the Lazarus Group. The Department of Treasury’s OFAC has also now sanctioned Roman Semenov as a Specially Designated Blocked Person. Roman Storm was arrested in Washington, while Roman Semenov remains at large.
Tl;dr– This was a pretty solid Twitter thread breaking down the privacy concerns this action raises. The DOJ criticizes the developers for creating help guides on how to best protect their privacy through the protocol, but also criticize the use of the protocol by sophisticated hackers that do not need assistance with navigating a UI and can interact with the code directly. Coin Center, which is currently funding a lawsuit in Florida challenging the sanctions against the protocol itself by OFAC, came out against the criminal charges. As stated in Bernstein and as I argued in my article, “[v]iewed from this perspective, the government’s efforts to retard progress in cryptography may implicate the Fourth Amendment, as well as the right to speak anonymously.” Fellow developer Alexey Pertsev is still awaiting trial for similar charges on house arrest in Amsterdam.
Other Stories
We finally got the Treasury Department/IRS crypto reporting rules proposal we have been waiting on and they are…something. Good news? Miners and validators are not required to submit the new Form 1099-DA for reporting non-employment income from digital assets. The bad news? Everybody else is, including DeFi, self-custodial wallet providers, and any entity that in any way “facilitates a digital asset sale on behalf of a customer” even if the transaction is peer-to-peer. Now these will go through the comment/finalization process and would go into effect in the 2025 tax year with “broker” reporting in 2026.
The SEC’s first crackdown regarding the relatively new “Marketing Rule” under the Investment Advisers Act relates to a crypto fund manager. A big part of the problem was that the manager allegedly buried disclaimers and assumptions about “2,700% returns” behind embedded hyperlinks. Just as a friendly reminder, have your attorney give a once over to marketing materials, even if they are a just tool located on a website or within an app.
Friend.Tech is hot in the streets right now, which allows people to connect their social media to the app and give out social rewards in form of tokens to followers. I tried to connect and got put in Twitter jail, so be warned. Also, they renamed the tokens from “shares” to “keys” so they totally won’t have the SEC come after them now…but the IRS still will.
Coinbase and Circle are reorganizing their partnership with Coinbase acquiring a minority stake in the USDC issuer Circle Internet Financial. The companies were previously linked through their Centre Consortium partnership so this doesn’t change much for the everyday user as far as I can tell.
I complaint a lot about the state of digital asset regulation in America, but it’s nice to be reminded it can always be worse. You could be in China and be sentenced to life in prison for mining crypto. Also, a reminder for the people trying to ban crypto, here are the list of countries that have done so: Qatar, Saudi Arabia, and China. So, maybe let’s not try to be like those countries?
It’s actually insane that NFT platform Recur apparently blew through over $50 million in under 2 years. Their office snacks must have ruled.
Coin Center is pushing Senators for a de minimis exemption from capital gains taxation for crypto payments. It doesn’t seem THAT hard to get software to calculate taxes on this, but I get the point that trying to figure out the basis for .27 cents paid in gas fees is dumb.
North Korea’s use of crypto has probably cause more damage to American progress than their fickle missile program ever has or will. It’s both funny and scary to see the U.S.’s fear of the North Korean boogeyman setting the industry back years in the U.S. while it advances internationally, and we are left behind. Not cool, NK.
BitStamp is cutting off U.S. users from their ETH staking services. I feel very protected not being able to earn a steady 4% on my digital assets with little-to-no risk. Thanks, Gary.
Zero-knowledge proofs and associated layer-2 roll ups is one of those things I need to stop procrastinating doing a deep dive into. I keep telling myself they are still a few years away, but with everything above about privacy and sanctions issues in crypto they are probably the last/best bet at maintaining a permissionless but legal system for digital assets.
Shopify has integrated USDC on Solana into their payment processing. This may be their early answer to the PayPal stablecoin.
PeOplE whO dOn’T wAnT eVeryThiNg to ReQuiRe KYC aRe Just CRiMiNalS.
In a shocking turn of events, funds the SEC obtained on behlf of “victims” haven’t even started in the process to be paid to those “victims” from the SEC’s first DeFi prosecution back in 2021. Luckily, it’s not like inflation is making that less and less valuable every day. Wait…
I have been avoiding SBF updates largely in these updates because they aren’t really crypto-specific. But since this is apparently crime week, he was given permission for unlimited visits in prison to help him prepare his legal defense, which largely involves blaming his prior lawyers, while also pleading not guilty to the latest inditement and complaining about prison food. I just need him to quietly go to prison forever and be done with this saga. Bad guy does bad things is not a crypto story.
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 