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.
A combination of a slow news week and me being out of town has resulted in a shorter than usual Web3 update. The big news was the SEC going after NFT profile picture projects, starting with the project put out by Ashton Kutcher and Mila Kunis, which raises questions as to the SEC’s role in the purchases of digital assets by consenting adults. The SEC Chair also had an uneventful day in front of the Senate, and Binance.US looks like it may be in trouble after a round of layoffs and departures of key stakeholders.
Here’s everything that happened last week in Web3 law:
SEC Brings Enforcement Action Against “Profile Picture” NFT Project: September 13, 2023
On September 13, the SEC released a Consent Order with an immediate cease-and-desist along with monetary fines for the creators of the “Stoner Cats” NFT project, through which NFTs were sold to fund the creation of an animated series. Similar to the prior NFT enforcement action, Commissioners Peirce and Uyeda dissented comparing the sales of the NFTs to sales of Star Wars merchandise. The project creators agreed to settle the dispute without admitting or denying any wrongdoing.
Tl;dr: The SEC’s first NFT enforcement action was covered in our last Bi-Weekly update. This most recent action is notable not only because of the names behind the project (Mila Kunis and Ashton Kutcher, among others) but also due to this being the first “profile picture project” named for NFTs which have unique artwork for each token in the collection intended to be used as social media profile pictures. As with any regulation by enforcement, this still leaves questions as to when a product sale is an unregistered security offering as opposed to something more properly under the FTC or other agency’s jurisdictional oversight. For example, the SEC cited to actions taken by the project to get it verified on platforms like OpenSea, which serves a valuable purpose in preventing people from being scammed and distinguishing the legitimate projects from copy-cats (pun intended). It is unclear how getting projects to cease doing this or risk being labeled a “security” actually protects consumers.
SEC Chair Gary Gensler Testifies to Congress on Digital Assets
SEC Chair Gary Gensler testified in front of the Senate Committee on Banking, Housing, and Urban Affairs on September 12. His opening statement is available here. He has a follow-up hearing before the House Financial Services Committee scheduled for September 27.
Tl;dr– Gensler made the usual rounds ahead of his hearing now that Congress is back in session. Honestly, the focus of the hearing wasn’t digital assets which was a nice change of pace. Even Senators like Warren who are closely aligned with the Chair on digital asset issues had tough questions for the regulator elsewhere including his rulemaking agenda which neither side is especially happy with. The big news from the hearing was the statement that the SEC was “still reviewing” the Grayscale spot Bitcoin ETF filing after the D.C. Circuit struck down the SEC’s rejection of the Grayscale application.
Other Stories
DeFi Education Fund is petitioning to cancel the patent claiming invention of oracle-like tech and being used by a patent troll to sue MakerDAO and Compound. You can read a blog post about the challenge here, but great to see.
Great analysis by Coinbase ahead of Gensler’s Senate testimony showing the empirical data on how current U.S. regulatory policies have hurt America.
Fireblocks is expanding its non-custodial wallet offerings for smaller companies. Fireblocks has always been great for larger entities, so it’s nice they will be a viable option for even start-ups with a more limited budget.
Really hoping they broadcast this round table from permissionless where SEC Commissioner Hester Peirce, former CFTC Commissioner Brian Quintenz, Representative Tom Emmer, and Blockchain Association CEO Kristin Smith discussed digital asset policy.
The Financial Crimes Enforcement Network (FinCEN) released an alert calling for banks to report suspicious activity connected to pig butchering schemes.
Polygon and others joined the Wall Street Blockchain Alliance in submitting their own letters to the Senate regarding digital asset taxation issues.
A founder of the Milady NFT project is suing a developer who allegedly made off with over a million dollars from the project’s treasury. So much for being the last code-is-law bastion for NFT projects.
Hester Peirce gave a speech reminding everybody there are still regulators who are acting in good faith and without some grander political agenda. “Regulatory forbearance also requires that we wait to bring enforcement actions until we have set forth the rules clearly and given people sufficient time to come into compliance with them. A commitment to the rule of law precludes arbitrary enforcement of the law.”
A OneCoin founder who co-founded the project with Ruja Ignatova, AKA “the Cryptoqueen,” is sentenced to 20 years in jail. Anybody around back in the ICO boom remembers OneCoin and its claim of being a “Bitcoin killer” while the founders flew around on private jets for promo. His Co-founder is still on the run from the law and on the FBI’s top 10 most wanted list.
House Majority Whip Tom Emmer has reintroduced his bill designed to curtail the ability of the Treasury Department to create a central bank digital currency. I am not as staunchly opposed as many, but there is a legitimate fear that creation of a CBDC with associated government surveillance could be used to force out private issuers of stablecoins like Circle, who have economic incentives to avoid overly surveilling its customers.
Binance.US lost about half its staff and its President this week. With its U.S. market share steadily declining, I wouldn’t be surprised to see it close up shop entirely and focus on other markets where it dominates, even though it claims to have seven years of runway.
If this Erik Voorhees speech at Permissionless doesn’t get you pumped up for truly revolutionary potential for a digital economy based on a permissionless blockchain ecosystem then I don’t know what will. While I am far from a code-is-law proponent (I generally like things like roads and public works and understand living in society comes with trade-offs), it reminds me of the Brian Brooks quote: “Shouldn’t we take seriously the possibility that algorithms and open-source software that take a measure of human error, greed, negligence, fraud and bias out of the system might actually make the system better on net, even if there are some new risks being presented that need to be understood and regulated?”
The Senate bill designed to kill crypto in the United States got a few more sponsors this week. While it is labeled “anti-money laundering” this is nothing more than financial surveillance specifically designed to make compliance impossible in a digital asset economy.
Even sophisticated investors like Mark Cuban can be victims of phishing attacks. Remember to always double check links, as phishing attacks and hacks remain an issue for anybody with self-custody over their assets.
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 