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.
Big week in Web3 law, as the Sam Bankman-Fried trial started, which is the biggest financial fraud trial since Bernie Madoff. But while the world was focused on a fraud story that happens to involve digital assets, the SEC responded to the Coinbase Motion for Judgment, and was denied their opportunity to appeal in Ripple. Oh, and in case you missed it we released our Bi-Weekly update. Please subscribe to the BitBlog so I can keep spending time shitposting about legal updates in the space.
Here’s everything that happened last week in Web3 law:
SEC Responds to Coinbase Motion for Judgment on the Pleadings
The SEC has filed their opposition to the Coinbase Motion for Judgment under Rule 12(c). The agency came out swinging, calling Coinbase argument’s flawed and attempting to distance itself from prior statements by the agency which seem to contradict their current litigation posture.
Tl;dr: The SEC claims in their filing that both (1) the rights conferred by digital assets are inherent in the code itself (fn. 5); and (2) the SEC is merely there to assure investors receive adequate disclosures (pg. 23). Which seems contradictory? The agency also claims its briefing in Edward where it said: “‘investment contract’ makes clear that instruments of that name include those in which a return—whether labeled income or profit—is promised in a contract” (emphasis in their briefing) does not mean they were stating a contractual promise is required (fn. 7)? That said, despite logical inconsistencies, the briefing is overall strong as could be expected from the top litigators in the agency, so it remains an uphill battle for Coinbase to get a dismissal this early in the case.
SEC Denied Interlocutory Appeal in Ripple
The SEC was denied its request for in interlocutory appeal at the trial court level, meaning it will need to take up its arguments on appeal after the trial on remaining merits issues scheduled for April 23, 2024. This means there is no chance of appellate review prior to 2024 as the SEC hoped for, and there is virtually no chance any decision could reach the Supreme Court before 2026.
Tl;dr: The judge clarified her Order that a Howey analysis is a facts and circumstances analysis, and her ruling was based on the facts and circumstances specific to this case and not the laws of digital assets generally. Any loss for the SEC is good for the industry at this point. However, there is no way to know if the 2026 or beyond SCOTUS will be made up of justices that are as hostile to agency overreaches as the current SCOTUS is. This leaves lower courts to continue to decide one-off issues until there is Congressional movement, the SEC changes its enforcement strategies, or SCOTUS decides the issue in 2026 or beyond.
Sam Bankman-Fried Trial Begins
The criminal case against SBF began this week, with the trial expected to take 6 weeks. The biggest news from the first week was that SBF was never offered a plea deal and some interesting jury selection moments. The prosecution focused in opening on SBF being a common fraudster, and the tech involved was immaterial to a tale as old as time in the form of a ponzi scheme. The defense painted a picture of a computer nerd who acted in good faith and made innocent mistakes in a highly technical startup environment.
Tl;dr: As I have repeatedly stated, this is an issue of fraud no different than Bernie Madoff. But at the end of the year, when I do a full year in crypto run down, the story of 2023 Web3 law can’t be told without including the story of SBF/FTX fallout. This interview was a decent read from a formal federal prosecutor on his view of the case as was this article from Ari Redbord on what to expect from the first week of trial. I will probably keep the trial updates to “Other Stories” unless there is some big revelation, because this is an interesting side show but not anything specific to crypto law.
Other Stories
Please do not support the Michael Lewis book praising SBF as a misunderstood genius. Sure, read the reported stories like SBF considering a $5 billion payment to have Trump not run for president and how the missing billions were apparently a rounding error to SBF. That’s good clean tabloid fun. But don’t buy into the “if there hadn’t been a bank run, FTX would have been fine” narrative completely ignoring the fact that exchanges aren’t supposed to be lending out or using customer deposits. These aren’t banks.
If there was any doubt about whether Do Kwon was just a victim of failed tech as opposed to an exposed fraud, these recently revealed documents where he says “I can just create fake transactions that look real” make it clear he was the latter.
I’m pretty sure due to the Speaker of the House drama, even if a major crypto proponent like McHenry or Emmer takes the throne, the chances of any crypto legislation getting passed during this chaos is slim-to-none. I’m still holding out irrational hope for the stablecoin bill, but if we are being honest the legislative year is a wash at this point.
The ETH futures ETF has started trading in the U.S., making it clear that even the SEC does not consider ETH a security, otherwise it would never be allowed to trade in securities markets. The playbook for a spot ETF is clear, with Grayscale again leading the way.
Crypto venture funding last quarter was down to “just over $1 billion” and M&A activity is down as well. Which is suboptimal, but with venture funding down across the board in a high interest rate environment and with the shiny objects of cold fusion/AI gobbling up most of the available spend, this isn’t as bad as it could have been. Web3 gaming and loyalty apps (like the EPL coins discussed below and this restaurant rewards business) still seem to be going strong.
Well this release about the CFTC chair focusing on “getting ahead of DeFi” isn’t at all ominous in light of recent barrel of the gun settlements with smaller DeFi players.
Pro sports teams have entered the shitcoin craze, with multiple English Premiere League teams issuing their own tokens through fan engagement app Socios. This June Deloitte survey explains why teams are rushing to the opportunity to engage with their fans through digital assets and rewards.
The Airbit Club saga came to an end with the co-founder getting twelve years in jail and certain facilitators getting 1-5 years. Turns out, stealing millions of dollars is illegal. Who knew?
THORSwap has disabled its cross-chain bridge after a massive surge of use by actors like North Korea and the FTX hacker to transfer funds. On one hand, facilitating money laundering for nukes is bad. On the other hand, where do we draw the line between neutral technology, which just like a pen can be used by good or bad actors, and entities with obligations to stop use by bad actors?
It looks like Danny Castle AKA Coolman Coffee Dan has won his lawsuit an alleged partner brought against him. I covered the lawsuit when it first dropped and it looked bad for Dan, so I will need to catch up and do a follow up blog.
Coinbase is focusing on growing internationally due to regulatory issues in the U.S., and can anybody blame them? While others too compliance shortcuts in the crypto wild west, by all accounts Coinbase has remained buttoned up to their detriment. And it earned them the same SEC lawsuit that Binance is facing.
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 