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.
It was a big week in Web3 law generally, and me personally as the most technologically supportive SEC Commissioner quoted me in a blistering dissent against SEC overreach. Not going to lie, it is both a high point in my career and low point in my efforts to cling to the last of my youth that I got so excited about an SEC Commissioner shout-out, but here we are. Love to see all this content the team at Polsinelli puts out on a regular basis is getting some attention from the highest levels. In actual news, the Yuga Labs trademark lawsuit ended with the judge throwing the book at the “performance art” trolling defendants, and SBF took the stand in a last-ditch effort to avoid a criminal conviction.
Here’s everything that happened last week in Web3 law:
Coinbase Files Final Reply in Motion for Judgment vs. SEC
Coinbase filed their Reply Memorandum in response to the SEC in what should be the final substantive briefing on the Coinbase Motion for Judgment on the Pleadings. While there may be requests from the parties to supplement their briefings, such as if there is a development in other cases to alert the Court to, this sets the stage for Coinbase’s attempt to gain an early dismissal of some or all of the SEC’s case against them.
Tl;dr: The Coinbase filing is obviously well-written, but they still face an uphill battle to get the entire case against them dismissed at this stage. The briefing does a good job about pointing towards the SEC’s changed stance as to what the word “investment contract” means. However, it is going to be a hard case to make when there are a wide arrangement of assets in question here and Coinbase concedes that some assets (such as the DAO Report tokens) would be securities which could not be traded on their platform. Either way, even if Coinbase does not get a complete win on these motions (which it likely will not) even a partial win or a loss which educates the Court on these issues is a step in the right direction for the exchange.
Yuga Labs Wins $1.6 Million in Trademark Infringement Lawsuit
Yuga Labs, the company behind Bored Ape Yacht Club and owners of the Crypto Punk intellectual property had damages decided in their trademark infringement case against Ryder Ripps and Jeremy “Pauly” Cahen. Yuga had previously won on all its claims at summary judgment, and a trial was held to determine measures of damages. Yuga was awarded $1,575,362.92 in damages and its attorneys’ fees and costs in an amount still to be determined. Yuga was also granted an injunction over the defendants, which required all the associated domain names, social media accounts, and smart contract controls be handed over to Yuga and for the defendants to permanently cease infringing on the Yuga trademarks.
Tl;dr: Bad day to be an internet troll. The Court through the book at defendants here, in large part due to their conduct throughout the proceeding, stating “Defendants unnecessarily and inappropriately made disgraceful and slanderous statements about Yuga, its founders, and its counsel during litigation, including calling Yuga’s counsel criminals who support racism, antisemitism, beastiality (sic), pedophilia and accusing them of using cartoons to market drugs to young children. These statements were egregious and far exceed the bounds of acceptable conduct.” (internal quotes omitted). The pending appeal for the Rogers test issues which was pursued concurrently with the damages issues being decided in this case was also heard recently, with the judges appearing skeptical of defendants’ claims before ruling in Yuga’s favor.
SBF Takes the Stand in Criminal Trial
SBF has taken the stand in his defense of the DOJ charges against him. His first day of testimony largely occurred outside the presence of the jury, with the Court hearing testimony to determine certain pre-trial admissibility motions including details surrounding his proposed advice of counsel reliance testimony. The second day, the jury got to hear SBF’s side of the story on direct exam. His direct examination will continue this week, and then prosecutors will get their chance to cross examine the former face of FTX.
Tl;dr: The first day’s examination was held out of the presence of the jury so the Court could assess how much of SBF’s testimony regarding his reliance on advice of counsel he could testify to. While the defense has abandoned the formal defense (meaning it will not be on the verdict instructions) it still can be used to show lack of intent mens rea. The second day was as expected, with SBF claiming he didn’t know about the balance sheet hole and playing the “distracted founder, just in over his head” card. Honestly, I got more out of this surprisingly well done Bloomberg documentary than I did out of the trial recaps.
Other Stories
SEC Commissioner Hester Peirce remains a voice of reason, recently stating the SEC’s regulation by enforcement for crypto is both a dumb drain on agency resources and risk setting bad precedents. She also came out against the LBRY case now that litigation is finalized, quoting yours truly and stating “This case illustrates the arbitrariness and real-life consequences of the Commission’s misguided enforcement-driven approach to crypto.” And yes, to answer your question, I am already working on getting this framed to memorialize my favorite SEC commissioner quoting me in a blistering dissent against SEC overreach into Web3.
It is looking like Ireland is going to be a MiCA hotspot, with the country’s “Innovation Hub” courting Web3 businesses looking to do business in a compliant manner in the EU. The UK’s treasury department also recently finalized its own stablecoin governance rules.
Similar to the Coinbase reply, Binance filed its own final reply in its bid to get dismissal in a CFTC action against it. Unlike Coinbase, though, there are so many facts about communications and such alleged that while Coinbase has a slim shot at dismissal, Binance has almost zero. It does take some shots, though, at the CFTC trying to be the world’s regulator.
The IRS has extended its crypto tax rule comment period, so there is no excuse not to use the LexPunk comment letter AI or have your attorney to write a comment letter about how the rules as proposed would be unworkable.
Paradigm’s legal team is at it again, filing an amicus brief in support of James Harper’s lawsuit against the IRS, which challenges the agency’s ability to use “John Doe” summons as a dragnet to surreptitiously obtain the private records of large groups of crypto users. I’ve always thought these John Doe subpoenas are problematic, but every challenge so far has lost, so seems like they have an uphill battle here. The DeFi Education Fund filed their own amicus in the case.
DCG said it was blindsided by the New York AG’s recent lawsuit, according to its Q3 shareholder letter. Which is an indicator that this lawsuit is more about press than curbing bad actions or getting payments for distribution to individuals allegedly hurt by those actions.
Despite the regulatory issues, North America is still the world leader in digital asset usage.
Not directly crypto related, but the SEC Director of Enforcement gave some remarks at the New York City Bar Associations’ Compliance Institute. He focused on how public trusts in institutions (from banks to big tech to Congress itself) is at an all-time low, which has negative effects on the orderly operation of markets and for capital formation. While his emphasis that companies need to proactively engage with SEC staff on compliance issues sounds good, it is hard to take that suggestion seriously in a digital asset industry where such engagement has consistently been met with punishment. See Coinbase/LBRY cases above.
Crypto gaming corner this week includes a $20 million series A round for a blockchain-asset first person shooter project, NFL rivals passed 3 million player mark, and Bitkraft Ventures has invested $103 million on blockchain-based gaming since 2021. I’ll keep saying it: as a gamer myself, having digital assets with potential for cross-game compatibility and a marketplace to buy and sell gaming assets is going to be huge.
As of writing this, the Wall Street Journal has still failed to retract false reporting that Hamas raised funds through cryptocurrency, which was cited by Elizabeth Warren and others in a letter requesting plans to prevent crypto-financing in terrorism (which isn’t a real thing). “The unique traceability of these assets have meant that the amounts raised remain tiny compared to other funding sources,” the research firm cited by the Journal said. “No public crypto fundraising campaign by a terrorist group has received significant levels of donations, relative to other funding sources.” Journalism!
Speaking of terrorist financing, there were 3 Congressional hearings on combatting the financing of terror this week (2 HFSC Sub-committees and 1 Senate Banking). CapHillCrypto did a great job breaking down the crypto related topics covered in his newsletter. Definitely recommend subscribing for his content on digital asset legislation.
JPMorgan moves $1 billion daily through its permissioned blockchain-based intra-bank value transfer system called “JPM Coin.” It’s almost like addendum-only ledger technology is useful? Who knew?
Senator Lummis and Congressman French Hill called for “swift” DOJ action regarding the use of Binance and Tether to fund terrorism. They used the provably false but unretracted article from the Wall Street Journal about illicit use of crypto in terrorist financing as support, which is not great to see from otherwise industry supporting legislators. I’m not even a big fan of Tether or Binance, but false reporting shouldn’t in any way be the basis for criminal investigations or regulatory capture of U.S. entities.
Citadel has denied claims that it was behind the run on Terraform protocol which tanked its value and started the current cryptocurrency bear market.
It looks like a former Roche Freedman lawsuit has been revived against Coinbase, with a case filed California state court on behalf of 114 consumers who had their Coinbase wallets compromised The case is CGC-23-609941, Lawrence Bateman Et Al Vs. Toshi Holdings PTE Ltd D/B/A Coinbase Wallet, Et Al. and will be something I follow along with.
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 