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.
Hope everybody got to enjoy time with families this past week. I am thankful that the week before Thanksgiving didn’t have any major legal developments to distract from the holiday. Just kidding! Binance agreed to pay $4 billion dollars to settle criminal and civil charges, and the SEC tried to front-run that news by bringing its own civil charges against cryptocurrency exchange Kraken. And for good measure, Tether froze a quarter of a billion dollars of $USDT at the request of the DOJ. So, you know, a nice quiet week.
Here’s everything that happened last week in Web3 law:
SEC Files Lawsuit Against Cryptocurrency Exchange Kraken
The SEC has filed a lawsuit accusing the second largest cryptocurrency exchange in the US of violating federal securities laws. Payward Inc. and Payward Ventures Inc., which operate the cryptocurrency exchange known as Kraken, is the latest to be accused of “unlawfully facilitating the buying and selling of crypto asset securities.”
Tl;dr: It was odd this wasn’t filed when the Coinbase/Binance lawsuits were filed, so I assumed that Kraken’s prior $30 million settlement got them some level of approval from the SEC for their remaining operations. I was wrong. While the SEC alleges that Kraken co-mingled customer funds, this is something Kraken self-reported years ago as an accounting issue which happened when Kraken switched accounting systems and they resolved thereafter. Kraken’s founder has pointed out that its cooperation and settlement with the SEC did not help them avoid further litigation, and encouraged others in the space to avoid the U.S. under its current regulatory regime. Many of the tokens named in the lawsuit are used daily as utility tokens and are up big on the year, creating the question of exactly who the SEC is protecting in these actions? Also, the timing of this is certainly suspicious with Gary Gensler potentially front running the major Binance settlement his agency wasn’t a part of.
Tether Freezes $225 Million Linked to Pig Butchering Scams and Human Trafficking
Tether, working in concert with the DOJ and Chainalysis, has frozen $225 million worth of its own stablecoin linked to an international human trafficking syndicate in Southeast Asia. The freeze occurred across 37 self-custodial wallets. The funds were primarily linked to pig butchering scams, where users are tricked into thinking they are sending funds to a cryptocurrency trading platform only to be robbed and refused the ability to cash out.
Tl;dr: It appears that Tether is working closing with the DOJ based on this and other recent cooperative asset freezes. So seemingly the “go after foreigners” request by Senator Lummis and Representative French Hill is working, with the Binance settlement discussed below and DOJ seemingly working with a cooperative Tether. This is good for the space to show when there is a lawful reason and court orders to freeze funds that can still be done without needing to put your social security number into the hands of every single person who touches digital funds.
Head of Binance Pleads Guilty to Bank Secrecy Act Charge and Steps Down
On Tuesday Binance and CEO Changpeng Zhao (“CZ”) admitted to violations of anti-money laundering laws along with sanctions violations and operating as an unlicensed money transmitter. You can read the indictment here and the plea document here. As a part of the deal, CZ agreed to step down as CEO, have no involvement with Binance for 3 years, and Binance is required to appoint an independent compliance monitor for three years. Total fines and sanctions were just under $4 billion dollars. CZ will plead guilty to a single count of failure to maintain an effective Anti-Money Laundering program under the Bank Secrecy Act, which carries a maximum sentence of five years. But due to various sentencing guidelines and downgrades he is likely looking at a maximum of 18 months.
Tl;dr: There were rumors leading up to the eventual press conference regarding the charges and plea deal, but those rumors were confirmed on Tuesday. The $4 billion is a massive fine but it looks like Binance was already getting ready to pay that for weeks now. CZ’s departure tweet is available here and the Binance official statement is here. Notably, the SEC was not a part of this settlement so its case against the exchange and CZ continues. It was well-known in the industry that Binance took some regulatory shortcuts in its rise to power, so this is not entirely surprising. This article provides a neat timeline of events leading up to this settlement. Hopefully the new CEO Richard Teng can continue on the path started by his predecessor of compliance with basic AML/KYC obligations. It is also interesting and seemingly smart that they tapped a former compliance officer and regulator the bring on the new era of Binance instead of the other co-founder who is conspicuously absent for the settlement.
Other Stories
The publication I use for many of my links in these updates, CoinDesk, was purchased by exchange Bullish. Note, this is the exchange run from the ex-president of the NYSE, so certainly an interesting development.
In an update to the Yuga Trademark lawsuit, Yuga is seeking $7,500,000 of its alleged $14,204,579 spent prosecuting the action be reimbursed per the Court’s Order awarding Yuga its costs and fees. After watching how the Defendants litigated and relitigated every single minor issue even after losing multiple times, I have no sympathy for the claims that Yuga spent too much attorney time on this case which was caused by the conduct of Defendants.
The Blockchain Association has filed a brief in support of the Tornado Cash request for appeal. This was a solid article breaking down the decision behind the filing and its implication on the larger industry.
The founder of Blur is forming a layer-2 with some…questionable and pyramid-y scheme tokenomics for people who invite others and who deposit without any firm deadline on when those deposits can be withdrawn. Gabriel Shapiro said it best with “Legally speaking, this is beyond crazy, particularly when only managed by a multi-sig. You are simply investing in a crypto hedge fund.”
The trend of funding consolidating in gaming/infrastructure continues, with Paradigm leading a $18 million Series A blockchain developer tool provider Privy. CoinGecko has also acquired NFT data analytics firm Zash this week. While many VCs have pivoted to AI, there is also a block of investors who are still betting big on crypto startups.
The SEC’s staff has apparently provided a recommendation on Coinbase’s Petition for Rulemaking but is still stalling in issuing a decision on it (i.e., denying it). Coinbase has called out the SEC’s transparent feet dragging in its most recent mandamus action filing.
With Tether firmly working with the DOJ and Binance taking its lashings for past compliance misdeeds, it is not surprising to see traditional financial institutions meeting with the SEC to get their share of the pie in no-longer-black-sheep industry of digital assets. Good old regulatory capture.
Hester Peirce went on Bloomberg to reiterate the regulation by enforcement is not the correct way to regulate digital assets or any other industry.
As a follow up to the domain patent dispute between the ENS foundation and Unstoppable Domains, it appears the ENS folks are not backing down. Good for them; it is unclear how an artificial monopoly on existing technology helps anybody in the space.
This Aragon DAO lawsuit against its founders is going to be fascinating to watch. The proposal is very interesting, and it will be interesting to see as the litigation progresses how issues such as privilege and discovery and such are handled in this new world order.
The Terraform labs case has already finished discovery and is at the summary judgment stage? That was fast. The “your size is not size” response from Do Kwon when somebody pointed out the attack vulnerability for his stable coin will always live rent free in my head alongside the SBF “1) What” tweet. But the Terra civil case is the least of Do Kwon’s problems.
Uniswap saw my update last week about all the money going to the DevCo after voting down the prior fee switch proposal and made some interesting moves with a proposal giving active delegates more voting power and a price pump off the Binance news and crack down on centralized exchange Kraken.
A wrinkle in the Binance case I don’t quite get in the DOJ’s attempt to make CZ stay in the U.S. until he is sentenced? Why would he agree to that settlement and step away just to still be a fugitive?
The kerfuffle regarding the BanklessDAO v. BanklessHQ shows the importance of trademark control. If you allow your brand to be used by people you don’t control, you are inevitably going to run into issues.
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 