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.
I got some pretty cool news last week that one of the Bi-Weekly updates the Blockchain+ team at my firm puts together was the second most read cryptocurrency blog on JDSupra this year. I truly enjoy staying on top of these legal developments, sharing them with you all, and putting the biggest stories out on the BitBlog. For everybody who reads the blogs I put out, or reaches out about these updates, thank you very much. Your support has been amazing.
Now, in actual legal developments, it was a busy week with the Elizabeth Warren anti-money laundering bill aimed at crypto transactions picking up steam, KuCoin settling with New York regulators, and Coinbase finally getting the denial on its Petition for Rulemaking that Coinbase had previously argued was a foregone conclusion for months now.
Here’s everything that happened last week in Web3 law:
SEC Denies Petition for Rulemaking; Coinbase Immediately Appeals
The SEC has finally issued their determination on the Coinbase Petition for Rulemaking, with the SEC declining to issue official rules specific to digital assets. Coinbase immediately appealed the denial to the Third Circuit, which also oversaw the Coinbase mandamus action requesting for the Court to Order the SEC make an official determination on the Petition for Rulemaking which was filed on July 21, 2022. Chair Gensler issued this statement on the decision with Commissioners Peirce and Uyeda dissenting.
Tl;dr: Coinbase filed for a Writ of Mandamus, which the SEC spent over 8 months litigating against to appellate judges. All to issue a terse denial of the Petition for Rulemaking, which Coinbase had argued to those judges was a foregone conclusion the entire time and the SEC was merely dragging its feet to avoid judicial review of the denial. In the end, Coinbase faces an uphill struggle as it will be hard to argue that declining to issues rules where Coinbase has argued the SEC does not have the power to under the Major Question Doctrine, is an arbitrary and capricious decision by the SEC. Still, it seems like a giant waste of agency resources by the SEC fighting this instead of denying the Petition around the time the mandamus was filed.
Senator Warren’s Digital Asset Anti-Money Laundering Act Gains Sponsors
The Digital Asset Anti-Money Laundering Act gained additional sponsors this week with Senators Raphael Warnock, Laphonza Butler, Chris Van Hollen, John Hickenlooper and Ben Ray Luján all joining in support of the bill. This is a bill that was reintroduced back in July after being delayed due to lack of co-sponsors. The bill seeks to expand the Bank Secrecy Act to include reporting obligation for blockchain validators and self-hosted digital wallet providers.
Tl;dr: The bill is universally opposed in crypto and would almost certainly face Constitutional challenges if it somehow managed to pass. Which is unlikely, as Warren isn’t exactly known for effectively passing the legislation she supports. Still, as the loudest voice in the room she gets attention and sways legislators and administrative agencies on these issues. The Warren heel turn to teaming up with the bankers she used to fight against has been quite a show to watch. But with terrorist financing a current hot topic and misreporting on the subject linking it to crypto, it is a bill which should be treated seriously and given the opposition it needs. As a personal aside, as somebody with one foot in data privacy and one foot in crypto/financial regulations, it is legitimately insane how much we as a citizenry have accepted warrantless surveillance and the obligatory dissemination of highly sensitive financial information to third parties in an age of zero-day exploits and daily data breaches.
KuCoin Settles with New York AG
KuCoin has agreed to pay a $22 million fine and block New York users to settle a lawsuit brought by the New York Attorney General for the exchange’s violation of certain state law consumer protection, fraud, and other statutory measures. KuCoin’s $22 million payment includes a $5.3 million payment to the state and the refunding of $16.7 million worth of cryptocurrency to 177,800 New York customers.
Tl;dr– When these charges first appeared, I thought KuCoin was going to no-show and take the default judgment as they have a history of doing. I haven’t been following the case closely because of that, but it looks like I was wrong. The worst things about these settlements generally, similar to settlements with the SEC, is that the settling party has no reason to fight outlandish admissions as the settlements typically ban the party from further activities in which those phrasings could come back to hurt them later. Here, however, it looks like KuCoin did the industry a favor and carefully negotiated the language to not throw other operators under the bus. Interestingly, neither the BitLicense nor the New York Department of Financial Services charged with overseeing that regulation are mentioned.
Other Stories
Former IRS Commissioner (2018-2022) Charles Rettig wrote an article which starts with “Proposed IRS tax reporting rules for digital assets are antithetical to the agency’s mission to provide quality taxpayer services for all Americans and enforce tax laws fairly and efficiently.” Couldn’t agree more, Charles.
Right now, it is not a matter of “if” but rather “when” a spot bitcoin ETF gets approved with the main players meeting regularly with SEC staff. The biggest hang up seems to be around in-kind vs. cash models which is very succinctly and visually explained in this iShares filing.
Trump is dropping another NFT collection. So I know what my dad is getting for Christmas…
SBF must be seething in his cell knowing that if he had been able to keep his con going for another year or so he would have been able to cover his positions and probably attending the Forbes 30 under 30 event. Makes you wonder how many people get away with these types of things due to dumb luck and timing.
Airdrop szn is also tax reporting szn. The IRS moves slow, but it does move, so make sure you are reporting those gains if you don’t want to have an unpleasant audit in a few years when they figure out crypto.
Good idea: El Salvador attracting crypto-savvy individuals for residency. Bad idea: telling the government of El Salvador that you have over 1 million dollars in cryptocurrency, so people know who to go to for wrench attacks.
I use Decrypt for lots of my news updates, and like to hop on Lex Line (a Rug Radio Twitter space/podcast) fairly regularly. So hearing the two companies are merging seems like nothing but good things to me.
Our favorite regulator Gary Gensler made the news this week for reiterating that lawyers representing digital asset clients are the problem. This isn’t the first time he said if you hire a lawyer as a digital asset company you are essentially a criminal.
This happened last week, but the SEC filed supplemental authority in their case against Binance related to the recent criminal plea by CZ and the company. At this point, even CZ is not saying he did not break the law, the issue is he didn’t break securities laws.
Interesting case I wasn’t aware of where a California Court ruled that cryptocurrency is not a physical loss under an insurance policy which covers for loss of personal property. This case is from 2022, so this isn’t a new development. But it’s a reminder that, in the event of a cryptocurrency theft, you should refer to your insurance policies such as home insurance to see if it might arguably be covered.
Sam Altman’s Worldcoin is coming for your eye scans with integrations with Minecraft, Reddit, Telegram, and others. Creepy biometric coin is still creepy.
The Government Accountability Office issued a 63 page report titled Agency Efforts Help Mitigate Some Risks Posed by Digital Assets. It is worth including in this update, but nothing ground breaking here as it found public blockchains make tracing assets easy, but on-ramps and off-ramps must be properly regulated across jurisdictions to make that tracing effective.
Self-custody is great, but the problem with self-custody is you have to remain aware of ongoing security threats like a recent Ledger code exploit. Learning basic self-custody security like seed phrase management, wallet management, and general online hygiene will prevent 99.9% of issues with that last .1 being vigilant on security developments. Big ups to wallet providers who stayed on top of this issue and prompted warnings to users.
Not legal, but this article on how data bottlenecks are being handled on ETH layer-2’s was very interesting. As ETH is looking towards its next upgrade post-POS switch to dramatically reduce transaction costs, it is worth monitoring how layer-2 solutions will continue to provide value in a world of universally cheap transaction costs.
Would I be sharing these Bitwise predictions for 2024 if they weren’t all crazy bullish? No way to know. But they are, so I am.
Apparently nobody told Gary G that the U.S. Treasury market is increasingly being propped up by stablecoin issuers which own more T-Bills than many nation-states and Berkshire Hathaway and are working closely with the Secret Service and FBI on multiple matters.
I missed this live stream, but the Global Blockchain Business Council hosting a roundtable discussion on Emerging Topics in Blockchain Law and the group of presenters makes this a must-watch.
More pig butchering scammers (allegedly) are likely going to jail. The FBI is recommending victims include “Pig Butchering PSA” in IC3 filings going forward so they can better track down victims of these crimes.
I apparently missed this, which is odd considering it hits both my Privacy and Digital Asset practice, but there is a proposed class action against Dapper Labs for its video tracking under the VPPA.
This One Page Crypto news aggregator created by Mark Cuban may put me out of the weekly newsletter business. From a quick glance, it’s certainly worth adding to your bookmarks bar.
The rush to buy Solana phones to gain the airdrop of a meme coin was one of those things that makes me love/hate crypto. God speed to the buyers, it is simply too stupid of a plan NOT to work in the world of crypto.
Red Bull Racing is dropping an NFT collection, and as a Max Verstappen hater I will not be participating.
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 