Intro/Disclaimer: Since late 2022, I’ve prepared weekly updates for attorneys at my firm to stay abreast of the latest Web3 legal developments. The biggest stories are included in Bi-Weekly posts on the renowned BitBlog, where we provide concise tl;dr overviews and insights into how these developments might ripple through the industry. In pursuit of a more thorough and personal discourse, I also share expanded versions of these updates on my personal blog every Tuesday. Here, you’ll find my unvarnished perspectives, offering a deeper dive into the nuances of these legal narratives. Please note, the views and opinions I express, both on BitBlog and my personal blog, are solely my own. They do not reflect the official stance or endorsement of my firm.
It was a busy week in Web3, with the executive branch continuing its seemingly hostile stance on the digital asset industry, this time with the Department of Energy digging into crypto mining. On the other side of the coin, it is looking like there is going to be enough Congressional bipartisan support to overrule the SEC’s proposed digital asset custody rule, so we will see if slowing the industry is enough of a priority for Biden to use political capital vetoing the joint resolution if passed as expected. There was also a very interesting think-piece about regulating DeFi as critical infrastructure providers rather than as financial intermediaries, and the alleged FTX hackers were arrested.
Here’s everything that happened last week in Web3 law:
Energy Department Issues “Emergency” Collection of Information Regarding Bitcoin Mining Energy Consumption
The U.S. Energy Information Administration (“EIA”) “authorized a survey of certain bitcoin mining operations on January 26, 2024, as an “emergency collection” for commercial cryptocurrency miners to respond to. The agency stated in a press release. “We will specifically focus on how the energy demand for cryptocurrency mining is evolving, identify geographic areas of high growth, and quantify the sources of electricity used to meet cryptocurrency mining demand.”
Tl;dr: The science is fairly well established that Bitcoin and other cryptocurrency mining is a net-positive for stabilizing electrical grids, especially for renewable energy sources which often have high outputs that need consumption. Factories and other energy consumers (unlike crypto mining) cannot be turned on and off when the wind is high/low or the sun is bright/covered. Combined with the proposed Digital Asset Mining Energy (DAME) 30% excess tax on crypto miners, this administration has made it clear that it does not see the value of crypto mining remaining in the United States to support the United Stated energy grid.
Bipartisan Joint Resolution Issued to Repeal Digital Asset Custody Rule
Senator Lummis (R-WY) along with Congressman Nickel (D-NC) and Flood (R-NE) introduced S.J.Res.59 under the Congressional Review Act which authorizes Congress to rescind agency rules through joint resolutions. The Joint Resolution would repeal the SEC’s Staff Accounting Bill (“SAB”) 121 which requires custodians of digital assets list those assets as liabilities on balance sheets unlike cash and other assets custodied by those custodians. The Government Accountability Office had previously ruled that SAB 121 failed to abide by the Congressional Review Act.
Tl;dr: Senator Lummis seems to believe she has the votes to pass this through the Senate because Joint Resolutions only require a simple majority and not the 60 votes required to end debate on other bills. This will almost certainly pass the House if it gets there. It is an accounting rule that makes no sense and results in there being less trusted fiduciaries who can protect customer’s digital assets from theft. It will be interesting to see if the President’s current digital asset stance is important enough to him to use his veto power on this Joint Resolution if it passes the House and Senate.
Alleged FTX Hackers Indicted Over $400 Million Hack
Three Americans have been charged with a series of sim-swap hacks which included the hack of certain FTX accounts during the disorganized period around the time that control of the exchange was handed over to attorneys. While the victims are not listed in the indictment, media outlets are reporting that Victim Company-1 is FTX, and access was obtained through a sim swap of an FTX employee’s phone who had access to various FTX digital wallets.
Tl;dr: In the days after FTX’s collapse, hundreds of millions of dollars in cryptocurrencies were moved out of FTX’s accounts. Many believed at the time this was an inside job, with a high-level employee moving those funds as a nest egg to preserve against government seizure. After not hearing many updates on this in the years following, it is interesting to find out it was three Americans behind the heist. SIM swapping is not an especially sophisticated form of hacking, so to hear these three allegedly got over $400 million and didn’t immediately flee to a non-extradition country is crazy. I can’t imagine the level of irrational confidence required to think you have operational security good enough to live consequence free in the United States after a $400 million hack. It also shows how lax the FTX security and compliance was at the time, to allow $400 million to be in the hands of a single authorized individual’s phone.
Other Stories
I am very much looking forward to reading this article titled Genuine DeFi as Critical Infrastructure: A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance. It is written by Rebecca Rettig, Michael Mosier, and Katja Gilman, so you know even if you disagree with the suggestions (which based on my skimming, I think I will in some parts) it will be well-reasoned and based on an understanding of how the technology actually works.
This is the regularly reminder that I am bullish on fun blockchain-based-games.
Google is stepping back in its policy to ban the advertisement of cryptocurrency products now that Blackrock and Fidelity are selling cryptocurrency products through their spot Bitcoin ETFs. The fact that this is news is why Web3 has so much potential. Google, Meta, Amazon, and TikTok account for something like 90% of online ad market share. That doesn’t happen in a truly open internet where people own and can transfer their data between platforms.
TopShot is moving to dismiss a Video Protection Privacy Act lawsuit brought against it. This wouldn’t be news if it didn’t combine my two areas of practice: privacy litigation and NFTs/Web3. But it does. So it gets added to the list! If you want to know more about VPPA litigation, read this article of mine from a month ago.
Su Zhu of Three Arrows Capital (3AC) apparently enjoyed his 3 month stint in a Singapore prison for failing to cooperate with the 3AC liquidation process? I think I speak for most of digital asset market participants when I say I hope he and his partner at 3AC Kyle Davies get plenty more relaxation behind bars.
Everybody stop what you are doing: new Vitalik blog just dropped! This one covers how cryptographic verification can be useful in an increasingly AI world. I don’t know what is making Vitalik take up the blog pen more often recently it seems, but I am a fan.
Speaking of AI/Crypto, I really enjoyed this old but good article about how Web3 represents digital scarcity in an AI world of digital abundance. The author has some follow up articles since then expanding on the thesis which are worth the read as well.
Potential future chair of the House Financial Services Committee French Hill says he is optimistic about the potential passage in 2024 of the stablecoin and FIT for 21st Century bills passed through House Committees in 2023. I put the chances of either passing in an election year at 5%…but that’s still a chance!
The SEC is once again protecting investors by bringing a civil lawsuit against an individual that already pled guilty to criminal fraud charges. Do you feel protected? Because I feel protected.
Speaking of the SEC, our unironically favorite Commissioner Hester Peirce filed a dissent to the SEC’s denial of the request to amend the gag rule which prohibits a party from settling with the agency while continuing to deny the allegations. “The policy of denying defendants the right to criticize publicly a settlement after it is signed is unnecessary, undermines regulatory integrity, and raises First Amendment concerns.”
New York is one of the only states I tell digital asset companies to actively avoid, so it’s interesting to see the New York Bar proposing amendments to the state’s Uniform Commercial Code (UCC) in an attempt to attract digital asset companies.
Ripple’s Co-Founder Chris Larsen got hacked to a tune of a little over $100 million. Kind of a flex to just have over $100 million sitting around in a piggy bank instead of an institutional wallet, but also dumb for reasons like this.
The Jupiter DeFi token drop has been a hot topic this week, with various attorneys looking at it from a regulatory perspective. After clearing over $1.4 billion in daily volume and unabashedly stating this was a fundraising effort it will be interesting to see how this all plays out.
I recently bookmarked the Chamber of Digital Commerce’s legislative tracker page and you should too.
FTX told the bankruptcy court that it expects to pay customers back in full but will not restart the exchange. And by “repay in full” they mean pay the value of crypto at time of bankruptcy, even though that value has gone dramatically up and was largely held in that crypto during the process? Cool for the lawyers/investors asleep at the wheel to benefit from that appreciation, though.
Genesis has settled with the SEC over its “earn” program, but since the company is in bankruptcy it is entirely meaningless as any fine is paid after creditors are repaid (and there isn’t enough to pay creditors, hence the bankruptcy).
Meta (AKA, Facebook) is still pursuing its metaverse expansion plans. While revenue on its metaverse focused team Reality Labs is growing, it is still a net loss vs. investment into the venture which was over $30 billion in 2022-2023.
There is some drama around Uniswap allegedly issuing takedown requests over an Uniswap clone despite being allegedly opensource. If true, it is decidedly uncool from an entity which was founded using funds from a Free and Open Source grant. The founder of Uniswap, Hayden Adams, has responded with his thoughts on the 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 