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 firm’s 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.
Last week, crypto lawyers were focused on various Congressional hearings and Treasury proposals regarding the role of digital assets in illicit finance. I am all for preventing the use of any asset in crime, crypto or otherwise. But not at the expense of financial freedoms, including the right to privacy until or unless you are suspected of a crime. There was also a cool initiative on the security front worth checking out this week. And the world hasn’t seemed to notice that most crypto is quietly up 10-15% in the past few weeks.
Here’s everything that happened last week in Web3 law:
FinCEN Proposes Expansion of Bank Secrecy Act to Investment Advisers
FinCEN has released its proposed rulemaking for Registered Investment Advisors and it’s a doozy. In essence, this would expand anti-money laundering and suspicious activity report filing requirements to not only federally registered investment advisers but also to federal exempt reporting advisers. Most investment advisers have long been excluded from the definition of “financial institution” because the people who supply funds and securities to investment advisers – largely banks and registered broker-dealers – are already subject to these requirements.
Tl;dr: More compliance requirements (the cost of which will be passed to consumers), more filing of suspicious activity reports which nobody reads, and more financial surveillance. Unlike banks and broker-dealers who are required to have full-time compliance staff, most smaller investment advisers and fund managers don’t have the infrastructure to handle this type of reporting. Further, the expansion to exempt reporting advisers not only vastly increases compliance requirements of many fund advisers, but also would extend substantive requirements to foreign fund managers who have more than a de minimis amount of US investors and thus are required to become exempt reporting advisers while having minimal US nexus, though many of those managers are already subject to local KYC requirements. House Financial Services Committee Chair Patrick McHenry is also skeptical of FinCEN’s request for additional authorities.
House Financial Services Subcommittee on Digital Assets Holds Hearing Entitled Crypto Crime in Context Part II: Examining Approaches to Combat Illicit Activity
The House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing on February 15 to discuss issues surrounding illicit use of digital assets. Witnesses included representatives from Circle, Coinbase, Arktouros, TRM Labs, and Terranet Ventures. This is the same week as a hearing before the full Financial Services Committee with FinCEN director Andrea Gacki and Office of Terrorism and Financial Intelligence undersecretary Brian Nelson resulted in many discussions on the now debunked Washington Journal reporting on use of cryptocurrency by Hamas.
Tl;dr: It seems like lawmakers are finally starting to understand that the immutable and public nature of the blockchain technology makes it less likely to be used by criminals rather than more likely. The new concern is privacy preserving technologies like mixing services. As explained by the TRM Labs representative, even when funds are put through mixing services they can often still be traced. It also does not appear that Congress understands how self-hosted wallets work, and how it would be impossible to effectively ban such technologies. More education is needed to open legislators’ eyes to the fact that the surveillance state built upon mandated use of intermediaries does not work in a digital world.
Other Stories
I could not possibly be more supportive of the Security Alliance initiative announced this week. The lawyers and technologists behind it are top notch, and it brings order to the chaos of a DeFi exploit scenario with a free 24/7 emergency hotline for help with incident response.
Coinbase announced Q4 earnings last week and, as expected, it was a great close of the year for the largest U.S. exchange. You can actually mint the earnings report as an NFT, if you want a collector’s item.
The Blockchain Association wrote a letter, signed by many members who are former or current law enforcement or military, advocating against Senator Elizabeth Warren’s proposed anti-money laundering law. Digital assets aren’t going away, so laws which are impossible to comply with based on technological limitations won’t kill it. It will just drive it overseas away from the reach of U.S. regulators.
Ledger and Coinbase are teaming up to make it easier for users to safely self-custody digital assets. Now if only the Ledger Stax I ordered like, a year ago, would ever be sent out…
Franklin Templeton has filed their own spot Ether ETF now, joining BlackRock, Fidelity, and others. Interesting to see that staking is being mentioned in the applications in the face of the SEC claiming staking as a service is a security in and of itself.
The above ETF news shouldn’t be surprising, with the current daily demand for Bitcoin from the spot Bitcoin ETFs ~10X more than can be produced through Bitcoin mining. That is before the halving, expected in April of this year.
Coinbase’s head of legal isn’t unrealistic about the exchange’s slim chance of success at the Motion for Judgment stage. Still, the arguments raised were good and set the stage for the Court to rule on the issue after discovery at the Summary Judgment stage.
My investment strategy is basically the same as Founder’s Fund, except the whole thing where they sold high while I held through lows. But other than that, essentially the same!
CZ’s money laundering sentencing was pushed back to April, so looks like he gets a few more months to enjoy the U.S. of A after previously being denied the ability to leave the country while on bail.
BlackRock and Fidelity’s spot Bitcoin ETFs garnered more assets in their first month than any other ETF ever has. So much pent up demand being released right before a halving? It’s like the SEC WANTs rampant Bitcoin speculation.
SEC Chair Gensler has responded to the Congressional letter regarding the SEC social media account hack in January. The fact that the government is securing its accounts with phones subject to sim swapping attacks is crazy.
While I am sad I am not getting a $STRK allocation despite my complete lack of contribution to the token ecosystem, I probably would have converted to ETH and spent on NFTs that go to zero, so it’s for the best.
The European Court of Human Rights ruled that requiring encrypted messaging services to provide encryption backdoors puts users at risk and erodes right to free (private) expression. Between this and MiCA, I might need to look into how I can continue to work the job I love while spending extended periods in the safe confines of the EU…
Top level trolling from whoever got a staffer for Elizabeth Warren to sign off on flying a flag over the capitol in honor of Satoshi Nakamoto.
MicroStrategy, a company which essentially solely exists to buy and hold Bitcoin (with some development services on the side), may enter the S&P 500 this year, with it currently valued at ~$12.4 billion.
It is crazy that Congress doesn’t see that the single easiest way to maintain dollar dominance as the world’ reserve currency is to legalize any stablecoin backed by U.S. treasuries.
I am very much looking forward to the end of the points and airdrop farming meta which is currently plaguing the ecosystem. Here’s a crazy idea: how about people just use the services they like and need rather than to gather points which have no known value and are gathered off-chain in a way which is the antithesis of open digital asset ecosystems?
Conclusion
If you have any questions or would like me to write about anything else, let me know on either of my Twitter (X?) 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 