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.
The SEC is apparently preparing to bring a lawsuit against the largest decentralized finance platform in the world, Uniswap. And it was a comparatively slow week in crypto law. That shows how crazy the past few months have been. But even in a slow week, there were updates in the Mango Markets criminal trial, the case against controversial figure Richard Heart is moving forward, and Coinbase is asking for an interlocutory appeal on the investment contract issue it lost on a few weeks ago.
Here’s everything that happened last week in Web3 law:
SEC Investigating Decentralized Finance Platform Uniswap
The SEC issued a Wells notice to the Uniswap Foundation, signaling the agency’s intent to bring a suit against the DeFi giant. While the contents of the notice have not been made public, Uniswap’s Founder and Chief Legal Officer both had strong words against the agency. Taking the dispute public before any charges have been filed has been criticized by some and applauded by others.
Tl;dr: When FTX/3AC/Terra/Celsius failed, platforms like Uniswap, Coinbase, Kraken, and others were designed and run well enough to honor billions in user withdrawals at a rate which would bankrupt any bank with fractional reserves. If anything, the ability of Uniswap in particular to handle such dramatic outflows showed the resiliency that DeFi is capable of. So is this really about investor protection, or something else? Also, interesting points from Gabe Shapiro and the Uniswap civil case on how the market maker smart contracts are not run by Uniswap. But since this is just a threat of lawsuit at this point, we will need to wait to see what the lawsuit itself looks like, and if it has anything to do with the recent fee switch proposal.
Richard Heart Moves to Dismiss SEC Lawsuit Related to HEX/PulseChain
Richard Heart has filed a Motion to Dismiss in the SEC’s case against him related to the $HEX cryptocurrency and PulseChain blockchain. Heart, the founder of PulseChain, is known for flashy displays of wealth which even industry participants have criticized. However, as Heart is a U.S. citizen who is a resident of Helsinki, Finland, the case raises novel issues as to the extraterritorial reach of the SEC in borderless digital asset cases.
Tl;dr– I find Richard as personally distasteful as the next person. The fact that he changed his social media picture from him in a gaudy outfit with hundreds of thousands in jewelry to an elementary school picture of himself after the SEC sued him is telling as to his manipulative persona (remind you of a certain FTX founder about to serve almost 25 years in jail?). But the SEC trying to use the fact that PulseX is a Uniswap fork (i.e., took the same Uniswap’s opensource code with slight changes) as an E.D.N.Y. forum hook has been widely criticized. That’s like saying the proper forum for any alleged improper code based on Linux is Helsinki. It just sucks the case law is largely being made selectively by the SEC against the least sympathetic defendants. It’s actually a blessing for the industry as a whole they also went agro and started going after the (comparatively) good actors like above (even if it sucks for those good actors).
Other Stories
Coinbase is seeking an interlocutory appeal of its Motion for Judgment loss regarding investment contract issues. Not surprising they are seeking this, but I do like the strategic move of not seeking review of the staking determination and limiting it to an issue which the SEC itself has stated is important enough for interlocutory appeal in its Ripple litigation. Generally these type of appeals are denied and saved until final judgment after a trial, but with a case of this importance it is possible that Judge Failla does want input from the Court of Appeals for these issues of law.
This is a pretty good op-ed to rebut the silly argument that ETH’s transition to the more energy and cost-efficient validation method of proof of stake does not convert what has been widely considered a commodity for years (similar to bitcoin) into a security.
The criminal trial against Avraham Eisenberg for what he called a “profitable trading strategy” in an exploit of Mango Markets has begun in New York. This case will determine important issues going forward on what level of human interaction is needed for “wire fraud” in a protocol exploit like this, where the main fraud is being perpetuated against an algorithm. Will he testify though? That’s the question.
Senator Warren has continued her personal vendetta against any and all digital assets, sending a letter filled with factual inaccuracies to House leaders regarding the currently pending stablecoin legislation. At least there is no remaining pretense that her issues are about consumer protection instead of just a personal disdain for the technology.
Treasury is asking for additional resources for cryptocurrency tracing, and Chainalysis has hired former IRS Criminal Investigations Chief Jim Lee. So now is a good time to go back and make sure your taxes are up to date.
Senate Republicans have released a counter to the Warren crypto-killing bill, which they titled the “Ensuring Necessary Financial Oversight and Reporting of Cryptocurrency Ecosystems Act” (“ENFORCE Act”). This has zero chance of going anywhere, but is instead a counter proposal to potentially make Senate Democrats back off the crazy overreach of their currently pending legislation.
BitBoy is an…unfortunate name for a gaming handheld. How does that make it through approvals with the well-known (and mostly despised) social media personality with the same name?
50/50 chance of the Ether spot ETF being approved next month? Not bad. It appears that Hong Kong is on the way for approving spot ETFs for both Bitcoin and Ether (which as of publication, were in fact approved and will be covered in next week’s legal breakdowns).
More people in GenZ own crypto than stocks. On one hand, the youth is the future. On the other hand, GenZ brought us TikTok influencers. So…
The first of the FTX snitches is due to be sentenced on May 28. I can’t imagine the Sunday Scaries on the weekend leading up to your prison sentence a little over a year removed from being one of the richest people on Earth.
Early Ethereum network legal advisor Steven Nerayoff has brought a lawsuit against the Department of Justice for defamation. He has also attacked many connected to Ethereum, so just not a happy guy generally.
Pac Finance upgraded its code without community knowledge or weigh-in, which resulted in $26 million in liquidations due to decreased collateral thresholds. Things like this, and protocols in name only which are actually controlled by a multi-sig with insiders having complete control, are the types of things the SEC should be looking into.
Conclusion
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Warpcast. 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 