Off the Blockchain+, April 22-29, 2024

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.

Big news as another industry giant goes on offense against the SEC, and multiple developments regarding the legality (or lack thereof) of developing privacy protocols which can be used by criminals and non-criminals alike. We have yet to find a judicial or legislative middle ground between the consumer desire for ease of transactions without requiring intermediary approval, and the government’s desire to prevent illicit transactions which have traditionally relied on intermediaries. We are seeing that play out in the courts now, but the answer really needs to come from Congress to give any form of certainty for industry participants.

Here’s everything that happened last week in Web3 law:

MetaMask Wallet Developer Sues SEC

Consensys, developer and provider of leading self-custody digital wallet MetaMask, has sued the SEC for declaratory and injunctive relief in the Northern District of Texas. Complaint available here. The suit alleges that the SEC issued a Wells notice which warns of a very likely lawsuit again Consensys. The Consensys lawsuit seeks a declaration that (1) the purchase and sale of Ether are not securities transactions subject to the SEC’s jurisdiction; (2) the MetaMask wallet’s swapping functionalities are not subject to the agency’s broker dealer registration requirements; and (3) the MetaMask wallet’s staking functionalities are not securities transactions.

Tl;dr: Consensys pulled out the Uno reverse card on the SEC, suing the SEC in a favorable 5th Circuit instead of allowing the SEC to bring a lawsuit first. Similar to the Coinbase lawsuit, this lawsuit has William Savitt from Wachtell as lead counsel, and appears to be part of a larger play to create a potential circuit split if the rulings differ from the Coinbase case in S.D.N.Y. (2nd Cir.), Binance case in D.D.C. (Fed. Cir.), or Kraken case in N.D.Cal. (9th Cir.). I will very likely do a full blog breaking down the lawsuit later this week, but for now this is a big move. It is unclear where the SEC feels it will have the resources in the crypto enforcement unit to litigate lawsuits against the above entities plus Uniswap plus the other outstanding litigation they have going on simultaneously.

Other Stories

The DOJ is asking for taksies backsies on its plea deal with Binance founder Changpeng Zhao (“CZ”) after previously agreeing to a conviction on charges with 18 month sentencing guidelines  and now the DOJ is asking CZ serve three years in prison. The old “lure a person from non-extradition country to trap him and then go back on word” trick. Classic.

Lawrence is one of the smarted minds in crypto, so despite this being analyzed under English law (gross), his recent dissertation on traditional agency law under Ethereum smart-contract arrangements is something worth reading. 

The Blockchain Association and Crypto Freedom Alliance of Texas filed a lawsuit against the SEC challenging the new dealer rule which would have a huge impact on DeFi. It looks like the crypto bar has chosen Texas as their fighting ground for challenges to administrative overreach. 

Hong Kong regulators officially approved Bitcoin and Ether spot ETFs to start trading on April 30th. With the SEC on the clock for approving or denying the various U.S. Ether ETF applications, it is nice to see other jurisdictions moving forward.

Ripple and the SEC continue to fight over proper damages to finalize their case for the SEC’s inevitable appeal. The agency seeking $2 billion in damages after losing the most important aspects of that case and dismissing the rest is…not unaggressive. But the agency is seeking $5.3 billion from bankrupt Terraform Labs, so maybe $2 billion is reasonable in their minds?

Interesting article on when development of opensource code, including smart-contract development, can give rise to criminal or civil liability.

Samourai Wallet and associated Bitcoin mixing protocols developers were arrested and charged with conspiracy to commit money laundering and conspiracy to operate an unlicensed money transmitting business. I would love to have a strong take on this like I have on Tornado.cash sanctions, but I don’t know enough about how the various technologies operate (and the indictment is sparse on technical functionalities) to have a take one way or the other.

Relatedly, after those charges were filed the FBI issued a warning that “Using a service that does not comply with its legal obligations may put you at risk of losing access to funds after law enforcement operations target those businesses.” As Representative Davidson put it “several federal agencies and some colleagues have attempted to ban your ownership of your own stuff. They want to keep everything account-based with entities they can monitor and control – 3rd party doctrine…”

Also related, the DOJ has responded to the Roman Storm motion to dismiss regarding his involvement with Tornado Cash. The most frustrating part of this response is the government (potentially intentionally) linking together the actions of disparate actors (developers, validators, relayers, and TORN token holders) into a single acting entity. Also crazy that the lack of control over the funds at issue (couldn’t redirect, couldn’t change amounts, etc.) is apparently irrelevant to the DOJ regarding the “accepting value that substitutes for currency” aspect of the rules and regulations. Make the Fourth Amendment Great Again.

All of the above will very likely lead to U.S. citizens having less privacy tools available, putting their safety and funds at risk. Yay consumer protection!

I don’t even want to cover the latest blatant lie from Senator Warren, but my integrity to the updates makes me since this was something which made news. I guess just ignore case like United States v. Gratkowski, 964 F.3d 307 (5th Cir. 2020) which demonstrate why using easily and publicly traceable crypto transactions is a bad way to commit crime.

Stripe is back in crypto! After previously trying (and failing) to permit transactions in Bitcoin (largely because tax reporting on fluctuating assets like that are a giant pain), it now supports USDC!  Gotta imagine the demonstration on USDC on Solana network was pre-recorded because the transaction went through without issue…(I’m kidding!) (kind of).

I loved this writeup about an enterprising man in Kenya who is having people send him crypto to buy goats in exchange from him naming the goats whatever the sender wants (usually crypto themed names). More stories about this, less about the hacks and crime which plague every industry.

Custodia has appealed the decision to uphold the Federal Reserve Banks’ denial of access to a Master Account. Whenever I talk Custodia, I need to talk how backwards it is that “we will just hold your money for a fee instead of lending it out and holding fractions of your money” is the unacceptably risky outlier in banking.

For the EU folks, Paradigm submitted a comment letter on where the line should be drawn between whether a crypto-asset falls under the EU’s new crypto framework (MiCA) or under the EU’s regulatory framework for tradfi (MiFID II). I only have so much attention and have resigned myself to only the most basic understanding of MiCA, but if anything is worth reading it is a breakdown from Paradigm.

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.