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.
This week is Consensus in Austin which I will be attending (hit me up if you are in town!), but last week was a crazy flurry of activity with the political tide dramatically shifting in crypto’s favor seemingly overnight. It started Monday with the bombshell dropping that the SEC had done an about-face and was poised to approve certain spot Ether ETF filings despite all evidence previously indicating a forthcoming rejection. Tuesday there was the Uniswap response to the SEC’s Wells notice. Wednesday the House passed comprehensive crypto regulation dubbed FIT 21. Thursday the spot Ether ETFs were largely approved, and the House passed a bill banning creation of CBDCs by the Federal Reserve. Luckily, Friday people took off from the whirlwind of activity to take advantage of the long Memorial Day weekend and give my update a break.
Here’s everything that happened last week in Web3 law:
House of Representatives Passes FIT 21 Comprehensive Crypto Law
The House of Representatives voted overwhelmingly in favor of passing the Financial Innovation and Technology for the 21st Century Act (“FIT 21”). The bill ended up passing 279-136, with 71 Democrats crossing party lines to vote in favor of this Republican sponsored bill. This included much of the leadership in the party, including House Minority Whip, Democratic Caucus Chair and Vice Chair, Campaign Committee Chair, and Speaker Emerita. FIT 21 proposes a complete market structure of digital asset regulations, with authority split between the SEC and CFTC, something the SEC Commissioner Gary Gensler came out in opposition of prior to the vote. While the bill has changed since we first wrote about it, the general structure has remained. While the President opposed the bill, he didn’t threaten a veto unlike the House vote in overturning SAB 121. Additionally, multiple members of the Democratic party such as Yadira Caravei (Co.) and Josh Gottheimer (N.J.) not only voted for FIT 21, but also stood to argue in favor of it.
Tl;dr: I previously wrote that this had zero chance of passing in the Senate, and still think that it is exceedingly unlikely to pass the Senate in an election year. But the sheer number of bi-partisan votes and arguments in favor makes me improve my projection from “zero” to “slight.” Prior to the vote, House Democratic leaders said that they would not whip against the bill after dozens of Democrats voted for a different crypto measure, leaving Representative Waters and her allies to rally opposition on their own. This update is actually a great resource to learn about the bill, including its strengths and weaknesses. Also, this flow chart is phenomenal work which shows how tokens progress through the legislation as written.
SEC Approves Ether Spot ETF 19b-4 Rule Change Proposals; Implicitly Acknowledging Ether is Not a Security
The SEC has approved various applications for rule changes which would allow exchanges to list spot Ether ETFs. While the S-1 applications of the issuing entities have not yet been made effective, by approving the requested rule change the SEC has necessarily made the determination that spot Ether ETFs can obtained through an S-1 form. Funds whose assets are 40% or more securities may not register through an S-1; rather, they are considered investment companies and must register on Form N-1A or N-2. Prior to last week’s SAB 121 vote, very few people expected these applications to be approved. It appeared that something changed internally at the agency, which led to a flurry of activity this week prior to the approvals discussed above.
Tl;dr– While not confirmed, due to the approval being through delegated authority and without a full vote of the SEC Commissioners, it appears that Commissioner Jaime Lizárraga may have made it clear fairly recently that he would not vote to reject the pending Ether Spot ETF 19b-4 applications, leading to a flurry of activity to provide official approvals without just letting the applications be automatically approved by rule due to not being rejected in the required time period. It is worth noting that Commissioner Lizárraga was the top adviser to Congresswoman Nancy Pelosi, who also voted in favor of FIT 21. This combined with a bipartisan push from members of Congress may have been what turned a likely rejection into an approval instead. It is also worth noting that, should any of the S-1’s be approved, none will include Ether staking, meaning the blockchain fees required for trading of spot Ether will be purely deflationary, without any offsetting staking rewards.
Uniswap Responds to SEC Wells Notice
Uniswap has published its response to the SEC’s Wells notice informing the DeFi developers of the agency staff’s intended recommendation to bring formal security charges against the entity. You can read Uniswap blog post announcing the decision to publish here. Uniswap advocates that “The Commission should not take on these significant litigation risks. Bringing this case would encourage Americans to use harder-to-regulate foreign interfaces and trading protocols, while also discouraging future innovators from attempting to foster new ideas that bring much needed competition and innovation to financial and commercial markets. Although there are legitimate questions about how best to protect customers and market integrity when traders transact on a peer-to-peer basis without an intermediary, those are policy questions that are primarily for Congress—and are part of ongoing policy discussions that Labs has helped lead.”
Tl;dr: While I have yet to see the Wells notice itself, and some information may have been transmitted to Uniswap in meetings or teleconferences with the agency, the blog post claims “The SEC asserts that the Uniswap Protocol is an unregistered securities exchange controlled by Uniswap Labs, that the Uniswap interface is an unregistered securities broker-dealer, and that the UNI token is an investment contract.” The response comes out swinging, but it seems unlikely to dissuade the agency from bringing an action. Similar to others, this response seems more for people outside the agency to sway hearts and minds rather than the agency officials it is addressed to.
Other Stories
The New York Attorney General settled with bankrupt entity Genesis for $2 billion according to recent filings. Considering Genesis doesn’t have enough money to pay off creditors as is, the settlement might as well be for 1 gazillion dollars because the State of New York won’t ever see a dollar of it.
Prometheum has soft-launched Ether custody services treating Ether as a security. I will be interested to see who Prometheum is going to point to as the reporting entity for Ether as required for securities and how this does not conflict with the spot Ether ETF issues addressed above.
As a Farcaster user (follow me here) I love to see $150 million more being pumped into creating decentralized social media. Power to the people.
Coinbase lost at the Supreme Court in a 9-0 decision which held that courts, not arbitrators, are the correct body to determine whether contracts between businesses and consumers have silently superseded earlier agreements to resolve disputes through arbitration rather than litigation. The only crypto specific aspect of the case was that this was a lawsuit over a Dogecoin sweepstakes.
The House also passed the CBDC Anti-Surveillance State Act, but this time by a narrow margin on partisan lines. The bill, if passed into law, would prohibit the Federal Reserve from issuing a Central Bank Digital Currency. Considering the Fed would likely need Congressional authorization to issue any such instrument, this is a largely ceremonial bill that will never be put into law.
I really want to dig into the functionalities of this Ether.fi crypto card which is apparently allowing people to spend and repay using automated DeFi lending? Typically, credit cards aren’t permitted to exceed certain fees due to state/federal laws and companies have been hit with massive fines for foot faults like when yearly fees or other amounts when combined with interest fees cause it to exceed those rates. I need to look into how Ether.fi is dealing with that considering fluctuating DeFi lending rates.
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 