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.
After a slow week in major developments last week, things picked up again with major arguments being briefed in litigation against Consensys and Lido and the court issuing its anticipated decision in Kraken. There were also developments in various political campaigns and federal agencies while Congress is on break that will have implications for years to come.
Here’s everything that happened last week in Web3 legal:
Kraken Loses Attempt at Early Dismissal of SEC Lawsuit
During oral arguments in the SEC v. Payward, Inc. et al. (“Kraken”) case’s hearing on Kraken’s Motion to Dismiss, the Court forecasted its intent to deny Kraken’s motion. So it comes as no surprise that the written Order released on August 23rd did exactly that, allowing the SEC’s lawsuit against the digital asset exchange to move forward into further litigation. The Court rejected the SEC’s “misstatements” about the tokens at issue themselves being securities, stating “[t]o the extent it tries to argue that the individual tokens that form the basis of transactions on Kraken are investment contracts, or are themselves securities, its argument cannot proceed.” However, the Court distinguished the reasoning for dismissal of certain secondary sales in Binance, and also refused to apply the major questions doctrine to the SEC’s actions.
Tl;dr: This brings the win rate for the “Investment Contract Require Contracts” argument to exactly zero after that argument was rejected in Ripple, Binance, Coinbase, and now Kraken. I am still a believer, since it makes sense as a limiting factor (is it reasonable to expect efforts of others based on your payment if there is no agreement or promise for those efforts?). I think the article from Edward Lee on The Original Public Meaning of Investment Contract also supports the view that the argument has legal merit. But eventually, if the losses keep stacking up, it will be hard for attorneys to keep advancing that argument. I do respect the hell out of this spin zone from Kraken’s head of legal on how this undeniable loss was actually a win, though.
Consensys Continues Fight with SEC Over Venue for Securities Law Battle
Back in April, Consensys Software Inc. (developer and provider of leading self-custody digital wallet MetaMask) sued the SEC for declaratory and injunctive relief in the Northern District of Texas. Complaint available here. The SEC, in part, mooted that lawsuit through a letter stating the staff was not recommending charges be brought related to the company’s role in “Ethereum 2.0” (i.e., the protocol switch from proof of work to proof of stake). The SEC also brought a separate lawsuit against Consensys in the Eastern District of New York alleging the digital wallet’s staking and swapping functionalities violate federal securities laws. The SEC moved to dismiss the Texas action, and Consensys responded in opposition.
Tl;dr: Consensys argues that under applicable Fifth Circuit precedent, the district court that first receives the lawsuit over the controversy at issue should retain jurisdiction (i.e., the “first to file” rule). If this was anywhere but Texas, I would give the nod to the SEC on strength of argument because most federal courts look for any valid excuse to punt on adjudicating matters when there is another court that can do the work for them. But this is the same district the just struck down the Federal Trade Commission’s noncompete ban and gave nationwide application to the ruling, so it is possible due to the expedited briefing schedule in place that this Texas federal court will want to retain jurisdiction if it feels like the SEC is trying to run from the court’s authority.
Motion To Dismiss Fully Briefed in Private Class Action Against Lido DAO
Back in December, a putative class action was filed against Lido DAO, amongst others, regarding the sale of LDO tokens and alleging such sales were unregistered securities transactions. In response, Lido DAO’s token holders voted to create a legal entity “Dolphin CL, LLC” for the purpose of hiring counsel and representing Lido DAO’s interests in the litigation. That entity filed a Motion to Dismiss, which was opposed by Plaintiffs, and has been fully briefed now with the latest Reply in Support.
Tl;dr: The arguments raised by Dolphin’s Motion to Dismiss are sound, in that Plaintiffs allege the DAO is a partnership with joint/several liability for members without meeting certain required elements (namely, the alleged partners having the ability to approve or disapprove additional parties from joining the partnership). However, the interesting part of this case is not the partnership law arguments, but rather how Lido DAO went about forming their defense. Creating a legal entity for purpose of defense rather than trying to wrap a DAO beforehand is a seemingly solid strategy in avoiding what the Dolphin motion refers to as a “Hobson’s choice” of having a default judgment levied against them or supporting the claim that the software at issue is, in fact, a legal entity capable of being sued. Certainly a case worth following.
Other Stories
This Mango Markets DAO vote on settlement with the SEC is fascinating. Have no idea what it will mean for the token going forward, but watching this all play out in real time has been interesting, to say the least.
According to a senior policy advisor on the Harris campaign team, Vice President Harris is looking to create a policy agenda which supports growth of the industry in the U.S. and departs from her predecessor’s policies which many view as less-than-supportive. Which is great news. Nobody in crypto wants crypto policy to be a partisan issue. Both sides should be focused on how we can protect consumers while supporting growth. Very positive development.
Ding dong, the witch is dead! The 2020 FinCEN unhosted wallet proposal (issued under President Trump) which would require having KYC information for the owner of every unhosted wallets individuals interact with has been formally repealed. It was mostly dead before this, but the official withdrawal is still good news.
It looks like the SEC has rejected Cboe’s SOL ETF applications for now. Not surprising considering the SEC considers SOL to be a security according to its lawsuits against various exchanges, so nothing really changes on that front. I think everybody expects this, and the applications for SOL ETFs are more about having a head start if there is a chance in SEC staff/policy following the elections rather than expecting the current SEC to allow such products to be formed and traded.
The Digital Chamber filed an amicus brief in the SCOTUS case regarding a derivative action against NVIDIA for failing to disclose in SEC filings the chip maker’s dependence on cryptocurrency mining to drive ongoing sales. Good on them, fighting back against this type of 20/20 hindsight claim disguised as a securities fraud case.
Speaking of amicus, the Blockchain Association and DeFi Education Fund has joined the amicus in a case challenging the SEC’s consolidated audit trail (“CAT”) database. Suspicionless seizures and broad government surveillance needs to be opposed on all fronts.
Really enjoyed this article about the implications of DeFi protocols like Uniswap and Aave moving away from opensource and towards more restrictive licensing like Business Source License (“BSL”). “Many DeFi projects that implement BSL are themselves built on resources provided by the open-source community in the first place. Abandoning this is seen by some as an attack on the underpinning values of DeFi.”
PIP Labs, the developer of Story Protocol, just got an $80 million cash injection in a Series B raise to develop a blockchain designed to tokenize and track IP in an AI world. Blockchain tech and its ability to create digital scarcity in an AI world of digital abundance just goes together like peas and carrots.
I think I missed the SEC guidance that Prometheum’s SPDB license gives them the ability to declare what digital assets are and are not “crypto securities” which they can custody under that license? I very much cannot wait to watch this company crash and burn, after a “soft launch” which hasn’t produced any reported revenue to-date.
Do we need more ETH Layer-2’s? Probably not; but if anybody it going to do it, I think I am OK with Japanese tech giant Sony Group doing it.
I am just learning about Project (Operation?) Shamrock, an effort led by California prosecutor Erin West to provide resources to victims of pig butchering schemes, but it is something I am glad I know about now for when those issues inevitably arise in the future.
The SEC pushed back against Richard Heart’s jurisdictional defenses, claiming his in-person podcast appearance in Miami and virtual appearances in the United States subject him to United States securities laws and gives the Court jurisdiction over him in those disputes. Not sure how a Miami podcast appearance supports New York venue arguments?
It looks like Magic Eden has spun off an entity which will be deploying a utility token to be used on Magic Eden and potentially other protocols? If Diamonds are used to determine air drop distributions I am going to have egg on my face after insisting an entity like ME wouldn’t be taking on that sort of risk under the current regulatory environment.
More of TradFi are dipping their toes into tokenized RWA, this time with Franklin Templeton tokenizing its money market fund on Avalanche. The future is here.
It looks like if Republicans win the Senate (decent chance based on the current projections) the likely Senate Banking Committee Chair Tim Scott will establish a subcommittee focused on the digital asset industry led by Senator Lummis. Would be great to see both the House and Senate with subcommittees on digital asset industry issues.
Wyoming is trying to be to crypto what Delaware is to corporations in the U.S., and I wish them the best. I think they could use some more weigh in from policy folks who understand the space, though, as their efforts thus far with the DAO LLC have been well-intentioned failures, imo. Here, for example, I’m not sure state sponsored stablecoins (CBDCs?) are what people are looking for.
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 