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 tl;dr overviews and insights into the biggest stories from the past two weeks. I post the weekly updates on my personal blog every Tuesday, where I also provide links to more obscure legal developments and otherwise discuss industry trends and stories. 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.
It was an extremely busy week in crypto legal developments last week. The first Congressional hearing on decentralized finance (DeFi) occurred, and there was a major decision regarding the CFTC’s regulation of prediction markets which could have massive implications on the agency’s regulatory authority over such markets. Additionally, the SEC settled with eToro in what is the first of likely many either settlements or lawsuits in September as the agency wraps up its financial year and sets its budget for next year.
Here’s everything that happened last week in Web3 legal:
Kalshi Predictive Markets Wins Lawsuit on Summary Judgment Against the CFTC
Kalshi predictive markets won its lawsuit against the CFTC after the agency sought to block the company from offering prediction markets on U.S. election outcomes. Due to the ruling’s proximity to the upcoming election, the CFTC has filed an emergency motion to stay the ruling pending an expedited appeal which was granted. Kalshi first brought this lawsuit in November of 2023, after the CFTC issued a final order, prohibiting Kalshi from offering prediction markets on certain federal elections due to Kalshi’s status as a federally regulated exchange.
Tl;dr: This was included in “Other Stories” last week because the full written Order wasn’t out yet. Now that is it, it is worth a bigger break down since the decision seemingly turned on the post-Chevron world order we are living in specifically citing to Loper Bright and holding “[t]his case is not about whether the Court likes Kalshi’s product or thinks trading it is a good idea. The Court’s only task is to determine what Congress did, not what it could do or should do. And Congress did not authorize the CFTC to conduct the public interest review it conducted here.” The decision flies in the face of current understandings of CFTC jurisdiction, which previously treated virtually any yes/no bets as binary options that are subject to CFTC jurisdiction. The Order also had a fun little part about federal elections not being “games” (philosophically deep). With polymarket at nearly $1 billion in presidential prediction markets, this could have massive implications.
Congress Holds Hearing on DeFi
The House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing entitled Decoding DeFi: Breaking Down the Future of Decentralized Finance. It featured testimony from Rebecca Rettig (Chief Legal and Policy Officer at Polygon Labs), Peter Van Valkenburgh (Coin Center’s Director of Research), and others. The Committee Memorandum is available here. The Digital Chamber provided a nice summary of the hearing, available here.
Tl;dr: Representative Sherman and others used to opportunity to make unsubstantiated claims that DeFi’s primary use is tax evasion which Van Valkenburgh countered stating “Tax evasion is a crime. It should be aggressively policed…I do not, however, think that tax evasion and its existence warrants a 100% surveilled and controlled financial system.” The fact there is still seemingly a partisan divide on the issue is disappointing, but not entirely unexpected. While there almost certainly won’t be crypto legislation passed this year, the fact that DeFi has even reached the level of importance to warrant a Congressional hearing is pretty cool.
eToro Settles with SEC and Delists Virtually All Crypto Assets
eToro USA LLC has agreed to pay $1.5 million to settle charges that it operated an unregistered broker and unregistered clearing agency in connection with its trading platform that facilitated buying and selling certain crypto assets as “securities.” While the platform will continue to permit trading of BTC, ETH, and BCH, all other digital assets such as LTC, DOGE, and others will be removed. Somehow, the Order requires eToro to immediately cease selling those assets but also is required to sell those assets/refund customers within 180 days.
Tl;dr: There is absolutely zero academic honesty in allowing BCH to continue trading but blocking the trading of LTC, DOGE, or certain other assets except maybe the fact that BCH has “Bitcoin” it its name and the SEC is really that dense. The $1.5 million fine is nothing for an entity like eToro and is probably why the exchange just settled rather than fighting this. The worst part is that eToro actually seemingly tried to follow SEC guidance, de-listed assets the SEC named in other lawsuits as securities, etc. But that apparently was not enough to spare it from the agency’s wrath. Also seemingly the only way for eToro to comply with forced sell aspect of Order will be to sell overseas (likely at deep discounts) so customers are double punished. You can expect more of these settlements/actions to flow in leading up to SEC’s EOY on September 30th.
Other Stories
The SEC mistakenly uploaded a speech from Chair Gensler which still had internal staff comments. But yeah, this agency that also had its Twitter (X) account hacked should be the ones regulating data security issues…Especially with this study which tracks SEC-associated devices and reveals troubling “chilling effect on insider behavior around these SEC interactions…”
Bancor was able to dismiss a putative class action brought against it related to removal of certain stop-loss functionalities on its digital asset exchange. The dismissal was based on jurisdictional and forum issues, with the recommendation (adopted by the Court) providing: “If American investors want the certain protections of the United States’ laws and courts, they should limit their investments to those that are clearly within the scope of those laws…”
The SEC v. Binance Amended Complaint dropped and looking at the redline it looks like the SEC decided to go full “we are going to allege so many facts this will never be an issue of purely law” mode. Bold strategy; let’s see if it works out. Also, a funny footnote about how the SEC didn’t mean “crypto asset security” when they said, “crypto asset security.”
The Kraken Answer in SEC v. Kraken also dropped, which is a whatever (denies everything, like most answers do) but the affirmative defenses are worth reading. Especially the free speech affirmative defense claiming this is the SEC retaliating against Kraken for being critical of the SEC in certain Congressional testimony.
While the SEC is making up new rules and standards on the fly as it suits them, the UK is considering a law defining crypto as an entirely novel form of property. USA! USA!
Pitchbook is seeing “signs of recovery” in crypto-industry fundraising efforts. Which is great to see as many builders are working on some awesome tech that would be a shame to lose due to market conditions rather than lack of fit.
FTX second-in-command and head of Alameda Research, Caroline Ellison, is asking for leniency and no jail time for her participation which led to the collapse of both entities and billions in investor funds being lost. This is the same person who apparently didn’t believe in stop-losses. So it’s possible she wasn’t evil; just wildly incompetent. And that has to count for something.
tZERO was approved to custody digital asset securities. Again, not sure how this is possible for digital assets of note that do not have a reporting entity, but at least tZERO has been around the block in the crypto world and isn’t a LARP like Prometheum with no business or plan.
You can now send ETH using ENS domains on PayPal and Venmo. Want to test it out? Send a few bucks to Birdnals.eth. It will be a fun experiment for everybody involved. The more you send, the more fun it will be!
Also, in FinTech news, Robinhood appears to be reaping dividends from their (relatively) early crypto exchange options. Love to see it.
This ape punk “heist” (purchased through dormant smart contract functionality for ~$23,000 when last similar NFT sold for ~1.5 million) is fascinating. Especially the last minute (failed) attempt to prevent it. I wish I had the skill or time to be a crypto-treasure hunter looking for long forgotten relics like this. Alas, I was cursed to be a mere practitioner of laws.
TRON, Tether, and TRM Labs are creating a public/private partnership to assist law enforcement in combatting use of USDT on TRON blockchain in crime? Idk, seems like more of a marketing stunt than anything.
I need to read this ZKsync governance system set up due to the attorneys involved advising them on it. Mostly to steal all the ideas and call them my own. You know; lawyering.
Vitalik is putting his foot down on L2’s pretending to be decentralized and I am all for it. Become ungovernable at the protocol level.
Circle is moving from Ireland to New York City as a part of its IPO plans. Pretty basic move, tbh. Should have chosen a city like, idk, St. Louis.
House Financial Services Committee Member introduced a new bill called the “BRIDGE Digital Assets Act” which would create a Joint Advisory Committee on Digital Assets consisting of private sector representative advising the SEC and CFTC on digital asset regulations? Idk, seems like a nothing burger that won’t go anywhere but any pro-crypto legislation is good.
The House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion is staying busy after the DeFi hearing, next holding a hearing scheduled for September 18th entitled Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.
Conclusion
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The NFTtorney 