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.
Last week was another busy week in crypto legal developments as I expect the upcoming week to be as well. Administrative agencies like the SEC and CFTC are looking to close out their budgets and have their upcoming budgets set, which means lots of consent judgments and enforcement actions. Meanwhile, Congress is back in session where stages are being set on what will happen after the November election in both the lame duck session and the following year.
Here’s everything that happened last week in Web3 legal:
Flyfish Club Settles with SEC over NFT Restaurant Membership Sales
The SEC issued an Order against Flyfish Club, the creators of restaurant club passes in the form of NFTs. As a part of the agreement, Flyfish Club agreed (in part) to destroy (?) all NFTs in the company’s possession, not take royalties on any ongoing secondary sales, and pay a $750,000 fine. Flyfish Club NFTs represented membership in the private dining club, for which holders of the NFT could digitally verify such membership and make reservations at the restaurant. Unlike more traditional restaurant clubs, Flyfish Club members could sell those memberships if they no longer wished to go to the restaurant.
Tl;dr: This happened a few days before opening, so that’s fun for holders. As usual, Commissioners Peirce and Uyeda are the voices of reason in their dissent. It makes zero sense that FanClub Memberships are not securities but simply tokenizing essentially the same memberships for a restaurant are. It rings of when Representative Torres (D-NY) asked Chair Gensler if Pokémon card sales were securities transactions (which Gensler of course answered in the negative) but could not say the exact same card, if tokenized and purchased on an NFT marketplace, was not a securities transaction. I understand the arguments for many digital assets (I disagree with them, but I understand them) but cases like these show the agency primarily pushing those arguments is simply not acting in good faith.
House Financial Services Committee Holds Hearing on SEC Approach to Digital Assets
Following up on the Decentralized Finance (DeFi) hearing the week before, the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing entitled Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets. It featured testimony from Dan Gallagher (former SEC Commissioner), Michael Liftik (former Deputy Chief of Staff to SEC Chair White), and others. The Committee Memorandum started with the following Introduction: “The Securities and Exchange Commission (SEC) has long struggled with the application of the United States’ securities laws to the digital asset ecosystem. Under Chair Gensler, the SEC has prioritized and pursued an enforcement and regulatory agenda to the detriment of the digital asset ecosystem.”
Tl;dr: The battle lines of crypto supporters (led by Ritchie Torres (D-NY) and French Hill (R-AR)) vs. detractors (Stephen Lynch (D-MA) and Brad Sherman (D-CA)) stayed consistent in this hearing. As an aside, what exactly does Lee Reiners do? He got dumped from his Duke Law teaching job, and now teaches a class or two a semester in the business school? Combined with the actor from the O.C., and the crypto-skeptics are really scraping the bottom of the barrel to get people to testify to support their skepticism.
SEC Charges Decentralized Finance (“DeFi”) Platform With Securities Violations
The SEC has charged the creators of the Rari DeFi platform with acting as unregistered brokers. MATIC, LINK, FTM, UST, and RGT were listed as “crypto assets offered and sold as securities” in the Complaint. The Complaint and Order are vague as to whether the agency is alleging only the Rari operated liquidity pools (which the Rari team would algorithmically rebalance) are what is at issue, or if any pool (including user created pools which Rari had no contact with other than providing a front end to access those pools) are at issue.
Tl;dr: Rari was literally created by high schoolers. So it wasn’t shocking when it suffered a protocol hack and lost $80 million a few years ago. Which also very likely led to upset individuals reporting them to the SEC/started the investigation which led to these charges. The hack revealed that that protocol was DeFi in name only, with highly centralized control above just the interface level with DAO votes being ignored or delayed and other related shenanigans. That said, this isn’t great precedent, with the looming Uniswap Wells notice still outstanding. It appears that that SEC is being intentionally vague as to the pools at issue precisely for that reason, which is just another example of this supposed “notice-based regulator” using strategic lack of notice to increase regulatory power.
Other Stories
I got and printed an early copy of this Web3 Desk Reference (hashtag blessed/insider) but now that it is public, I encourage anybody else who practices in the space to do that same. It was written and reviewed by some of the top legal minds in the space, so hugely beneficial resource.
I almost didn’t cover this copy-cat private securities class action brought against Opensea following the SEC’s Wells notice issued against the NFT marketplace, but the allegations are too hilarious not to. Including a “maybe it’s about the friends we made along the way” joke post from the CEO and the straight up garbage purchased by one of the Plaintiffs in paragraph 122 is chef’s kiss great.
Representatives Emmer and McHenry have sent a letter to SEC Chair Gensler regarding the agency’s official stance on airdropped tokens. The letter stated “the ethos of crypto and blockchain technology is premised on decentralization. The, the SEC’s regulatory approach seems to make the goal of decentralization impossible to obtain.” GOOD POINT!
An individual was sentenced to 47 years in prison for a series of “wrench attacks” robbing individuals known to have cryptocurrency at gunpoint. Again, financial privacy is not just a right, it’s a necessary protection for individuals.
The Georgetown University Financial Markets Quality Conference occurred last week, and highlights included Representative McHenry discussing the future of Fit 21 (he thinks it can be passed with spending bill, but that’s wishful thinking), and CFTC Chair Behnam reiterating his intent to push through election prediction market oversight (including appeal of Kalshi Order) and stating that Litecoin is a commodity (somebody tell the SEC/eToro that having “Bitcoin” in the name doesn’t make Bitcoin Cash meaningfully different from Litecoin).
In light of the Flyfish settlement, the Digital Chamber backed NFT bill becomes a lot more important. I know nothing gets done this year (I don’t care what House Republicans are selling with their hopium) but it’s an important issue. If Pokémon cards or season tickets or a billion other things are not securities, putting their equivalent on the blockchain shouldn’t be either.
This would usually be in the major stories, but in the current political environment I am providing the update on the Trump backed DeFi project here instead. Looks like there will be a Reg D/S token sale, with locked tokens and no venture or presale allotment, so as fair as a token launch can be. It seemingly just provides a nice interface over existing technology backend and provides easy access to DeFi, which is great. I just wish this wasn’t political. If Trump sold steaks again, that doesn’t make cow meat a Republican issue. Make Crypto Bi-Partisan Again.
Remember last week when the SEC said in a legal filing in Binance (fn. 6) that it doesn’t use the term “crypto asset securities” to refer to the digital assets themselves as securities? Remember? Apparently, the SEC doesn’t.
In fairness to the SEC, as long as you are Blackrock or Bank of New York Mellon the SEC will work with you. V neutral regulation. Nothing to see here.
Lol at Magic Eden not receiving a Wells Notice while OpenSea did. This is not saying Magic Eden should have received one (any SEC attorneys that read this blog- cease and desist. Or at least just be cool about it and don’t use it to fish for your next target. Like. Come on. Trust tree). But Magic Eden dominates in terms of market share. Kind of like allowing eToro to continue trading Bitcoin Cash but not virtually identical Litecoin, the SEC just doesn’t understand anything about digital assets but wants to be the industry’s primary regulator.
Using the Samourai Wallet developer’s “bug out plan” as a reason to deny bail seems like a low move. Oh, the guy who designed privacy preserving technology was also a paranoid over planner? Shocking!
MicroStrategy can’t stop/won’t stop, acquiring another half billion in Bitcoin taking total holdings to 252,220 BTC (worth around $15.7 billion USD, writing today). With a total cost of $9.45 billion USD, that’s a pretty solid ROI since the Bitcoin giant first started purchasing with size around August, 2020.
These ZachXBT investigations always blow my mind. Shows how easy tracking funds is when they are transferred on a public blockchain. The only criminals who still use crypto are (1) idiots; or (2) people like North Koreans/Russians who don’t care if the funds are traced back to them due to nation-state level protections.
In “that’s actually probably right” news from the SEC, auditor Prager Metis settled charges related to their actions in “auditing” FTX. That said, what are the “certain restrictions on accepting new audit clients” portion of the order? What clients can’t they audit, Gary?
There was also a Congressional hearing on Pig Butchering, which is certainly serious and often involves crypto. But this is just the current Nigerian Prince scam and is less about crypto and is more about the need to educate individuals about risk of sending any form of money to strangers online for promises of riches or romance.
Nic Carter’s grudge and time are a blessing on the industry. His thread breaking down the recently filed Declaration of then Chief Administrative Officer of Silvergate Bank (Elaine Hetric) is worth a read.
I very much look forward to the documentary chronicling Vitalik Buterin’s life and involvement with building Ethereum. There is a valid case to be made that there is an unreasonable hero worship of the guy, but from all accounts seems like a legitimately brilliant and good-natured person who has maintained those characteristics despite his massive rise in culture/power.
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 