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.
Another big week for Chair Gensler’s agency, as another digital asset exchange sued the SEC in Texas and the agency brought charges against multiple digital asset market makers, which included one lawsuit which is a part of a wild FBI sting and involves creation of fake securities? There was also a stablecoin bill proposed in the Senate to match the bill that made it out of committee in the House, and a DAO did a last-minute switcheroo in its vote over a proposed SEC settlement.
Here’s everything that happened last week in Web3 legal:
Crypto.com Sues SEC in Texas
Foris DAX Inc. (“Crypto.com”) has gone the route of Consensys and sued the SEC for declaratory judgment after receiving a Wells notice from the agency. According to the company’s press release, “our lawsuit contends that the SEC has unilaterally expanded its jurisdiction beyond statutory limits and separately that the SEC has established an unlawful rule that trades in nearly all crypto assets are securities transactions no matter how they are sold, whereas identical transactions in bitcoin (BTC) and ether (ETH) are somehow not.” The company also took the rarely used option of filing a petition for joint rulemaking by the CFTC/SEC under the Dodd-Frank Act to determine whether certain (undisclosed) digital asset products are “swaps”, “security-based swaps” or “mixed swaps” which is a creative way of starting the clock and forcing the agencies to put out some rationales on what digital assets are commodities vs. securities.
Tl;dr: We have seen how this played out for the Metamask developer, when Consensys took a similar strategy and lost with the judge punting on the Texas action in light of the later case brought by the SEC pending in New York which would reach a decision on similar issues. This case takes a different route, framing the SEC’s actions of treating everything except BTC/ETH as a security as a “Rule” without following APA comment and rulemaking procedure and stating the Agency’s king making of two digital assets vs. substantially similar assets without explanation is arbitrary and capricious. Commissioner Uyeda, while not commenting directly on the case, criticized the Agency’s enforcement without rulemaking for the digital asset space. “Our agenda is directed by the Chairman, Gary Gensler, and so the staff all follows his lead.”
SOJ and SEC Bring Charges Against Digital Asset Market Makers
The DOJ and SEC have brought separate actions against individuals and entities which the agencies accuse of market manipulation of a digital asset created at the direction of the FBI in a sting effort against “wash trading” of certain digital assets to inflate transaction volume and encourage parties to buy. The FBI created their own coin called “The NexFundAI Token” (aka, “NFA”, a common term in crypto-circles for “Not Financial Advice”) which the government claims is a security.
Tl;dr: The background on the DOJ’s case on the seedy underbelly of market makers is crazy. Apparently, the government directed these coins to be sold on publicly available markets (like Uniswap) so members of the public at large bought tokens which were created at the direction/assistance of the FBI and which the DOJ and SEC claim to be securities. Does that mean the government performed unregistered securities transactions with the public at large? Is there a honey pot exemption to securities laws?? Hilariously, an NFT was airdropped in the wallets of all token holders after the trading function was disabled on the tokens.
Other Stories
SEC Charges Cumberland DRW– New (financial) year, new lawsuits by the SEC, including a new suit brought against Cumberland DRW LLC for “operating as an unregistered dealer in more than $2 billion of crypto assets offered and sold as securities.” Cumberland issued a staunch open-letter response, which takes a nice shot at the time DRW beat Gary Gensler (when he was at the CFTC) in an earlier lawsuit brought against it.
Senate Stablecoin Bill Introduced– Senator Hagerty (TN-R) has introduced a stablecoin bill in the Senate which mirrors the House bill, and raises the chances of stablecoin regulations getting passed this year from zero to maybe 3-5%. Stablecoin regulation is so easy (make things that say they are backed by a dollar actually be backed by a dollar) that it is slightly crazy it has taken this long to get to this point with mirror bills in the House and Senate.
Mango DAO SEC Settlement Gets Spicy– Apparently, the Mango DAO vote to approve the SEC settlement failed to meet quorum requirements after votes were withdrawn 5 hours before the proposal was due to finalize. Meaning the tokens to pay the SEC fine remain locked. Does the SEC sue the DAO, or settle for win against corporate settling parties?
Chokepoint 2.0 Update– It appears there is more support after the Silvergate executive Declaration that there is a shadow cap on amount of blockchain industry clients banks can accept. More evidence for why an alternative to traditional banking is needed, tbh.
Tornado Criminal Case Analysis– I really enjoyed this analysis of the oral dismissal ruling in the Tornado.cash developer criminal case. I do think reasonable minds can differ on this, but seeing well thought out and sourced points (one way or the other) I always appreciate. Especially when we have rampant money laundering at a less transparent level in banking.
SEC Partially Wins 2017-Era ICO Case– I missed this when it came out a few weeks ago, but the SEC won its Section 5 violation claims on summary judgment regarding ICO sales of OPP tokens in a case filed in 2020 regarding sales from 2017.
FTX Executive Asks for Delayed Sentence- Ryan Salame, the former CEO of FTX Digital Markets, is asking for a delayed prison sentence citing medical treatment for a dog attack. That’s right; he is giving the “my dog ate my homework” excuse to prison. It failed, though, as he began his prison stint this week.
Crypto-Gaming Goes Mainstream– Off The Grid, a Battle Royale Shooter on Avalanche with some of the biggest streamers playing on their streams. Could not be more pumped to actually own (i.e., ability to sell and trade and exchange) the assets I earn/buy in games. Need to download and play myself.
Debate Over Doxxing Influencer Wallets– Lots of debate this week over revealing memecoin influencer wallets. If a social media account is going to pump a token knowing a lot of people will buy and thus increase its value, it seems fair people have knowledge of when that same person sold or is selling while still pumping to unsuspecting followers. If they aren’t private with buys, being private with sells doesn’t seem fair.
Stripe Reinstates Crypto Payments– Stripe has integrated crypto payments into its platform again, after a brief trial of bitcoin support back in ~2018.
Staking Rewards Lawsuit Filed– A new lawsuit was filed by an individual (with the backing of Coin Center) regarding the tax treatment of staking rewards.
Bitnomial Sues SEC Over XRP– Another firm has gone on the offensive against the SEC, suing the agency in an attempt to front-run XRP ETF blocking efforts of the agency which is appealing the Ripple decision.
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 