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.
After a quiet few weeks, there were a ton of legal developments in the final week before the general election (finally, an end to election szn). There was another SEC Wells notice announced against a U.S. company in the digital asset space, while at the same time there were motions filed in matters against the agency regarding the application of securities laws to digital art and airdropped tokens. There were also documents made public through a FOIA action which lends credence to the Operation Chokepoint 2.0 theory, and a squirrel got got (RIP). Plus some other developments I discussed below.
Here’s everything that happened last week in Web3 legal:
Blockchain Gaming Developer Receives SEC Wells Notice
Blockchain-based gaming infrastructure developer Immutable has reportedly received a Wells notice from the SEC informing the company of anticipated agency action related to certain sales of IMX tokens in 2021. According to the SEC Enforcement Manual, a Wells notice is generally only be issued after SEC staff have completed their investigation but before making a formal recommendation to the Commission. Here, Immutable claims the Wells notice was issued mere hours after first being contacted by the SEC informing the company of the investigation.
Tl;dr: The IMX token is listed on Binance, Kraken, and Coinbase, so it is surprising the SEC is targeting Immutable instead of the plethora of token issuers of the tokens named in the SEC’s lawsuits against those exchanges. It is possible the SEC is seeking to have active litigation against a wide range of actors (such as the recent market maker targeted actions) from exchanges, to issuers, to developers—so this is the “gaming” developer the agency has its eyes set on.
FOIA Requests Reveal Banks Blocked from Accepting Digital Asset Customers
Coinbase has revealed that it has unearthed at least 20 documents in its FOIA requests to the FDIC where the agency tells banks to “pause” or “refrain from providing” or “not proceed” with offering crypto-banking services. This is an ongoing request and Coinbase recently served additional requests on the FDIC so more documents can be expected. The Coinbase head of legal stated: “we’ll keep pushing to get clarity from our regulators through FOIA requests and any other means necessary.”
Tl;dr: The “shadow cap” of not allowing banks to have more than a certain percent of their customer deposits be from digital asset companies is something which was suspected to be a part of Chokepoint 2.0, and which a Silvergate executive Declaration seemed to support. The fact that banks can reject any individual or business for any reason is just further support on why individuals should be given self-custody and self-banking options even in an increasingly digital world. People who want to forgo the banking system completely and transact in stablecoins should be given the option to do so.
SEC Seeks to Dismiss Declaratory Judgment Action by NFT Creators
The SEC has filed a Motion to Dismiss in a declaratory judgment brought by various NFT creators seeking clarity that the digital artworks they sold were not unregistered securities transactions under federal securities laws. Similar to what is discussed below, the SEC’s motion relies on Fed. R. Civ. P. 12(b)(1), claiming the agency has sovereign immunity from having its enforcement discretion questioned, and that the claims are not ripe because the SEC has not brought charges against these particular Plaintiffs yet.
Tl;dr: As stated by one Plaintiff: “Respectfully, I’m asking the SEC to explain why I can’t do exactly what Stoner Cats did” referring to the action by the agency against the creators of an online comic series Stoner Cats which was fined $1 million by the SEC and ordered to destroy all remaining digital art in the creator’s possession. I look forward to the reply pointing out the SEC’s inconsistency as to the proper route to compliance (if not through the courts), when the agency refuses to respond to no-action letter requests or issue any guidance outside of what can be divined by the agency’s enforcement actions (in courts). Seems like a “court guidance for me, but not for thee” situation.
Amicus Support Action for Token Airdrop Clarity
Coinbase, a16z/Paradigm, and Coin Center have filed amicus briefs in support of an action brought by a Texas apparel company seeking a declaratory judgment that its potential token airdrop to purchasers does not violate federal securities laws. The SEC had previously moved to dismiss on procedural grounds, stating that the SEC is immune from being required to answer the action and that the action’s claims under the Administrative Procedure Act are not ripe.
Tl;dr: The a16z/Paradigm brief says it well at pg. 16, stating “Given the similarity between the allegations against Sun and other companies and the facts presented by Beba, it is unsurprising that the SEC has offered no explanation why the threat of enforcement is not credible.” In reality, the only thing preventing the SEC from bringing lawsuits against virtually all digital asset participants is seemingly a lack of resources. The amicus all strike a similar tone, which is after years of attempting to get guidance from the SEC and Congress on how to operate a legally compliant digital asset company, the only recourse left is either the courts or fleeing the U.S. entirely.
Other Stories
Regulation by Enforcement Tracker Launched: The Blockchain Association has put out a great website showing data behind the SEC’s “regulation by enforcement” approach against America’s leading crypto companies. Resources like this and the awesome effort spearheaded by Polygon labs to start preparing a list of real world positive use cases are great resources when trying to explain how blockchain tech can be a boom for America if the companies building it wouldn’t be hamstrung by needless costs from regulators.
Hong Kong Moving Forward in Crypto: The Hong Kong Stock Exchange is introducing bitcoin and ether index prices in November, and looking into tax issues and trading platform licensing.
I Continue to Pump Crypto Gaming: I have essentially abandoned a gaming mainstay of mine, Call of Duty, for a new game Off the Grid which is going to have its own token and which mints all of its rewards as NFTs for users to buy and sell. So I enjoyed this write up from Blockworks on the state of crypto gaming. Assuming Gensler doesn’t try to kill it on his way out the door.
Stablecoin Issuers Prop Up Treasury Bonds: While the Treasury Department is quietly trying to put into place KYC rules which would be impossible to comply with in crypto, it also issued a report that $120 billion of stablecoin collateral has been invested in Treasuries. Which is more than all but 17 nation-states.
Privacy is a Human Right: I didn’t see a whole lot come from the DC Privacy Summit (this Peter Van Valkenburgh speech there was great), but I know that privacy in crypto was a hot topic. I do hope we can find a way back to the middle away from the surveillance state it seems like many are increasingly complacent to, back to a place where privacy matters and is protected.
Laura Shin Release Op-Ed on Kamala’s Need to Embrace Crypto: I have made a conscious effort to limit my presidential election crypto updates to avoid potentially upsetting people who support either candidate (I just want my privacy, jpgs, and magic internet money, man. I don’t particularly care the political affiliation of whatever politicians work to protect and grow those things in the U.S.). But I greatly respect Laura Shin as a journalist so her piece on the issue I think is worth reading. “The way that there’s the internet and then China’s own censored version, now the world has a burgeoning crypto economy, while the U.S. has a censored crypto landscape.” I can’t wait for this election szn to be over.
Verge Article on Gensler: Pretty great article about why SEC Chair Gensler is such a hot button issue. “Before I say more, let’s go over that again: one of the biggest crypto exchanges asked for more regulation, and then the regulatory agency in question — run by a man who says crypto is full of scams and frauds — said no.”
Crypto Elections to Focus On: @CapHillCrypto as always providing valuable insights on various Congressional races which have fairly significant digital asset implications depending on who wins those races.
Tampa Jury Convicts SOL NFT Developers of Money Laundering: This wouldn’t have been a story, except the DOJ’s apparent case which alleged “Using decentralized cryptocurrency tumbler Tornado Cash, Nowlin moved the fraud proceeds from the Solana blockchain to the Ethereum blockchain, also known as ‘chain-hopping.’” Which seems to either be a mistaken or deliberate misstatement as I do not believe Tornado has a bridging functionality, and while bridging to throw off chain analytics software is certainly a thing, the chains things are moved between are almost exclusively minor blockchains and not SOL and ETH.
RIP Peanut The Squirrel: A TikTok squirrel was seized by certain New York state officials and euthanized resulting in a memecoin in its name reaching a market cap that exceeded $60 million. Combined with the fridge that launched a coin and an AI twitter account being a millionaire influencer, I don’t know if this is the worst or best timeline.
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 