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.
Bitcoin keeps hitting all-time highs (or it did when I was writing this last weekend), the SEC lost on a major Broker Rule case, SEC Chair Gensler announced his resignation, the CFPB backed off its proposed digital wallet rules as to crypto, and even ETH pumped a little bit. So yeah, it was a great week. But it wasn’t all sunshine and rainbows, as there was a DAO ruling which left many debating whether DAOs are capable of existing without having untold liability for members, and Kraken’s early appeal attempt was smacked down.
Here’s everything that happened last week in Web3 legal:
Court Strikes Down SEC Dealer Rules
A Northern District of Texas Court has ruled in favor of the Blockchain Association’s challenge to the SEC’s promulgated the “Dealer Rule” which expanded the definition of “Dealer” under the SEC’s interpretation of the Securities Exchange Act. The Court’s ruling states “the SEC exceeded its statutory authority by enacting such a broad definition of dealer untethered from the text, history, and structure of the Exchange Act.” It also incorporated by reference its analysis in the related case, Nat’l Ass’n of Priv. Fund Managers v. SEC, No. 4:24-cv-00250 (N.D. Tex), where the Court noted “[under the Dealer Rule], many of the world’s largest, most prominent market participants, including the Federal Reserve, may have been operating unlawfully as unregistered securities ‘dealers’ for 90 years without anyone—including the Commission—having previously noticed.”
Tl;dr: The Court didn’t even have to reach the arguments regarding whether the rule was arbitrary and capricious or exceeded the SEC’s authority under Loper Bright to smack down the Dealer Rule. This means that SEC rules enacted under Gensler and challenged in court are now 1/5 in surviving those challenges. That is more rules overturned by courts than the previous 3 SEC Chairs combined. Chair Gensler has decided to stay on as Chair until January 20th, indicating he believes there are additional matters he wants to finalize that he fears would not be done without him there to break a 2-2 tie, so still more to come. But he will leave behind a lasting legacy; just not the legacy many would want.
Consumer Financial Protection Bureau Issues Digital Wallet Rule
The Consumer Financial Protection Bureau (“CFPB”) finalized its rules to supervise digital funds transfer and payment wallet apps. In announcing the final rule, the CFPB stated it “made several significant changes from its initial proposal. The transaction threshold determining which companies require supervision is now substantially higher, at 50 million annual transactions. Given the evolving market for digital currencies, the CFPB also limited the rule’s scope to count only transactions conducted in U.S. dollars.”
Tl;dr: While Coinbase, the DeFi Education Fund, the Blockchain Association, and others all sent staunch opposition to the proposed rule encompassing self-custody digital asset wallest, most expected the agency formed by Elizabeth Warren would still go through with the rules as written. So the CFPB expressly limiting the rule to wallets for U.S. dollars was a pleasant surprise. I don’t necessarily disagree that digital wallet service providers should be free of any regulation, but that regulation should be the same as any other software providers regarding consumer protections and notices. Either way, this saves a ton of industry time and effort in not having to file lawsuits to challenge the rule if it has been enacted as previously written.
Judge Rules Lido DAO *Might* Be a General Partnership
The Court in Samuels v. Lido DAO has rejected motions to dismiss filed by various investors, holding that Lido DAO is adequately alleged to be a general partnership under California law, and that the investors are adequately alleged as general partners which would make them jointly and severally liable for the actions of the DAO. This means the named parties will need to defend themselves in Court or risk being held jointly/severable liable if the challenged DAO actions are deemed illegal.
Tl;dr: The reason for arguments for either corporate wrappers or BORGs is to avoid situations like this where participation in a DAO makes an individual or entity on the hook for everything it does. It seems like judges are easily convinced that the reason for DAOs is avoiding liability as opposed to mitigating other risks such as opaque governance and centralized risks. As it stands it seems like DAOs will need to avoid the U.S. entirely or implement corporate wrappers of some kind to have a target for courts to point a finger to in lawsuits.
Other Stories
SEC Chair Gensler Announces Planned Resignation: This was likely going to happen regardless of who won the Presidential election, but Gary Gensler announced he will resign from the SEC effective on inauguration day. Staying in his position until the last possible moment before being forced out is typical Gensler, but either way he gone. With Commissioner Lizárraga also announcing his resignation, that will leave only Commissioners Peirce (pro-crypto), Uyeda (pro-crypto), and Crenshaw (anti-crypto, but on an expired term) left until new Commissioners are appointed by the President and approved by Congress.
Coinbase Veteran Launches Online Bank: It looks like the former CEO of Coinbase Custody, Ryan Bozarth, is launching a bank aimed at serving crypto startups and foundations. I don’t know if I will ever go truly bankless because I value convenience. But having a set-up where I only use a traditional bank for ATMs and some auto payments is certainly in my near future.
Kraken Request for Early Appeal Denied: The judge in SEC v. Payward Ventures (aka, Kraken) has denied the exchange’s request for interlocutory appeal of the dismissal denial ruling. So the case marches on.
Bitfinex Couple Sentenced: TheIlya “Dutch” Lichtenstein and Heather “Razzlekahn” Morgan were sentenced to five years and eighteen months, respectively, for their role in the Bitfinex hack and subsequent money laundering of proceeds. Her days of being a crypto baron are over, but her rap career has never been higher. Meanwhile, FTX’s Gary Wang got off with just time served (which is fair, it seemed like he was just an engineer programming what he was told to and didn’t have active involvement in the fraud).
Lawmakers Upset Software Continues to be Software After Arresting Developers: Apparently the staunchest opponents of digital assets in the House are figuring out that software continues to be software and operate even if you arrest the people who wrote the software’s code. They even emphasis that Tornado cash was pitched as “ensuring complete privacy” as a bad thing? Which earns a golf clap from people who read Orwell and thought the protagonists had it coming.Also, please watch the Roman Storm interview on Bankless and consider donating to his defense fund.
Frozen Staking Rewards Still Income: This was released the first week of November but that was a busy week in crypto legal updates so I neglected to include this letter memo where the IRS clarified that their position is staking rewards are taxable the year earned, even if inaccessible due to being frozen on a platform or otherwise locked in a protocol. While doing catch-up, here is the Consensys Answer in their case against the SEC (also filed that week).
DeFi Education Fund BSA Deep Dive: LOVED this deep dive into the history of the Bank Secrecy Act and how it is neither fit nor constitutional when applied to digital asset transactions. Make the Fourth Amendment great again!
Oral Arguments on Tornado Cash Sanctions Occur: The 11th Circuit heard Coin Center’s challenge to the Tornado Cash sanctions last week. Oral arguments here. The arguments tended to focus on whether the Tornado Cash protocol services are “property” that a foreign person has an interest in, or the sanctioned immutable addresses are property, or some combination of the two.
Shaq Settles NFT Lawsuit: Shaq has agreed to pay $11 million in connection with the Astrals NFT project he promoted. His shenanigans in avoiding service of the lawsuit will remain legendary, though.
Coinbase to Delist WBTC: Coinbase is going to delist wBTC allegedly due to increasing influence of Justin Sun over the wrapped asset used in DeFi. Is it a little convenient this comes after Coinbase launches its competing product (cbBTC)? Sure.
Crypto Administrative Agencies Candidates Emerge: Everybody is trying to be the first to report on who Trump will choose to lead the SEC, with names like Teresa Goody Guillén (which may be more wishful thinking from the industry than reality), Paul Atkins, and Robert Stebbins all having their names thrown into the hat apparently. Meanwhile, Senator Bill Hagerty appears to be the industry’s preferred Treasury Secretary, and former CFTC Chair Chris Giancarlo is being considered for non-admin Whitehouse position.
“Chill Guy” Artist Threatens Legal Action: The creator of the cartoon which became a “Chill Guy” meme and then associated memecoin is threatening to sue for unauthorized use of the work stating “I don’t endorse or consent to my art being used to any crypto-related things.” Not chill.
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 