Off the Blockchain+, December 23-30, 2024

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.

Hope everybody who celebrates had a happy holiday season with friends and loved ones! It was a predictably slow week in blockchain legal developments until the IRS decided to drop a bombshell of new crypto reporting rules which, if enforced, would make it nearly impossible to conduct decentralized finance activities in the United States without obtaining the social security number and other identifying details of every participant. Fun!

Here’s everything that happened last week in Web3 legal:

IRS Crypto Broker Rules Released

The Treasury Department has finalized rules requiring brokers who “facilitate” digital asset sales to collect KYC information from users and report those transactions to the IRS for tax compliance purposes. You can read a ChatGPT summary of the regulations here. It essentially makes all non-custodial wallet software providers (to the extent the software has swapping functionality), DeFi lending and exchange platforms, and any tool which enables digital asset transactions to be a “service effectuating transfers,” subjecting these participants to reporting requirements.

Tl;dr– This rule, as written, would seemingly apply to internet service providers and web browsers, and requires reporting of all digital asset transactions including stablecoins which will essentially never result in a gain or loss. It is almost certainly never going to go into effect (set for 2027 under the current language) and will be struck down either by the new administration, the courts, or Congress under the Congressional Review Act. But not until a bunch of money is spent on attorneys’ fees fighting it and game planning worst case scenario. There was already a lawsuit filed challenging the rule which was prepared for exactly this scenario. Releasing it on the Friday between Christmas and New Years is just the cherry on top of this administrative overreach.

Bipartisan New Frontiers in Technology (“NFT”) Act Introduced

Congressmen William Timmons (R–SC) and Ritchie Torres (D–NY) have introduced the first stand-alone bill designed to provide clarity as to the legal status of non-fungible tokens. The NFT Act is intended to define certain type of NFTs as non-securities under U.S. law and requires the Government Accountability Office to publish a study on NFTs and other digital assets examining their benefits across multiple sectors and use cases.

Tl;dr: This bill has the support of the Digital Chamber so it comes with fairly significant industry buy-in and assistance with drafting the language of the bill. The NFT Act has a zero percent chance of passing before the end of this congress, but is a great stage setter for the next congress to be passed quickly similar to the stablecoin bill while more comprehensive digital asset regulation is discussed and iterated on.

OTHER STORIES

Crypto Venture Poised for Breakout in 2025: PitchBook’s Robert Le is projecting that crypto venture could hit $18 billion in 2025, which would blow 2024’s roughly $11 billion out of the water. So that’s fun!

Toku/LiquiFi Lawsuit: Toku is suing LiquiFi and their head of legal (who was formerly head of legal for Toku) in Delaware state court for alleged trade secret misappropriation. Thanks to crypto twitter for bringing this to my attention because it isn’t being reported anywhere. Nothing like a trade secret lawsuit with TRO right before Christmas.  

Bo Hines to Lead Crypto Council: President-elect Donald Trump announced that Bo Hines, who lost in his House bid in 2022 to Wiley Nickel (D-NC; and a huge ally for blockchain companies in the House), is apparently going to head Trump’s “Crypto Council” as the Executive Director of the Presidential Council of Advisers for Digital Assets. I don’t know much about Mr. Hines, but he has his work cut out for him, so best of luck.

Richard Heart Wanted by Europol: Hex founder Richard Heart is wanted after a “Red Notice” was issued on behalf of Finland on charges of gross tax evasion and assault. Just because I think there are some questionable jurisdiction/venue issues with the SEC’s case against him, doesn’t mean I think he’s not a bad guy.

HyperLiquid Security Threat: It looks like there is evidence North Korean threat actors are probing HyperLiquid’s platform for vulnerabilities. Not a great time for anybody too underwater on their longs to cash out…

Terra/Luna Founder Extradited to U.S.: Terra co-founder Do Kwon’s extradition to the U.S. has been signed off on by Montenegro’s minister of justice overseeing the matter. Which is fitting on a week when other projects are seemingly cocky about being too good to need to take advised precautions.

Degens for Good: There were a few nice stories this holiday season, with a memecoin being used to raise millions of dollars for cancer research and Vitalik “adopting” the viral pigmy hippo Moo Deng.

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.