With March Madness in full swing, the Southeastern Conference wasn’t the only SEC making noise last week, with the federal agency version of the SEC seemingly dropping its appeal in Ripple and releasing staff guidance on proof of work mining. On the legislative front, stablecoin bills are moving full speed ahead, and M&A activity continues to stay hot with digital asset exchanges looking to acquire regulated futures platforms. Also, if you are in D.C. this week for the D.C. Blockchain Summit hit me up! Would love to see as many of you as possible at the conference.
Here’s everything that happened last week in Web3 legal:
SEC Announces Most Proof of Work Mining Participation Do Not Involve Offer or Sales of Securities
The SEC’s Division of Corporation Finance has released a statement clarifying its views that most proof-of-work (“PoW”) mining activities do not qualify as securities transactions under federal securities laws. The statement applies specifically to “Protocol Mining” activities involving “Covered Crypto Assets” which are defined as crypto assets tied to the functioning of a public, permissionless PoW network. The release states that whether through self-mining or pooled mining, miners are still contributing the essential “work” themselves and therefore the mining rewards issued do not represent proceeds from the “entrepreneurial or managerial efforts of others,” thus failing to meet the “investment contract” prong of the Howey test.
Tl;dr– It’s important to note that releases like these do not create binding law and each set of facts can differ and may yield different legal results which may make certain PoW mining fall outside of this safe harbor-like release. Still, the statement signals that, under typical PoW mining arrangements, participants who merely contribute computational power to validate transactions and receive rewards likely do not cross into securities territory. This may allow more risk-adverse entities to contribute compute to mining, which only serves to strengthen network resilience and efficiency which is a win for everybody.
SEC Drops Appeal Against Ripple
The SEC will drop its appeal of the ruling in Ripple, and settle outstanding dispute. This will bring an end to the case originally brought in 2020 during President Trumps’ first term in office. This will still need to be approved at the next meeting of the Commissioners, and it is unclear what this dismissal will entail, as Ripple has its own cross appeal which it hasn’t publicly said it will abandon as a part of this deal. Still, there wouldn’t be an announcement like this if a deal was not in place, so now it is just a waiting game to see the details which should be available in the next few weeks.
Tl;dr– Ripple was one of the few digital asset issuers from the ICO boom that had the resources to fully litigate against the SEC, and it has been doing so for half a decade. And litigate they did, with over 25 filings related to the Hinman speech documents alone. Combined with the dismissal of the Coinbase matter and its pending appeal, and there is still no binding precedent on the applicability of investment contract law to digital assets. If market structure goes through as expected, this shouldn’t matter. But if not, the industry will be left in limbo still not knowing how 1940’s securities law are properly applied to magic internet money.
OTHER STORIES
SEC Hosts First Crypto Roundtable: The SEC’s first crypto round table is available to view. Not many major takeaways but good to see these conversations occurring in public forums. This is ahead of expected SEC Chair Atkins’ hearing before the Senate next week. Also worth reading the a16z response to the SEC’s crypto questions.
Liquid Staking Token Securities Analysis: Jito Foundation put out its 19 page legal analysis on why its liquid staking token is not a “security” under applicable U.S. laws, which seems bold to risk attorney/client privilege waiver like that, but I appreciate the open discussion and look forward to reading.
Crypto Pirate Proposal: Not going to lie, I love this crypto privateers proposal which would authorize private individuals to hack North Korean scammers. Fight fire with fire. Gotta imagine we have better hackers than North Korea.
New Head of Digital Chamber: Congrats to Cody Carbone on his recent promotion to CEO of the Digital Chamber. Fun fact: Polsinelli got invited to join the Digital Chamber after Cody was a frequent reader of my legal updates on blockchain topics. The Digital Chamber is in great hands under his leadership.
Unburnt Tokens: Cronos had a governance proposal approved, where it will reissue 70 billion CRO tokens, previously burned in 2021? What is dead can never die, I guess.
Prediction Markets Going Mainstream: It looks like Robinhood is teaming up with Kalshi to offer prediction markets to the masses. I don’t know if we ever go back to a world where election prediction markets are not widely available. Not sure if this will help or hurt election predictions.
Stablecoin Legislation Update: Ro Khanna (D-CA) said he believes stablecoin and market structure legislation gets done this year at the Digital Assets Summit on March 18, stating there are 70 to 80 Democrats in the House which view this as an important issue to maintain American dollar dominance and influence. Bo Hines also stated stablecoin legislation gets done in the next few months.
Dueling Advertisements: We saw examples of how to advertise and not advertise in the space, with SOL’s now deleted cringe ad, juxtaposed with a16z’s phenomenal ad which included the iconic Kevin James Indy 500 starting call. Speaking of, congrats to crypto advocate Miles Jennings for his promotion to head of policy. Also, I thought this was a fun thread of crypto commercials.
OCC Drops Reputational Risk Investigations: The Office of the Comptroller of Currency has announced it will cease investigating banks for suspicion of “reputational risk” which is how politically disfavored industries were debanks in Operation Chokepoint and Operation Chokepoint 2.0. Love to see it.
OFAC Removes Tornado Cash Designations: In another “ding dong the witch is dead” scenario, OFAC has finally removed protocol addresses from its sanctions list, which is a huge win for software developers and privacy advocates everywhere. If criminals use hammers, the result shouldn’t be banning hammers, it should be focusing on getting rid of criminals.
Kraken to Acquire Futures Platform: It looks like Kraken is set to retail futures platform NinjaTrader for $1.5 billion, while Coinbase is in advanced talks to acquire options platform Deribit. And M&A stays hot as we predicted at the beginning of the year.
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.
Outro/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.
The NFTtorney 