After a few quiet weeks, we are back in the swing of things with the Department of Justice reassessing their entire digital asset prosecution strategy, the SEC working to register certain industry participants, and omnibus digital asset legislation next up for Congress. It was also a busy week in crypto M&A as digital asset companies acquire traditional finance companies in preparation for future integrations between crypto and TradFi.
Here’s everything that happened last week in Web3 legal:
DOJ Releases Memo “Ending Regulation by Prosecution”
Deputy Attorney General Todd Blanche has issued a memorandum to Department of Justice employees with the subject reading “Ending Regulation by Prosecution” where he states “consistent with President Trump’s directives and the Justice Department’s priorities, the Department’s investigations and prosecutions involving digital assets shall focus on prosecuting individuals who victimize digital asset investors or those who use digital assets in furtherance of criminal offenses…” The memo clarifies that the DOJ is not going to focus efforts on exchanges or wallets for the actions of third-parties, and is not the regulator of alleged unregistered money transmission laws. It also disbands the National Cryptocurrency Enforcement Team which was responsible for most current investigations and prosecutions in the space over the last few years.
Tl;dr– Note that this memorandum does not pause prosecutions of alleged violations of 18 U.S.C. 1960(b)(1)(C) which involves allegations of transmitting funds that are “knowingly” the product of criminal offenses, which is the heart of the Roman Storm and Samuri Wallet developer cases. Interestingly, the memo calls out the issue of how digital asset losses are calculated when trying to compensate victims (not-so-subtle reference to FTX depositors getting ~$20,000 per Bitcoin lost when Bitcoin was worth 4X that by the time repayments happened). Not sure if there is a solution to this other than making people choose early in the process if they want in-kind or value of asset at time of theft. Unfortunately for Do Kwon, even with this DOJ pivot he’s still probably headed to jail forever.
SEC Issues Guidance on How to Register Securities Which Do Involve Crypto
Much of the focus at the SEC post-Gensler has been on releasing guidance on what crypto offerings are not securities (memecoins, stablecoins, etc.). The SEC Division of Corporation Finance has now put out guidance for issuers whose securities involve crypto assets on how federal securities law disclosure requirements apply. It recognizes that issuers may offer equity or debt securities as part of operations related to networks, applications, and crypto assets, and highlights the need for tailored, clear, and consistent disclosure aligned with existing rules (e.g., Regulation S-K, Forms S-1, 10, 20-F, and 1-A). Key disclosure elements include a focused description of the issuer’s business and developmental milestones, potential risks (such as technological, regulatory, and liquidity risks), a complete description of the securities (including any unique features and technical specs), and information on directors, executive officers, and significant employees (or third parties) performing policy-making functions.
Tl;dr– Tokenized securities are coming. Blackrock knows it, Franklin Templeton knows it, everybody knows it. Most digital assets are not securities, but many securities could be better handled through addendum only ledger technology rather than an endless number of middlemen all getting their cut to make sure none of the other middlemen are cheating the consumer. Blockchain tech fixes this. So, while the SEC and Congress work through determining which digital assets are securities and which are something else, this is a good step to allow innovative companies to start registering tokenized products.
Market Structure Hearings Held in House of Representatives
The House Financial Services Committee’s (which oversees the SEC) Digital Asset Subcommittee and the House Agriculture Committee’s (which oversees the CFTC) Digital Asset Subcommittee both held hearings on how to approach an overarching market structure for digital assets now that stablecoins seem to be on the fast track to regulatory standards. There is broad consensus that digital assets that are securities need to be provided a way to register with the SEC and abide by SEC rules that aren’t so onerous that the registration process kills any value of the product.
Tl;dr– You can probably read the statements from witnesses like Bill Hughes, Chris Brummer, and Rodrigo Seira to get the gist of where focus should be for digital asset regulation. Both hearings had a noticeable focus on use cases for digital assets (shoutout Polygon for last year putting together this database of real world use cases for digital asset technology) . We are still waiting for what the market structure bill will look like. It will be close to FIT21 previously passed through the House Financial Services committee, but we don’t know how close it will be yet as there were noticeable weaknesses in the bill. I expect we will see draft language soon, though.
OTHER STORIES
CZ Advising Nation-States on Crypto: It looks like the founder and former CEO of Binance is going to be advising Pakistan and Kyrgyzstan on crypto policy? Would love to be a fly on the wall when he explains “safu” to foreign dignitaries.
$1.2 Billion M&A Deal: Ripple is reportedly acquiring global credit network Hidden Road for $1.25 billion. This is apparently an effort to give functionality to Ripple’s stablecoin, RLUSD, in traditional finance for cross border settlements? Good for both parties, I guess. Magic Eden also acquired Slingshot Finance to start offering exchanges services in-house, so big week in M&A.
Lawsuit Over Identity of Satoshi: It’s crypto, so there are a lot of dumb lawsuits, but this one may take the cake as the dumbest. Another case of a crypto-twitter lawyer getting out over his skis. Hate to see it.
DeFi Lending Liquidations: One of the problems with being a bag holder of programable money is when the program liquidates other people’s loans with programable money backing. Knew I should have just put my money under a mattress.
Shaq Settles NFT Suit: Looks like Shaq has agreed to settle the lawsuit brought against him regarding his Astrals NFT project from early 2022. Never forget how the 7-footer managed to avoid service in the FTX lawsuit for so impressively long.
Illinois Looking to Pass BitLicense 2.0: An Illinois bill is gaining traction and expected to pass which would enact similar onerous reporting and registration requirements as the New York BitLicense. Need federal preemption ASAP.
OpenSea Open Letter: OpenSea has submitted a public letter to the SEC advocating for NFT marketplaces to be carved out of broker/dealer registration requirements with the SEC. There should be Section 230 type of exemption where if a centralized marketplace removes items accused of being securities from their listings, they are immune from prosecution.
Sus Dollars Lose Peg: I only know about Synthetix’s synthetic stablecoin “sUSD” because of the news of it massively losing its peg in recent market volatility, but also, whoever decided to name this “Sus Dollar” needs a lesson in product marketing. That’s why I only put my money in crypto with strong technical fundamentals like Fartcoin.
PowerPoint Presenter Freed from Jail: Ethereum developer Virgil Griffith has been in jail the past 5 years for the crime of… giving a lecture titled “Blockchains for Peace” in North Korea? But last week he was finally released!
SEC Round Table: The SEC hosted a roundtable titled Are We Between a Block and a Hard Place? Love the public access to these conversations, but feel like the more effective use of time is reading through the submissions the SEC has been publishing.
Hinman Cleared by Office of Inspector General: I apparently missed this, but former Corporation Finance Director Bill Hinman has been cleared of allegations that his infamous speech was the result of insider dealings. The ETH vs. XRP war was always dumb to me, so this is one of those things that should be left in the past.
Nova Labs Lawsuit Dismissed: Nova Labs (developer behind Helium Network) was sued in the last days before Gensler resigned, and that lawsuit has now been dismissed with prejudice. So actually, ended up good for them since the lawsuit being brought then dismissed in this way prevents any future lawsuit over the same allegations from the agency.
Pay Your Taxes: While I think the John Doe summons against exchanges should be unconstitutional, you still need to not lie on your taxes. Nobody’s opsec is as good as they think and the IRS will find you if you owe them money.
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.
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