It was a relatively quiet week until Thursday, when the SEC decided to drop its case against Binance and release proof of stake guidance on the same day the new market structure bill (now named the “CLARITY Act”) dropped. Would have been nice if one of these major developments had come the week before or at least on a different day of last week to spread things out, but good things come in 3’s I guess? There was also a lot of news worth noting coming out of the biggest Bitcoin conference of the year last week in Vegas.
Here’s everything that happened last week in Web3 legal:
Bipartisan Market Structure (“CLARITY Act”) Bill Text Dropped
After releasing draft language of an untitled bill a few weeks ago, it looks like the revised and newly named digital asset market structure legislation, the CLARITY Act, dropped last week. It was introduced by House Financial Services Committee Chair French Hill and has five Republican and 3 Democrat co-sponsors, all members of the House Financial Services or Agriculture committees. It is expected to be fast tracked for markup in the Financial Services committee, maybe as early as June 10th, so this could move quick through committees with an unclear timeline in the full House as Congress is focused on a million other things other than digital asset regulations.
Tl;dr– It appears the sponsors of this bill seriously listened to industry input and many of the areas which were flagged as potentially problematic language based on the functionalities of the technology were fixed. For example, many pointed to the definition of “Decentralized Finance Trading Protocol” as an issue, which was fixed from the prior version of the bill and seemingly now covers the protocols the way the drafters likely intended. There is a hearing this upcoming week in the House Financial Services Committee which the bill is certainly going to be a centerpiece of, so I will be doing a full write up on the BitBlog once there is more time to digest the full implications of the revised language.
SEC Releases Guidance That Certain Proof of Stake Staking Activities Do Not Implicate Securities Laws
The SEC Division of Corporate Finance put out a “Statement on Certain Protocol Staking Activities” which clarifies its view that certain proof-of-stake blockchain protocol “staking” activities are not securities transactions within the scope of the federal securities laws. This follows related guidance on Proof-of-Work mining which was put out in March. “Accordingly, it is the Division’s view that participants in Protocol Staking Activities do not need to register with the Commission transactions under the Securities Act, or fall within one of the Securities Act’s exemptions from registration in connection with these Protocol Staking Activities.”
Tl;dr– This likely clears the way for staking in ETH ETFs or other ETFs linked to proof of stake blockchain assets which are expected to be approved in the near future (although I am told there are tax and investment company issues which would make this complicated). It is unclear how this effects the prior Kraken consent order, as much of the staking services which Kraken got hit with an SEC judgment over would now be seemingly deemed “Ancillary Services” under this guidance. It is great to see all this guidance coming out, but until the guidance is formalized into rulemaking or until there is action from Congress in this area, then the industry is largely left to trust the whims of the administration currently in control with no assurances those viewpoints will continue under different leadership.
SEC Moves to Dismiss Binance Case with Prejudice
The SEC has asked the Court to dismiss the agency’s case against the various Binance entities and its founder, Changpeng Zhao (“CZ”) with prejudice, which would bring an end to all the cases brought by the prior administration against major digital asset exchanges. This follows the SEC previously dismissing cases against Coinbase and Kraken and closing investigations into OpenSea, Circle, and others shortly after the change in administration and resignation of prior SEC Chair, Gary Gensler.
Tl;dr– As we explained in our 2024 year-end digital asset rundown, the cases against various exchanges were bet the company litigation for all the exchanges sued. If it was ruled that sales on the platforms of exceedingly common tokens like SOL were securities transactions, that would have made it difficult for individuals with less crypto experience interacting with decentralized finance and bridging tokens across networks to purchase digital assets in the United States. With these lawsuits behind the exchanges, all eyes turn to formal guidance and rulemaking from the SEC/CFTC, and whether there will be comprehensive digital asset legislation out of Congress which is currently being considered by both chambers.
OTHER STORIES
Bitcoin Strategic Reserve Advances: Bitcoin Vegas was this week, and Whitehouse Crypto Czar David Sacks was there where he talked about how the announced Bitcoin strategic reserve is progressing. I don’t personally care if the government buys my bags (including the potential New York Bitcoin Bond) and seems like more of a distraction from real policy if anything, but it is newsworthy.
Circle Still Going Public: After some rumors last week that Circle may pivot to a private sale to Coinbase or Ripple, it looks like the IPO is back on track. Interestingly, the filings to do so revealed they purchased Hashnote for $99.8 million in January of this year. It will be interesting to see if Circle gets more into tokenized treasuries, especially if stablecoin yield is banned in the ultimate stablecoin bill.
More Micro Strategies: Another company has popped up with the business plan of essentially “buy crypto and sell convertible notes to fund” this time for Ethereum. There are apparently benefits to this structure for certain financial firms, but isn’t it easier to just buy ETFs?
Crypto 401K’s Gucci Again: The Department of Labor has retracted guidance discouraging retirement managers from considering cryptocurrency as an investment option in 401(k) plans. If you are under 40 and haven’t/aren’t adding at least Bitcoin ETFs as a part of the high volatility portion of your 401K I am not sure what you are doing.
ICOs are Back: Echo, the angel investing platform owned and operated by early crypto investor/influencer Cobie, launched a platform (Sonar) which has functionalities for founders to conduct securities law compliant initial coin offerings. It’s almost certainly going to get sued eventually, but I love the idea and hope Sonar/Echo win that inevitable lawsuit.
$USDC Linked to Libra Frozen: Stablecoins linked to the Argentina Memecoin $LIBRA got frozen, and hilariously two different attorneys are claiming credit for it. Lots of shady stuff happened around $LIBRA and it was certainly fraud/manipulation; it just wasn’t securities fraud/manipulation.
Uniswap DAO Submission: Uniswap and the DeFi Education Fund submitted a paper to the SEC last week requesting clarification that many activities of DAOs fall outside of the SEC’s regulatory purview. Love a good call out of DAOs in Name Only (“DINOs”), so will be interesting to see if the SEC takes the recommendations, especially with regards to voting delegation functions.
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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