After the flurry of activity over the past month, it was a relatively calm week in crypto legal developments. The main event worth tracking was the conclusion of the DOJ v. Roman Storm trial, which ended in one guilty verdict for an unlicensed money transmission charge related to the creation of non-custodial open-source software which is certain to be appealed. Also, the SEC built on their prior staking guidance, giving new guidance as to the creation and redemption of liquid staking tokens, and the Senate market structure working draft legislation got industry input.
Here’s everything that happened last week in Web3 legal:
SEC Issues Guidance on Proof of Stake Liquid Staking Tokens
For the less crypto savvy, liquid staking tokens (“LST”s) are tradeable tokens you receive in exchange for staking your cryptocurrency with a protocol. They represent your staked assets plus accrued rewards while allowing you to use them in DeFi activities. This lets you earn staking rewards without locking up liquidity, since you can sell, lend, or use the LST while your original stake remains locked in the network. The SEC Department of Corporate Finance (“Corp Fin”) has now released guidance on when it views “Liquid Staking Activities” as not involving the offer or sale of securities. It should be noted that that guidance is limited, and does not mean than all configurations of LST issuance and redemptions are outside of the activities regulated by the SEC and state securities regulators.
Tl;dr– This follows other guidance on Covered Stablecoins, Memecoins, and Staking, continues the current SEC’s approach of providing regulatory guidance for digital asset activities where Commissioners previously making such decisions advocated for (and continue to advocate for) ambiguity. We actually specifically called for the Commission to address liquid staking tokens in our written submission to the SEC on behalf of the Digital Chamber (see, pg. 20) so this is exactly the type of guidance leading industry advocacy groups have been clamoring for. The liquid staking tokens market is substantial, so this guidance is helpful especially as PoS token network treasury companies expand and look for ways to earn yield on their tokens held in treasury.
DOJ v. Storm Privacy Preserving Technology Criminal Trial Ends
The trial in the DOJ’s criminal prosecution of privacy preserving technology developer Roman Storm lasted about three weeks. The DOJ’s case alleged Storm’s knowledge of criminals using the privacy tool he created (along with non-criminals who used the tool) put him into a conspiracy with the criminals. The case concluded with a verdict of guilty on the conspiracy to operate an unlicensed money transmitting business charge, and a deadlock on the conspiracy to commit money laundering and conspiracy to violate sanctions charges last week. The verdict actually came the week after closing statements, as jurors needed additional time to reach a verdict and ended up deadlocked on two of the three charges which means the DOJ could choose to re-try those counts. Bernstein v. United States was critical in articulating the right to free speech included the right to create and publish the cryptographic technology which is the backbone of online privacy today and wouldn’t exist without those lawsuits. This case is equally critical in determining if there is a right to create neutral privacy preserving software.
Tl;dr– The first witness in the trial testified that a “recovery firm” told her that crypto that was stolen from her was sent through the Tornado Cash protocol. As it turns out, the “recovery firm” was actually under investigation by the FBI for fraud, and her stolen crypto never actually touched the protocol. A fact prosecutors were allowed to attempt to clean up through testimony of an IRS agent that didn’t know the difference between ETH and an ERC-20 token. There were also issues of potential witness intimidation, after prosecutors said they were still considering charges against certain defense witnesses, causing those witnesses to plead the Fifth instead of testifying for the defense. The fact that the only charge Roman Storm was convicted on was regarding failing to obtain a license for something FinCEN (which issues such licenses) directly told the DOJ a person doesn’t need a license for is both heartening for chance on appeal and disappointing such a charge was brought in the first place. This is far from over, as the only conviction was also the most centered on legal vs. factual issues ripe for appeal, but a mixed result with uncertain implications for creation of non-custodial software generally.
OTHER STORIES
Digital Chamber Releases Comments to Senate Working Draft: The Digital Chamber has put out their response to the Senate Banking Committee’s digital asset market structure working draft questions. Not to toot my own horn too much, but it was pretty cool to be the only associate from a group of insanely respected industry attorneys who was recognized for contributions to the response.
Crypto Privacy Update: You know my rule: if I see an article about how the BSA is long overdue for a refresh, I post that article. This time, it comes from Coinbase which explains how Zero-Knowledge Proofs (“ZK Proofs”) can meet the fraud and crime prevention goals of the BSA while reducing the reduce the risk, and waste that BSA compliance has become rife with. This comes the same week as my favorite SEC Commissioner, Peirce, released a long speech about importance of financial privacy. Both apt with the Tornado Cash trial discussed above.
Crypto Executive Orders: The President released two Executive Orders related to crypto last week. The first was directly related and mandates the Secretary of Labor issue guidance for 401Ks to include “alternative assets” including crypto. The other is related to Operation ChokePoint 2.0 and requires federal banking regulators and create policies to prevent de-banking based on political or industry affiliations. These were already both in the works as I have covered, but still worth mentioning when they get Executive Order-level attention.
CFTC Looking for Spot Crypto Comments: The CFTC is looking for comments regarding allowing for spot crypto to be traded on CFTC-registered futures exchanges? Who is asking for this? CFTC guidance here doesn’t seem like it could preempt state licensing laws without a Congressional authorization, so not sure how this would help anybody.
ETH as Digital Oil Report: Saw this report referenced in a recent Tom Lee interview and had to include it in my update. Am I including it because my personal biggest crypto holding is ETH and its findings include “conservatively, ETH could reach $80,000+ as a monetary reserve/commodity asset” as a statement? No way to know.
More Crypto IPOs: Bullish, an exchange not available to U.S. customers, is looking to go public in the U.S. at a $4.2 billion valuation. Seems like a silly price to me, but ‘tis the IPO season, I guess.
China Dislikes Stablecoins: For people keeping score at home, the U.S. passed the GENIUS Act for the private issuance of stablecoins (vs. a CBDC), while China is actively trying to limit their use (in favor of their CBDC digital Yen). It will be nice to see the U.S. removed from “prohibited use” lists for crypto protocols as regulatory clearance continues to emerge, where the U.S. has been often listed as “prohibited” alongside China, Russia, Iran, and other countries which we typically wouldn’t want to be regulatorily associated with.
Ripple Stablecoin Acquisition: Ripple is acquiring stablecoin infrastructure provider Rail in a $200 million acquisition. It will be interesting to see where stablecoins consolidate when it is all said and done. This came the same week as their battle against the SEC came to a final conclusion, with all appeals dropped the and the SEC issuing an Order removing the restrictions against further capital raises which were issued in the SEC’s limited win in the underlying matter.
Whitehouse Crypto Head Steps Down: Bo Hines is stepping down as the executive director of the White House crypto council to return to work in the private sector. His big job was the working group report, so with that done it is not shocking to see him taking a well-deserved pay increase to return to private sector work.
CONCLUSION
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Farcaster. 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 
amazing newsletter, thank you!
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