It was another busy week in crypto law. I was personally focused on catching up on the prediction markets vs. state gaming regulator lawsuits, another of which was filed last week in New York. But additionally, there were developments in the public markets despite the SEC being largely unstaffed during the ongoing government shutdown, and the CZ pardon continues to create unnecessary drama.
Here’s everything that happened last week in crypto law:
Kalshi Files Lawsuit Against New York Gambling Regulators
After receiving a letter from the New York State Gaming Commission ordering Kalshi to cease offering prediction markets involving sporting events to consumers in New York, Kalshi filed a lawsuit against the regulator claiming their prediction markets were under the exclusive purview of the CFTC. The prediction market also have filed similar lawsuits in other states such as Nevada, New Jersey, and Maryland, all of which are either ongoing or currently undergoing appeal. The comes as the Trump family also looks to expand into prediction markets in their business ventures.
Tl;dr– The dispute centers on whether sports prediction markets are gambling (regulated under state law) or swaps (regulated under federal law). Recently, the same judge in Nevada that ruled in favor of Kalshi at the preliminary stage ruled against Crypto.com on that same issue, and district courts in New Jersey and Maryland have had different rulings on the issue which are currently being appealed, so this is very much not a settled area of law. The court in the Nevada case ruling against Crypto.com did so on the basis of claiming “occurrences” and “outcomes” are different things which I didn’t find particularly persuasive, but this will continue to be an issue until there is a uniform binding decision on this topic as states aren’t likely to want to cede power in this area to federal regulators without a fight.
OTHER STORIES
Unapproved Securities Products Go Public: The SEC previously announced allowances for generic listing standards for crypto ETF products (meaning those products can do live unless the SEC says otherwise within a set period after application filing) and now companies are going public under the process of “approved unless told otherwise” which hasn’t been done in decades. Interesting development for sure and something worth monitoring.
Programable Compliance Paper: I have only had a chance to skim through this paper so far, but I am very much looking forward to digging into the details and cites of this amazing piece of thought leadership on creating intermediary-free compliance programs in a digital age. Katherine Kirkpatrick and Jessi Brooks (authors) are legal geniuses who understand the tech inside and out so I know this is going to be a must-read.
Securitize Going Public: Speaking of companies going public, tokenization provider Securitize is also going public, via a $1.25 billion SPAC. Kind of crazy the difference a year makes with all the companies (crypto and otherwise) going public after a bottleneck in the private markets the past few years. Metamask wallet developer, Consensys, also seems to be on the verge of going public.
Members of Congress Bigly Mad Over CZ Pardon: Senator Warren, Schiff, and Markey have introduced a Resolution for condemnation of the pardon of Binance founder, CZ. To which lawyers for CZ responded to by threatening a defamation suit against Senator Warren (likely tied to her inaccurate Twitter post which said CZ pled guilty to money laundering charges when he actually pled guilty for compliance failures). I still don’t understand the need for a pardon or the desire to condemn said pardon, but I guess if you don’t have haters you don’t have fans. Binance’s U.S. entity also put out a statement denying any political motivation for listing various World Liberty Financial assets which are also listed across most major U.S. and international exchanges.
Mastercard Acquires Zerohash: Mastercard has acquired blockchain infrastructure provider Zerohash in a $2 billion deal. Visa has been building up their crypto services and team for years, so some of this feels like Mastercard playing catch-up, but either way, love to see it.
Western Union in Crypto: Western Union has announced it plans to use stablecoins on the Solana blockchain to facilitate international transfers. Unless they are going to pass the cost savings down to customers this seems like a nothing-burger.
Code-Is-Law Documentary: There is apparently a new documentary that documents various DeFi exploits and the open questions on what (if any) crimes are committed when what is being defrauded is autonomous software controlled by nobody. Adding to my watch list to see what they mess up.
RIP Blockworks: Blockworks announced that it was shutting down its newsroom. Sad to see, as it was a source I frequently cited in these updates and I really valued your perspective on issues. I know a few reporters there who said they read my blog, so to those reporters and their colleagues I am sorry this happened, thank you for everything, and hope you all land on your feet somewhere.
FDIC Released Reputational Risk Repeal: The Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) released a rule proposal that would “prohibit the agencies from criticizing or taking adverse action against an institution on the basis of reputation risk.” This formalizes some previous guidance from the agencies that they would be eliminating “operational risk” examinations which was used in Operation Chokepoint 2.0 to debank disfavored industries like crypto. It is also what would be mandated under the FIRM Act if that legislation passes after passing in Senate Banking on an overwhelmingly bipartisan vote this past summer.
Senator Tillis Releases Debanking Legislation: Speaking of debanking, Senator Tillis has released draft legislation (which the Digital Chamber is quoted as supporting in the release) which would prohibit denial of banking services for politically motivated reasons. Even with the above, this or something like the FIRM Act is likely needed to administration-proof these good operational changes at the OCC and elsewhere.
Custodia Loses Master Account Decision Appeal: Custodia has lost in its Tenth Circuit appeal against the decision by the Kansas City Fed to deny the bank access to a fed Master Account. There is seemingly less at stake with the announcement of “skinny account” access and changing opinions at the Fed on Custodia’s business model, but still a loss in that ongoing fight which you hate to see.
Coinbase Stablecoin Research: Coinbase put out thought leadership titled Stablecoins and Bank Deposits: Overstating Risk, Overlooking Opportunity which debunks claims that allowing users to utilize stablecoins to collect interest payments would drain deposits from U.S. banks. Good on Coinbase, with the banking lobby trying to re-open this issue which was closed through the bipartisan passage of the GENIUS Act.
What Stablecoins are Cash: The Financial Accounting Standards Board (“FASB”) added a project to its technical agenda to clarify whether certain stablecoins may be classified as cash equivalents. Calling my shot that their answer will be “it depends.”
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: In late 2022, while I was at Polsinelli, I started preparing weekly updates for attorneys at the firm to stay abreast of the latest Web3 legal developments. I now 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 are solely my own. They do not reflect the official stance or endorsement of the Digital Chamber or any of its members.
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