This was quite possibly the busiest week in terms of major crypto legal developments since I started practicing in the space in 2020. It is hard to be upset, as they are (almost) all positive and move the industry forward significantly but, like, can the agencies maybe talk and spread these out so poor Policy Directors like me have a little time to digest it all??
We have the SEC moving forward with tokenized stock through a no-action letter to the largest settlement agent on earth, the CFTC gave guidance on tokenized collateral and to prediction markets which could have federalism implications, and a new bipartisan bill directed toward stopping pig butchering dropped that I wouldn’t be shocked to see make it into market structure at some point. Plus a bunch of other smaller developments. Also, if you are interested, check out the Law of Code podcast where I broke down some of the biggest developments from last month.
Here’s everything that happened last week in crypto law:
CFTC Tokenized Collateral
The CFTC released a slew of guidance related to tokenized collateral, including permitting the use of ETH/BTC/payment stablecoins as collateral in derivatives markets! It also provides guidance for use of tokenized versions of existing permitted collateral, like treasury bonds, and related standards for valuations of such assets, and liquidity, maturity, and credit-quality requirements. This is long overdue, but glad to see this all released so that market participants can take advantage of improved settlement time, finality and liquidity that are all enabled through blockchain technologies. Relatedly, the CFTC withdrew prior conflicting guidance related to when digital assets are deemed “delivered” for CFTC purposes.
Tl;dr– I am slightly surprised how much acting-Chair Pham is doing with one foot out the door, but allowing tokenized collateral is something the CFTC has been looking into for years now and something The Digital Chamber advocated for recently in a tokenized collateral comment letter. As addressed in our letter, use of like-for-like collateral (so use of ETH as collateral in ETH futures positions) is SIGNIFICANTLY less risky in basically all aspects vs. use of cash or other collateral. The fact that the pilot program announcement specially lists USDC (while the no action letter itself is not USDC but instead “payment stablecoins”) is essentially saying the CFTC views it as the most aligned with current GENIUS Act bill requirements for payment stablecoins ahead of implementing regulations being released. But still slightly odd for the specific asset call out when the no action relief itself is less specific.
SEC Tokenized Stock No Action Letter
The SEC’s Division of Trading and Markets issued a no-action letter to The Depository Trust Company (“DTC”) related to the tokenization and trading of existing stocks. Commissioner Peirce put out a statement on it as well, saying “DTC’s tokenized entitlement model is a promising step along the tokenization journey, but other market participants are exploring alternate experimental avenues. As I have said repeatedly, the Commission’s crypto work is iterative. We welcome and expect other market participants’ continuing efforts to innovate and experiment.” This is in line with a Nasdaq rule proposal which designated DTC as the clearing and settlement agent for tokenized stocks. It is worth noting that The Digital Chamber responded to that proposal noting the lack of clarification on DTC’s clearing and settlement plans central to the rule proposal. The SEC also put out an investor alert on how to self-custody digital assets, which is extremely bullish for what they have in store next.
Tl;dr– This doesn’t seem too distinct to what players in private markets like TZero and Securitize already do re: tokenization and wallet whitelisting, but expanding it to public market equities is still a huge positive step. I have seen some FUD online, which is fair when DTC is saying this is bridging TradFi and DeFi when it very much is not with the layered registered wallet whitelisting and transaction reversibility. Permissioned DeFi is not DeFi. Full stop. But Chair Atkins has said this is one of the many (not only) ways he is trying to bring public markets onchain, so I look forward to consumers having the full range of options from trading how they currently trade, to trading tokenized stocks with DTC, to actual real DeFi integration for trading and settlement.
CFTC Issues Four Prediction Markets
The CFTC’s Division of Market Oversight and the Division of Clearing and Risk released four no action letters to various prediction markets regarding swap-related recordkeeping requirements for binary option contracts. This is huge, as it provides support for prediction markets who are currently fighting in courts across the country over whether event outcome markets are commodity derivatives, as this confirms that the CFTC sees itself as the proper regulator for these event markets (and, if the CFTC is correct, then the CFTC would be the exclusive regulator over such event markets, meaning state gaming regulators have no power to oversee such markets).
Tl;dr– There has been a FLURRY of activity at the CFTC between this, the CEO Innovation Council, the withdrawal of guidance on when digital assets are deemed “delivered” for purposes of CFTC regulations (which is good, but surprising it was done without going through comment and rulemaking procedures), and the tokenized collateral guidance discussed above. These are all positive, but I am still a little surprised this is all being done under an Acting Chair when the presumptive permanent Chair has not been confirmed yet due to a procedural hiccup in the Senate which delayed his confirmation by 2 weeks? Still, hard to complain when this continues to move the ball forward despite the hiccups in getting a permanent Chair confirmed and in the seat.
Bipartisan Crypto Crime Bill Drops
Senators Jerry Moran (R-Kan.) and Elissa Slotkin (D-Mich.) have introduced the Strengthening Agency Frameworks for Enforcement of Cryptocurrency (“SAFE Crypto”) Act which would create an inter-governmental task force between federal agencies and the private sector to coordinate identifying and combating cryptocurrency fraud.
Tl;dr- When I was in private practice, I interacted semi-regularly with the DOJ’s Dark Web Task Force, which was a group of IRS, FBI, and other partnering agencies which often got involved if there was a high-level crime involving digital asset theft. This seemingly would just create something similar except explicit to crypto, and would probably not get major story attention but-for the fact this was released in the Senate while the Senate actively discusses market structure. It would not shock me to see this bill’s text combined into that market structure bill text by the time this is all said and done.
OTHER STORIES
Gensler Crypto Policy Advisor Interview: This interview by Bankless podcast with former SEC crypto policy advisor under Gary Gensler, Corey Frayer, was a fascinating as it was rage baiting. In the first 20 minutes, he said his group was detached from enforcement investigations, and then followed saying “the initial place where we started was to (1) open investigations [into centralized exchanges].” But still a fascinating look into the mindset of the agency. At least he is just obtuse/reductionist and doesn’t outlie lie or refuse to learn how the tech works, which is better than 99% of critics.
Crypto UK Joins TDC: I am obviously biased, but glad this partnership which has been in the works for a while is finally public! The UK is an important partner to the U.S. as we expand digital asset technologies, and I am looking forward to getting across the pond to grab some pints with the lads soon!
Farcaster Pivot: This was announced a while ago but it is making news on the bird/X app so as one of the few and proud farcaster users, I need to cover the drama over farcaster’s pivot to wallet app first. Coinbase wallet has built their social functions on top of the farcaster protocol so this seems less like a hard pivot and more into aligning resources with where growth is (payments with social/app integrations). Long live the purple app!
OCC Lets Banks Send Crypto Between Users: The Office of the Comptroller of the Currency put out guidance that allows banks to facilitate crypto transfers between parties. P sure the whole point of crypto is not needing an intermediary for simple transfers, but still an important step for banks to be able to provide the products and services which consumers do want or need an intermediary for. The OCC also issued conditional approval for five national trust banks including BitGo, Fidelity Digital Assets, Paxos, and Ripple.
Market Structure Update: Apparently, Senate Banking Democrats sent their “asks” to Republican committee colleagues last week and there was a leaked draft of the Republican response. But some Senators (both D and R) are asking for a hearing on market structure before a markup of the current draft legislation. There have been multiple hearings on it already this year, but I guess the ask is for another one with the benefit of more robust draft legislation as a scene setter? There seems to be a lot holding things back despite claims there is nothing holding things back…
CFTC CEO Leadership Announced: Acting CFTC Chair Pham announced the first group of CEOs to serve on the CFTC’s Innovation council, and it included all the expected players in the industry who all (other than Bullish/LSEG) hold CFTC-registered Designated Contract Market licenses (including Gemini, which just got their license last week). No idea what this group will actually be doing, but a solid group for sure.
JPMorgan/Galaxy Tokenized Debt: It feels like a crypto mad lib typing out that Galaxy is issuing commercial paper (short term debt) on the Solana blockchain with JPMorgan as the banker and Coinbase as custodian and investor (along with Franklin Templeton investing). But here we are.
Do Kwon Gets 15 Years: Do Kwon was sentenced to 15 years for his involvement in the multi-billion collapse of the Terra/Luna ecosystem. He was arrogant when told about risks dismissing them with “your size is not size” messages, and told people to “hold steady lads” which prevented them from taking protective actions during the collapse. He ruined lives and people killed themselves over the losses they suffered because of him. 15 years is 100 years too few, but glad he is facing some justice.
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.
The NFTtorney 