It was another fairly busy week in crypto legal developments. We got an announcement of future announcements (but it involves prediction markets, so worth more attention than similar pre-announcements), Uniswap won again in a ruling that could be used as persuasive reasoning in other matters against DeFi protocol development companies, and we got a teaser of what 24/7 trading could look like in a tokenized equities world with Hyperliquid operating at scale while markets were otherwise closed.
Here’s everything that happened last week in crypto law:
Prediction Market Notice of Advanced Rulemaking Coming
Chair Selig spoke at a Milken Institute event last week, and made news by announcing that the CFTC is finalizing an advanced notice of proposed rulemaking related to prediction markets. The agency is expected to release informal guidance to help guide registered entities first, followed shortly thereafter by an advanced notice of proposed rules and questions for the industry to respond to and assist agency staff in formalizing more permanent rulemaking applicable to event contracts. He also reiterated his commitment to working with the SEC as many of the markets overseen by the agencies overlap, and stated the CFTC is currently working to bring true perpetual futures (not long-dated contracts) to the U.S. within the next month.
Tl;dr– I try not to focus on announcements of future announcements in the major story breakdowns, but I made an exception for this one simply because prediction markets are in the catbird seat behind only potentially stablecoins on current impact of blockchain-enabled technologies on the average person. While there isn’t a set date on the ANPRM being released, it is crucial that the CFTC be seen as a real regulator over these markets and this is a way for the agency and industry groups to come together and lay out exactly what is needed in these markets to ensure everybody is playing by the same rules and consumers are protected. If the agency doesn’t act, I could see far more legislation being proposed like the recent proposal from the Senate, and I do not think either the CFTC nor the entities it oversees would like the rules if Congress decides to start over from scratch on these essential but still often negatively perceived segments of financial markets.
OTHER STORIES
Uniswap Wins Again: Uniswap previously won during the motion to dismiss stage in a Plaintiffs’ class action alleging sales of tokens through the Uniswap protocol were illegal securities transactions. After some appeals, the case continued on state law fraud/consumer protection grounds, but Uniswap won on those now too, so there is a chance that case is done for good now. “merely creating an environment where fraud could exist is not the same as affirmatively assisting in its perpetration.” Tell that to the prosecutors in the Tornado Cash case.
Effect of 24/h Trading: I have talked to others wondering if the scale of Hyperliquid and its enabled trading over the weekend after the Iran strike when traditional markets were all closed was a factor in the markets not taking an initial hit on Monday as would otherwise be expected when they opened due to price discovery being done by then at scale on Hyperliquid. So when I saw this article from Matt Hougan laying out similar thoughts I had to include it in my update. Certainly something to watch as all markets move to T+0 settlement and 24/7 trading.
Kraken Fed Master Account: After starting the process in 2020, Kraken has finally obtained their long sought after (skinny/restricted) master account access. As reported by The Block: “Rather than routing dollar transfers through intermediary banks, Kraken can now connect straight into the Fed’s payment infrastructure.” More crypto companies (like Zerohash and Revolut, which both just applied for U.S. banking charters) are seeking banking services licenses to the chagrin of certain banking lobbies who want to protect their regulatory moat.
Trump Shot at Banks: Trump took to social media to not his displeasure with banks holding up market structure legislation on stablecoin yield issues. The banking industry had momentum for a bit on the issue, but it looks like that is fading as they may have overplayed their hand in refusing to submit a workable compromise for their demands. I just wish they would stop using community banks as the scapegoat when the primary regulator of community banks completely rebuts their claims.
Nasdaq Prediction Market: Nasdaq is seeking approval from the SEC to list a new series or products related to prediction markets for index funds? I guess they are trying to find ways for companies to take “all-or-nothing” positions out stock outcomes, which is different from options in some minor ways, but also not sure why this couldn’t be done by sophisticated traders already and this seems targeted for retail?
Crypto Funding is Hot: In addition to the prediction market news, the parent company of the NYSE also invested in crypto exchange OKX at a $25 billion valuation. This came shortly after a16z announced its plans to raise $2 billion for its 5th crypto fund. Markets rise. Markets fall. Funding always finds its level in the end.
FBI Nabs BTC Thief: The FBI through work with French authorities arrested the son of a U.S. Marshals Service contractor who is alleged to have stolen $46 million in BTC seized by the U.S. Marshals. This is a wild story which involved authorities being alerted to the theft after he doxed his wallet while trying to flex online, and was tracked down by the crypto-forensics expert known by his online moniker ZachXBT. I’ve covered a lot of wild stories in my years of writing about crypto legal developments, but this one might take the cake and I would 100% watch a movie about this.
Pudgy Penguins IP Case: The Penguin clothing brand is suing Pudgy Penguins for trademark infringement. These seems like an overaggressive Plaintiff, because I personally do not see any similarities or likelihood of confusion here and neither penguin mark is especially strong. But that’s for the court to decide now, not me.
Pancake Swap IP Pre-Case: Curve is claiming the Pancake Swap’s latest product offering used stolen and unlicensed code. It seems like the parties are working it out behind closed doors now, but could be messy if they can’t reach an agreement.
Tokenized Stock Bank Guidance: Banking regulators put out an FAQ which clarifies that tokenized stock has the same valuation rules as non-tokenized stock. This seems like common sense, but is a big move as it was unclear if stock tokenized on public blockchains like Solana or Ethereum would have differing valuation and risk rules than stocks tokenized on permissioned chains. This affirmatively answers they do not, which is huge for building on public networks.
SEC and CFTC Considering Becoming Roommates: The SEC and CFTC are considering new office space in the same complex, which makes sense. There is too much inertia for the common sense of just combining the financial regulators who overlap so much in modern finance, but becoming roommates could further cement the agencies into a forced cooperative working arrangement.
Florida Leads in State GENIUS Act Companions: Florida became the first state to enact their own stablecoin legislation designed to be compliant with the state path process provided for in the GENIUS Act. Many other states are considering similar legislation, and while it shows the states that are trying to stay ahead of digital asset regulations, I do question how many state sub $10 billion stablecoins will actually come about from all this work.
Treasury Report on Privacy and Illicit Finance: When the GENIUS Act was passed, within the bill was a directive to the Department of Treasury to study and release its findings regarding the use and potential use of innovative and novel methods, techniques, and strategies by financial institutions to counter illicit finance related to digital assets. That report was released last week, and while page 8 does recognize there is a meaningful and legitimate reason for consumers to want to use mixers to protect their personal privacy, the report as a whole read like a hammer who views any form of financial privacy without government backdoors as a nail. Which is suboptimal.
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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