It’s DC Blockchain Week! Looking forward to seeing so many of you in D.C. this week. For all the small talk that will be occurring at happy hours and events throughout the week, see below for the legal news from last week. The biggest news the CFTC’s various updates on prediction markets, and the CFTC and SEC entering into a historic MOU to work together as agencies to eliminate duplicative regulatory structures and better align rules for the financial firms they oversee. There was also a decent amount of news from a major banking industry conference touching on crypto, and in things you hate to see, the DOJ is re-trying Roman Storm for the charges which the jury couldn’t reach a unanimous verdict on last time.
Here’s everything that happened last week in crypto law:
CFTC Releases Guidance and Advanced Notice of Proposed Rulemaking on Prediction Markets
The CFTC released an Advanced Notice of Proposed Rulemaking Relating to Prediction Markets which lists questions for public comment, and the CFTC’s Division of Market Oversight released a Prediction Markets Advisory notice. The Advisory Notice focuses on Core Principle 3 of the CEA, that requires contracts listed on a registered exchanges cannot be “readily susceptible to manipulation”. It also touches on Principle 4 (DCM requirement to prevent manipulation) and 12 (make/enforce rules to prevent manipulation). Meanwhile, the ANPRM seeks comments on a wide range of topics which could shape future rulemaking relating to prediction markets including margin issues, use of blockchain technologies in market, market surveillance, public interest standards, and a range of other topics.
Tl;dr– I feel slightly guilty for doing the announcement of a future announcement last week as a major story only to drop the actual announcement the next week. But if anything is deserving of back-to-back major story attention it is this. I did a thread breaking down my instant reactions to the Advisory Notice, but the big takeaways there were the reveal that the CFTC is working directly with major sports leagues to set up data sharing and monitoring agreements, and the line drawing provided in the notice which essentially told DCMs not to get into exotic of niche markets which may be difficult to protect against manipulation (i.e., any market which a single or small group of individuals have ability to control outcome of).
The ANPRM was more substantial, as it covered things like everybody expected such as event market-specific rules for insider trading, the public interest carveout, and blockchain-enabled technologies. However, it also covered things that I think others did not expect the CFTC to be considering rulemaking on so early, such as margin trading for event markets, and swap execution facility contracts only available to institutional investors. There is also a fairly quick turn-around (45 days from official publication instead of the standard 60-90) indicating the CFTC is already working on rulemaking in many of these areas and is looking for public feedback sooner rather than later to help refine that rulemaking.
OTHER STORIES
SEC Commissioner Speeches: SEC Chair Atkins and Commissioners Peirce and Uyeda all gave speeches recently and every one of them touched on tokenization and/or blockchain enabled technologies in our securities markets. All are worth a read, but if you can only read one, Crypto Mom’s is the one to go with, as Commissioner Peirce states in regard to tokenized securities intermediaries “What if there are no intermediaries to regulate? One of the beauties of this technology is the ability to transact without intermediaries.” Seems like the recent Coin Center letter to the crypto task force on precisely that issue had somebody listening?
SEC/CFTC MOU: Chairs Atkins and Selig announced at their fireside chat almost a month ago that they were preparing to entered into a historic Memorandum of Understanding between the SEC and CFTC to better coordinate and work collaboratively together as agencies, and that MOU is now final/public. The fact sheet provide a good tl;dr of what the MOU says, but just great to see these agencies who are going to have to overlap a lot on things like prediction markets, crypto, and a range of other topics playing nice.
American Bankers Association Yield Focus: The American Bankers Association had their big conference last week, and for all the speeches there about wanting competition, there was a lot of focus on trying to stifle competition threats from yield-paying stablecoins.
No Deposit Insurance on Stables: The Chair of the FDIC Travis Hill was one of the many government speakers at the ABA conference, and his speech said that pass through insurance would not be available to stablecoin holders, which makes sense? I didn’t think this was especially new or interesting despite all the attention it got online, and seeing the head of policy for Circle agree was nice confirmation on that.
Tornado Cash Developer Retrial: In bummer news, the SDNY Attorney General’s Office has decided to retry Roman Storm for the 2 charges which the jury was deadlocked on in the first trial. This sucks. Nobody should go to jail for writing code, which is what Roman faces. As always, I encourage all readers to donate to his defense fund.
Token-To-Equity Conversion: The labs co. managing the development and upkeep of the Across Bridge is proposing the DAO be converted to a private company with token holders given the option for equity or buyout of their tokens. The legal engineering needed for this would be crazy, but really interesting if the proposal passed on how they do it.
Hyperliquid as Digital CME: Maybe it is bag bias, but this article about how to value Hyperliquid in comparison to traditional trading venues and the proof of PMF at institutional level seen in off-hour oil trading on the protocol are super interesting to me. Hyperliquid.
Binance Sues WSJ: Binance has sued the Wall Street Journal for defamation regarding the WSJ’s reporting on allegations of compliance failures. It’s really hard to win a defamation case under U.S. law because of the whole freedom of speech/freedom of press thing we have here, but I think people are forgetting that it won’t just be Binance’s word against the WSJ, but also likely the independent third-party compliance team Binance was required to implement as a part of its settlement with the DOJ.
Don’t Do $50m Swaps on Mobile: This individual who lost nearly $50 million because he was seemingly lazy/indifferent in a swap and ignored warnings as to his slippage set learned a valuable lesson: when you are doing multi-million dollar swaps on DeFi, maybe pull out your laptop and pay attention to interface warnings? Just a thought. Take it or leave it. (Also, this wasn’t some high-tech laundering job made to look like an accident; sometimes people just make dumb mistakes. Not everything is a complex conspiracy).
Another Prediction Market Bill: Senator Schiff and Representative Levin released proposed legislation last week which would prohibit prediction markets based on war, death, or terrorism. The CFTC has already prohibited those under its powers under Rule 40.11, so seems like an educational gap more than anything here similar to the proposed insider trading ban bill from last week covering things that were already largely impermissible.
Prediction Market Lawsuit L: Kalshi lost its bid at a preliminary injunction in its lawsuit in Ohio, which sets up for an interesting appellate fight as this ruling is directly contrary to the ruling in Tennessee and both sit in the 6th Circuit. Looking forward to that showdown.
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 