I am still recovering from D.C. Blockchain Week and all the events throughout the week, but lucky for me, most the major legal developments from last week were announced live at the D.C. Blockchain Summit, which made it easier over the weekend to gather everything and put this update together. The biggest story was the release of over 60 pages of guidance from the CFTC and SEC on a token taxonomy to give further information on when digital assets can be sold in a securities transaction. It was a busy week for both agencies, as the SEC approved certain tokenized securities trading rule changes, and the CFTC issues no-action guidance to software wallet provider Phantom, and entered into an MOU with the MLB.
Here’s everything that happened last week in crypto law:
SEC and CFTC Release Guidance on Token Taxonomy
The SEC issued an official interpretation clarifying how the federal securities laws apply to certain crypto assets and transactions involving crypto assets which the CFTC joined as to the impact on the CFTC’s administration of the Commodity Exchange Act consistent with the SEC’s interpretation. As explained in the Fact Sheet, the SEC split digital assets into 5 categories, and addressed how a non-security crypto asset may be subject to (and cease to be subject to) an investment contract. This guidance was announced at the DC Blockchain Summit by Chair Atkins as well as other plans he has for the SEC this year such as fundraising exemptions, and investment contract safe harbors.
Tl;dr– As put out in prior guidance, the SEC reaffirmed that “protocol mining,” “protocol staking,” and the “wrapping” of a non-security crypto asset (each as described in the interpretation) do not involve the offer and sale of a security and that airdrops which do not involve any “investment of money” are not investment contracts under the Howey test. While this is a huge step forward, this still leaves questions for the industry such as when statements can turn previously sold tokens into an investment contract through secondary sales, and if not, how two fungible tokens can in some instances be subject of investment contract transactions but not others. This was a great step from the SEC, but as stated in Chair Atkins speech, there is still a need for comprehensive rulemaking as would be provided in the CLARITY Act. Still, this is a far cry from regulation by enforcement, which is a welcome relief.
OTHER STORIES
Law of Code Podcast: I did my monthly spot on Jacob Robinson’s Law of Code Podcast, so if you like my weekly update but just think “there are too many dang words in these updates” this is the spot for you. I highly recommend that you browse through the other episodes as well, since he always has great guests to break down the legal topics of the day in Crypto in a plainspeak way that is accessible to lawyers and non-lawyers alike.
CLARITY Act Negotiations Continue: The DC Blockchain Summit had lots of talk from legislators on the state of the CLAIRTY Act. The good news is that virtually all of them were confident there is motivation from both sides to get this passed. But we will know more shortly, as we expect release of negotiated stablecoin yield language and Democrat negotiated changes to bill text any day now.
CFTC No Action to Phantom Wallet: The CFTC issued no-action relief to the developers of the Phantom Wallet which would allow users of that wallet software to directly interface with CFTC-registered DCMs without the need for Phantom to register as an introduction broker.
ETH Foundation Declaration of War: The Ethereum Foundation released a 38 page manifesto two weeks ago which had ETH maxis debating this past week if ETH’s cypherpunk principles of censorship resistance, open source, privacy, and security, are getting in the way of optimization to make it the rails of all financial services. I personally think this is long term vision and worth supporting, but I understand people who bought into the idea of ETH as the world’s computer seeing it slip into the background as other blockchains are optimized for limited (more lucrative) uses.
OpenSea Postpones Airdrop: The fact that OpenSea announced it would be postponing its airdrop the same week as a Vanity Fair article comes out which uses its found as one of the examples of extravagant crypto living was…suboptimal. TBF, at least the pictures in the article were bad ass.
CFTC MOU with MLB: The CFTC. As previously announced was likely, has entered their first data sharing arrangement with a sport’s league (the MLB). This will allow both entities to share information to ensure the integrity of the league and the markets which base their outcome on the league’s games.
CFTC Issues FAQ Information: It was a BUSY week at the CFTC, as shown above, as the CFTC issued guidance which aligns with SEC guidance on the appropriate haircuts to apply to digital assets used as margin in trading. This provides further guidance to market participants which is great to see and also continue to algin the CFTC and SEC as agencies working together.
SEC Approves Tokenized Security Trading Rule Proposal: The SEC approved a Nasdaq rule change proposal which allows for the trading of tokenized securities through the model previously proposed by DTC and which was subject to the SEC’s no-action relief on that issue. This is a necessary first step for the cooler stuff like trading of securities without intermediaries like through DeFi.
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 