For all the readers looking for this in their inbox yesterday, apologies for the delay! We are cooking up some stuff at The Digital Chamber that I am really excited will be public next week, but I got distracted and forgot to press publish on the blog/put out on social media. So as a make up, I won’t charge anybody for access to the blog for the next year. Probably.
In crypto news, prediction markets had their day in court to argue against Nevada imposing its local gaming laws on nationally registered CFTC-exchanges. There was also a great article on the founder of Hyperliquid showing how much potential DeFi has to upgrade existing financial markets, and on the other side of that coin a massive breach which lead to contagion across the DeFi ecosystems demonstrating the fragility even the most battle tested of DeFi protocols can be prone to in times of high stress.
Here’s everything that happened last week in crypto law:
Oral Arguments Held in 9th Circuit Appeal of Prediction Market Cases
The oral arguments for three separate matters on appeal to the 9th Circuit regarding prediction market issues were heard last week. There was also an appeal of the state court matter against Kalshi which was removed to federal court and on appeal against an order remanding the case back to state court. You can watch a video of the arguments here. The arguments were heard by Judges Ryan Nelson, Bridget Bade, and Kenneth Lee (all Trump appointees). The parties involved were Crypto.com, Kalshi, Robinhood, and the State of Nevada (and/or the Nevada Gaming Control Board). The main disputes were regarding whether these contracts are considered “swaps” under the CEA, what effect (if any) the CFTC’s Rule 40.11 has on these contracts being listed via self-certification, and whether the DCM vs. off-DCM distinction should matter for potential ramifications of the Court’s determination.
Tl;dr– I did a live thread of my instant reactions while watching the oral arguments here. Both sides were exceptionally represented. I found especially compelling the arguments from Robinhood that what the state was arguing around Rule 40.11 doesn’t effect preemption, but rather that argument is the State saying the CFTC has gotten federal law and application of its rules wrong. If that’s the case, then the correct route would be for the State to bring a federal Administrative Procedures Act (“APA”) challenge. Judge Nelson pushed back on that and many of the exchanges’ positions, especially as to whether the “on-DCM vs. off-DCM” distinction matter. There was also an uncomfortable moment when he quoted Kalshi’s counsel from the D.C. circuit ruling from last year where their attorney on oral argument said sports contest outcomes were gaming under Rule 40.11. There was also an interesting discussion from Judge Lee about whether these contracts could be certified in a categorical format under 40.11(c) or if these would need individualized determinations. I am biased, but I think the CFTC/DCMs (or FCM in case of Robinhood) had better arguments, but other than maybe a little overstep from the State on election markets and bringing up replied appeal which gave the Unlawful Internet Gambling Enforcement Act counter, the State argued its position well (and seemed like at least Judge Nelson was leaning towards the State’s position, but impossible to say from questions alone). Either way, I have never been more certain that this issue will be before SCOTUS before its all said and done.
OTHER STORIES
DeFi Contagion: Over the weekend, there was an exploit which allowed attackers to create almost $300 million in rsETH tokens despite not having the actual ETH to bridge to generate those rsETH tokens. This wouldn’t be a massive deal, except that rsETH was approved collateral on AAVE, so the attackers were able to deposit the fake rsETH and borrow real assets against it, creating massive bad debt on AAVE. This is still a very fluid situation, but certainly a huge hit to DeFi generally showing the added risk that come from such protocols.
Hyperliquid Founder Interview This deep dive with Jeff Yan (founder of Hyperliquid) is a fascinating look into one of the most brilliant developers in the space and how he built one of the most exciting project in the space with no venture funding and a staff of 11 people. Also great job from this user organizing all the public interviews that Jeff has given to-date.
DeFi Security: The thing about crypto, is there are a TON of great people who work tirelessly to make it safe and accessible for very little recognition or payment. Here is a great example of resources put out by the Security Frameworks by Security Alliance (“SEAL”), which provides basically everything a blockchain developer needs in terms of tools and resources to ensure their software is developed in a safe and secure way.
Prediction Market Startup List: Even I am shocked how many prediction market startups there are. With exactly how tokenized equities will take shape, it is hard to think of anything in crypto that has gotten better PMF than prediction markets, stablecoins, and bitcoin.
Kraken Acquires DCM/Prepares to go Public: Big week for Kraken, as it acquired Bitnomial (including its DCM, DCO, and FMC licenses…Kraken Prediction Market imminent?? Citadel is considering it…) and confirmed it is in the process of IPO’ing and has confidentially filed notice of such with the SEC. Thoughts and prayers for the in-house attorneys there that had both those stories drop in the same week (along with fresh funding) and the associated legal prep required to lead up to that.
SEC Comment Letter: I am writing this on a Friday, so I may or may not have had a chance to actually read this SEC comment letter regarding the token taxonomy release before this is sent out. But enough people I respect have read it and told me it’s good, that I 100% plan to read it in the near future and am including here for anybody else interested.
Roman Storm Oral Argument Breakdown: The Rage as a publication isn’t always super accurate on legal issues (they aren’t attorneys, so fair/expected) but I enjoy their coverage of the Roman Storm trial including this breakdown of the oral arguments on the motion for acquittal.
Circle/Drift Lawsuit: A user of the Drift Protocol is suing Circle in a proposed class action for failing to freeze USDC taken from the protocol. I have no idea of the merits (or lack thereof) of the lawsuit, but this is something worth monitoring. Also worth listening to a recent Law of Code podcast on this issue.
Chair Selig Testimony: CFTC Chair Selig testified before the House Agriculture Committee last week. As could be expected, prediction markets and other crypto topics were heavily discussed by members of both sides.
Iran’s Failed Bitcoin Toll: Despite what the actor from The O.C. may tell you, Iran is not evading sanctions and collective massive tolls in BTC or digital assets. Bitcoin is good for a lot of things. Fast and private transactions is not one of those things, both of which would be required to be useful to Iran in collecting tanker tolls.
CONCLUSION
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Farcaster. Any typos or errors are intentional to prove I am not AI. 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 