It’s the week before Consensus, so a reminder to all my subscribers/readers: (1) I am not actually an astronaut and my real name isn’t Birdnals; (2) this is me, so if you are in Miami and see me, please come up and say hi! I always enjoy connecting irl with people who regularly read this silly blog.
In legal news, it was another big week for prediction market developments with the CFTC/DOJ bringing claims against an enlisted military member accusing him of insider trading on contracts related to the operation against former Venezuela leader Nicolás Maduro, and New York/Wisconsin getting into the states v. DCMs game. There were also a few freezes of tokens which had people talking, and policy organizations pushing for the SEC on rulemaking relating to software-enabled peer-to-peer trading issues.
Here’s everything that happened last week in crypto law:
CFTC/DOJ Prosecution of Insider Trader Related to Venezuela Military Action
The CFTC and DOJ brought separate actions against a member of the military related to allegations of insider trading on prediction market contracts. The markets at issue were offered through Polymarket’s offshore/DeFi platform and connected to potential military actions and the political leadership of Venezuela which the individual allegedly had inside information on due to his role in the military. This marks the first criminal and one of the first civil enforcement actions brought against individuals related to insider trading/fraud on a prediction market.
Tl;dr– While many are commenting on how this is a bad look for prediction markets, I disagree. All financial markets have some level of fraud and abuse. It is impossible to preemptively stop people from doing that, but the idea is we want to detect and prosecute the people who try to break the rules. If anything, this is bullish for event contract markets as it shows (1) insider trading by government officials and everyone else on prediction markets is already illegal; (2) the (alleged) trades didn’t occur on a CFTC-registered DCM; they occurred on an offshore market that blocks US users. U.S. markets don’t allow for contracts on war. And (3) they were detected and caught because they happened on a public and immutable blockchain which allowed the public to flag as suspicious and alert authorities to investigate. If anything, this shows Congress there are already laws that exist that prohibit this type of thing and it’s just a matter of enforcing those existing laws (which can be aided with blockchain tech). Although I need to give serious consideration as to why both DOJ and CFTC chose to plead jurisdiction how they did, as that could have unintended and lasting consequences.
OTHER STORIES
California Meme Coin Decision: In what should be obvious to everybody but apparently wasn’t obvious to some Plaintiffs’ attorneys in California, meme coins are not securities like stock and bonds. Hopefully the civil cases pending in New York alleging “Peanut the Squirrel Coin” at the type of investment vehicles Congress intended to regulate like stock and bonds are dismissed on similar grounds, as this case has solid reasoning on why that is a, legally, stupid claim to make.
PACE Act: Really great to see this bill drop with The Digital Chamber’s support that will give greater banking rail access to fintechs while still limiting it so safety and soundness goals remain met. Good to see bipartisan legislation drop and hope it quickly moves forward.
Massive USDT Freeze: Tether froze almost $400 million of their USDT stablecoin on the Tron blockchain, and while this appears related to Iran or a pig butchering scheme instead of the recent hacks by North Korea, it still shows real world assets on blockchain tech can still be subject to (and comply with) lawful orders.
New York Coinbase Lawsuit: The New York Attorney General is suing Coinbase and Gemini related to their prediction market offerings, classifying them as illegal gambling. It looks like the CFTC was ready for that, and filed its own suit similar to in other states to prevent New York from imposing its gambling laws on CFTC-regulated commodities market operators (great thread breaking it down here). Wisconsin entered into the fray with its own lawsuits as well. This issue is going to SCOTUS so it’s just a matter of doing our best to ensure the weight of authority is on the markets/CFTC’s side when it gets there.
Arbitrum Freeze: The Arbitrum Security Council made the decision to step in and freeze roughly $70 million that was on their chain and directly linked to the Kelp DAO hack. Honestly, I am of the belief that this was the right move to make by the Security Council, while also reenforcing that people should understand when they are trading on a stage 1 L2 that this type of action can be taken by a limited group of people which has its own cost/benefit analysis to be understood.
DeFi United: It is really cool that in the wake of the KelpDAO attack, people are coming together to make up for the lost funds on DeFi protocol balance sheets, including the Solana Foundation which didn’t even have their ecosystem effected and is still giving. What’s important here is less that DeFi is getting stress tested (we all knew it would need to be) but that the DeFi community is rebuilding together and not asking for government bailouts and the like.
Galaxy Digital Policy Updates: Galaxy Digital put out a couple of great updates last week for crypto/legal nerds which included an update on where the CLARITY Act stands in Congress and a solid letter to the SEC regarding self-custody wallet and peer-to-peer trading technologies on the blockchain. Well done by their team.
DeFi Ed Coalition Letter: I was super happy to see The Digital Chamber sign on to this letter spearheaded by DeFi Education Fund. The internet isn’t an intermediary and neither are non-custodial software applications on the internet. The SEC’s guidance on this topic is a great first step and we support the SEC turning it into more durable formal rulemaking.
Bitcoin Documentary: Most stories trying to find the creator of the Bitcoin network have been dumb, but this one funded by people who are actually in the industry and which I hear determines the most likely creator was a group of people including the late Hal Finney is one I actually want to watch.
French Wrench Attacks: It appears the recent French wrench attacks against cryptocurrency holders is likely tied to French authorities’ collection of such data and then selling that data to criminals. It’s almost like collecting a bunch of information that authorities don’t need is its own form of danger? If only people like the Founding Fathers would have thought of that and enshrined rights against it here in America. Oh wait…
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 