It was another week with a ton of focus on the CFTC and how it is approaching prediction market rules with the first of many expected rulemakings on the topic of event contracts dropping last week. But we also got some significant rule change proposals from the SEC which will impact tokenized security trading when that day comes, and a farewell speech from Crypto Mom.
Here’s everything that happened last week in crypto law:
CFTC Releases First Prediction Market Rulemaking Focused on Public Interest Issues
The CFTC released the first of what is expected to be a series of rulemakings specific to prediction markets, this one focused on “Enumerated Activities” and when event contracts involving those activities go against the public interest. The most significant takeaway is that the CFTC is officially moving away from the idea that sports and other event contracts are presumptively problematic. Instead, the agency proposes evaluating contracts through a balancing test that considers factors such as hedging utility, information value, market integrity risks, insider information concerns, and whether an exchange can effectively oversee the market. No single factor would be dispositive.
Tl;dr– Special Rule 40.11 from Dodd-Frank and the CFTC’s implementing rules surrounding that provision has been a heavily debated topic in state agency litigation against the CFTC and its registrants, so it isn’t surprising to see the CFTC start there. The proposal represents one of the most prediction-market-friendly rulemakings ever issued by the CFTC. While it does not eliminate the agency’s ability to block event contracts, it replaces ad hoc decision-making with a structured framework that is likely to make approval of many prediction market products, including some sports-related contracts, significantly more predictable. The Digital Chamber will be responding with tweaks to further improve upon this rule and in support of the overall framework proposed.
OTHER STORIES
Everything App: SEC Chair Atkins has been a big proponent of revising SEC rules so people can have an “everything app” and do all their financial planning including trading stocks, crypto, futures, cash, etc. in a single place. So great timing for this article from Galaxy looking at Hyperliquid’s new HLP-4 protocol and Kalshi’s expansion into perpetual futures as these companies look to open more trading options for their users. Hyperliquid.
Prediction Market Monday: The first of a series of posts regarding common prediction market misconceptions is out! This is a recurring series so continue to check out The Digital Chamber’s socials and blog to learn more every week. Since I post this on Tuesdays, here’s a little peak at Week 2’s post as well.
Hester Speech: I know I feature a ton of SEC Commissioner Peirce statements since she seemingly never misses, but it was an oversight not to include this banger from two weeks ago. We are losing a brilliant Commissioner soon, so wish her the best in her future teaching and beekeeping endeavors.
Atkins Wins Long Battle Against NMS Rules: When Chair Atkins was just a standard SEC Commissioner back in 2005, he issued a historically scathing 44-page dissent against implementing Reg. NMS’s adoption. So it is no surprise to see the proposal to rescind those rules. But what people aren’t focused on (but should be) is how Rule 611 which is rescinded as well was one of the biggest technical blockers from trading tokenized equities in DeFi. A return to principles-based best execution is something DeFi can actually do functionally.
Accelerator Pushing Blockchain: Probably the most successful start-up accelerator on Earth, YCombinator, is saying if Clarity Act passes it expects every single one of its portfolio companies to implement blockchain-enabled technologies in some way. This is a story that kind of flew under the radar but is huge. Basically the companies that have the best chance of being the next Stripe or Door Dash are all going to be using crypto.
DOJ Laundering Charges: Things I love about the recent DOJ case against two individuals charged with money laundering crypto: (1) if all of crypto is money laundering, why do criminals need to use individuals like this to launder crypto? Answer: because crypto is incredibly difficult to actually launder because of the permanent and public data on all transactions. (2) this proves the DOJ can still go after money launderers and bad actors without needing to stretch the laws to encompass neutral software developers.
Crypto Tax Hearing: As covered last week, the House has released a series of crypto-tax proposals ahead of a hearing that occurred this past week. It seems like there is some urgency and bipartisan support for clearing up crypto-tax rules so certainly something to continue monitoring.
Morpho Token Raise: What is interesting about this recent raise announcement from Morpho is the fact that there is no entity owning equity in Morpho with the sale entirely coming from tokens. Not double dipping with tokens and equity in a development company that owns the IP. Just tokens. Brave new world!
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.
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