There was a fairly massive ruling from the Ninth Circuit which creates an appellate court circuit split on prediction market preemption issues and which everybody believes is going to end up in front of SCOTUS eventually. There were also some updates from the SEC as it looks to modernize custody rules and works with the CFTC on joint authority over certain swaps.
Here’s everything that happened in Crypto Law last week:
9th Circuit Rules Against Sports Contract Preemption; No Determination on Election Contracts
The ninth circuit ruled in favor of Nevada in determining prediction markets on sports events when offered on CFTC-registered designated contract markets do not preempt state gaming law. It sent the issue back to the district court for further determination on if election event-contracts, which also have overlap with wagers offered on casino books, get similar lack of state preemption treatment. This makes it an official circuit split, with the third circuit coming out the opposite direction and the sixth circuit still awaiting decision. The appeal (if any) from New Jersey is due this upcoming week, so will be interesting if this speeds up the route to SCOTUS (though great analysis from Stefan at Paradigm on why the issue probably isn’t ripe yet).
Tl;dr– As I wrote about on Twitter and LinkedIn, I think the court got the decision wrong. There is a fundamental conflict with the Court ruling that (1) CFTC Rule 40.11 is relevant to the decision; and (2) the CFTC’s determinations on this do not preempt state law on the topic. If state law is not preempted, it is because the CFTC doesn’t have authority over these contracts at all. There is a ton of legal back-bending for courts to get to the lack of preemption determination because these cases were brought against the exchanges themselves instead of the regulator in an administrative procedures action, I think. The 9th Circuit claims there isn’t an administrative procedures act issue because Nevada isn’t challenging CFTC action or inaction, but CFTC inaction is exactly what is being challenged as to what the CFTC is allowing to be listed on the exchanges it oversees.
OTHER STORIES
24/7 Markets: Lots of ongoing debate on if third parties should be permitted to tokenize public company shares or if only the issuers themselves should have control on that, but what isn’t up for debate is the benefits of 24/7 markets in pricing stocks while traditional markets are closed, and shown by NVIDA shares being accurately priced at opening on DeFi platforms that allowed trading in those markets over the weekend.
Joint Swap Questions Answered: The responses to the SEC/CFTC joint RFI regarding the definition of swaps (including issues around security based swaps) was due this past week, and I might be biased but the pair of responses prepared by The Digital Chamber were the most insightful. Wonder if the playing nice between staffs can continue though, especially in hot issues like this where both want to protect their own turf claim.
SEC Custody Rule Changes Coming: There is a rule proposal at the White House for executive counsel review which would change how securities custody rules work. It will be interesting to see if the proposal hits on custody through vaults or if it kicks the can on that issue it will need to address eventually to some later date.
Bitcoin Quantum Developments: A couple interesting developments on how to prepare the Bitcoin network and associated tokens on that network to quantum computing. The first was a transaction executed on the existing network which would provide safety against quantum hacks but is economically infeasible at scale. The second was research from Blockstream which would create a more affordable fix but would require protocol upgrades. Either way, Bitcoiners are going to need to come up with some solution and there isn’t consensus on what that solution should be, yet.
Tornado Cash Retrial Delayed: The retrial on charges the first jury couldn’t reach a determination on in the case against Tornado Cash developer Roman Storm has been delayed until 2027. My hope is that the Court is at least considering kicking the entire first case (likely also killing this second trial) on the motion to acquit which it still has not ruled on.
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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