It’s Clarity Act vote week! Third time the charm, as there were multiple Clarity Act vote weeks in the months proceeding this one, but this time it’s on for real! We got new market structure text dropped late Sunday night ahead of the vote Tuesday of this week. We also saw the ongoing “Whitehat or theft” argument continue in the Liquid Network exploit, and lots of developments important to the Ethereum Network ecosystem.
Here’s everything that happened in Crypto Law last week:
New Market Structure Text Dropped Leading Up to Vote Tuesday
Market Structure (aka, the “Clarity Act”) had new text dropped ahead of a cloture vote which is scheduled for Tuesday the 15th when the Senate is back from their August recess. The new text hit on every single remaining Democrat ask which included enhanced ethical restrictions on ownership by public official including the President and Vice President with state AG authority to enforce via injunction, a yield circuit breaker for if deposits are impacted in the next 18 months by existing yield permissions, some further limitations on vertical integrations for spot market providers which will require many existing crypto exchanges to restructure their businesses if passed, and changes to the Blockchain Regulatory Certainty Act (“BRCA”) which removed explicit reference to 18 USC 1960 which is a huge blow to the developer protection aspects of the bill. The next text also retained the changes released earlier in the week regarding the DeFi registration rules in the agriculture/CFTC sections of the bill.
Tl;dr– The ethics provision is the single biggest change and something not many were expecting the President to agree to. This is a massive expansion which prohibits not just issuance or endorsement but also investment ownership outside of blind trust arrangements. The yield circuit breaker is also something floated by Senator Tillis and the 18-month limitation shouldn’t change much for crypto since there will be limited opportunity to show the deposit flight narrative is real (because it’s not real). The biggest issue is the changes to the BRCA which, admittedly, suck. It still says developers can’t be required to register under section 1960 as federal money transmitters, and failure to register claims were one of the swords which hostile DOJs have used against developers, but the clear criminal exemption is gone. This should make the bill much more likely to pass the Senate, but with the House’s new schedule the calendar remains a problem since the most likely outcome is this doesn’t get voted on in the House and signed into law until a lame duck session post-midterms which is tricky for any legislation and certainly even harder for massive sea-changing legislation like market structure.
OTHER STORIES
Whitehat Status Dispute: The group running the Liquid Network, which had 4,000 BTC withdrawn from individuals claiming to be whitehats who returned a vast majority of the funds but retained 15% as a “bug bounty”, is claiming this was not a Whitehat good actor but is instead just a thief. Both sides have reasonable points, and I just hope they can reach a resolution because if not, next time 4,000 BTC is exploited it might have zero returned which is bad for everybody.
Consensys Split: The company which runs both the MetaMask wallet software and a large amount of Ethereum network’s protocol and institutional work is splitting those two business lines into separate entities with Joe Lubin to remain head of the MetaMask wallet side of the business. This is probably an overdue change, so good to see the core areas of focus getting exclusive attention of separate entities now since both are so important to the Ethereum ecosystem as a whole.
ETH Targets Quantum Fix for 2029: The Ethereum Foundation (“EF”) is targeting the end of 2029 to release the necessary network upgrades for a post-quantum world. Always hard to actually know how realistic far out forecasts like these can be, but good to see this issue getting serious attention and thought from EF.
Case for Permissionless Networks Paper: Love to see compelling arguments from experts like Omid Malekan of Columbia Business School on why permissionless networks make sense for even highly regulated entities over networks permissioned at the network level. Everything businesses need to worry about regarding sanctions and specific regulatory compliance issues can be done at the token/app level while leaving the network itself permissionless. Well worth a read along with his earlier work with Rebecca Rettig and Michael Mosier on how Financial Institutions can use permissionless networks.
U.S. Bank and Stellar Stablecoin: U.S. Bank took the huge step of processing the first major transaction if its stablecoin, USBDC, on the Stellar Network. Love to see traditional financial institutions doing things they would have never done through blockchain technologies just a few short years ago due to the negative regulatory headwinds at the time.
Data Center Dividends Proposal: This proposal which would use tax revenue from data centers as dividends to local residents closest to those data centers/most likely to be impacted by them makes a ton of sense and is a great idea. Similar to Alaska oil dividends it seems like a fair way to prevent people totally removed from the data centers at issue to hold up proposals if the local communities those data centers would support want to host them.
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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