In what will likely be a familiar dichotomy for the next few years after the failure of the Clarity Act, the administrative agencies were busy last week implementing Clarity Act-type rulemakings and guidance under existing agency authorities. The SEC issued extremely significant (even if non-binding) guidance on application of securities laws to crypto assets on fully functional networks, while the Fed finally released its GENIUS Act implementing rules. The CFTC was also busy, cracking down on “mention markets” while reiterating its plans to facilitate tokenized trading on CFTC venues.
Here’s everything that happened in Crypto Law last week (special limited Wednesday “I Forgot to Schedule Post Yesterday” edition!):
SEC Crypto FAQ’s Limit Application of Securities Laws to Tokens
The SEC’s latest FAQs, while non-binding agency guidance, is potentially the most significant crypto-related release from the SEC to-date. The guidance provides: (1) liquid staking tokens are largely not securities; (2) promoting utility or future utility without promising investment returns are not investment contract promises; (3) ongoing maintenance and improvements to a functioning network are not essential managerial efforts; and (4) token buy-back arrangements are not, by themselves, the basis for an investment contract scheme. It is important to note that these are intended to be read in the context of the Interpretive Guidance from earlier this year, meaning parties with centralized control elsewhere on the network would not be able to rely on this guidance.
Tl;dr– This is all but confirming that the SEC should have never brought the LBRY case and that the current SEC believes the lower court was wrong for siding with the Commission in that and similar cases. Which I agree with. There is a big difference between selling tokens saying “in the future you will be able to do X with these” and selling tokens saying “you can use these for X now and maybe more later” which lower courts never seemed to distinguish (wrongly). No different in my mind than Tesla saying FSD will improve with ongoing software updates. While this guidance is largely bullish for crypto as a whole, even attorneys in the crypto space are questioning how far the SEC went with its token buy-back analysis. I personally prefer an SEC which is overly broad about what isn’t a security vs. the Gensler area where all allegations of fraud or mismanagement turned into securities law claims even if dinner club passes had never been deemed securities before (Flyfish Club was the second worst SEC cases after LBRY during the Gensler era, imo).
OTHER STORIES
Innovation Exemption Comment Letters Start: Some of these were likely already in motion before the SEC released their proposed Innovation Exemption, but I really enjoyed these letters from Gabe Shapiro, a16z, and DeFi Education Fund on how to make peer-to-peer equities trading through DeFi work. Also a good letter from Omid Malekan on the need for further definition of “permissionless network” from the SEC.
CFTC Mention Markets Warning: The CFTC released a staff advisory notice putting registrants on formal notice that “mention markets” (i.e., markets which resolve on whether an individual says certain words or phrases during events or whether an individual will attend certain events) present a heightened risk of manipulation. This is probably overdue, and while those markets are fun they probably don’t belong on federally regulated exchanges except in rare cases.
Chair Selig Reiterates that Tokenization is Coming: CFTC Chair Selig reiterated in a recent speech that “One of the most important innovations is the tokenization of real‑world assets. As I remarked earlier in my tenure as Chairman, high-quality tokenized collateral has the potential to make liquidity more dynamic and markets more resilient.” It just does not stop being nice to have administrative leadership embracing innovation. Looking forward to the pending rulemaking on crypto markets to be public.
Blackrock Crypto/AI Report: This Machine Native Economy report from Blackrock is the world’s largest asset manager saying what the crypto community has been preaching for years: “AI represents machine-native intelligence, while digital assets represent machine-native money.”
Fairshake Commits $30m Against Sherrod Brown: With zero Democrats voting for the Clarity Act, it is not a surprise to see Fairshake come out big against Sherrod Brown with $30 million committed to oppose his Senate bid. Anyone who remembers his prior role in the Senate knows he is second probably only to Senator Warren in opposing crypto, and with lack of committee term limits if the Senate goes Democrat, then Senator Warren will take the Banking Committee gavel again killing any chance of passible crypto legislation for at least 2 years. So with Clarity effectively dead this Congress, Fairshake’s hands were effectively tied here.
Traditional Money Laundering: This Financial Times article about how a “Kremlin-backed forgery scheme moved $6.9 billion through global banks” and how little coverage this got outside of this article is a great reminder that “old-fashioned” money laundering through highly regulated banks is insanely more common than crypto despite crypto’s relatively smaller illicit use getting all the media attention.
Online Anonymity is Dead: This recent paper where researchers were able to build an AI that can effectively dox a vast majority of Reddit accounts for $2 in token spend is a great reminder that nobody’s OpSec is as good as they think their OpSec is. Making privacy preserving technologies more important than ever.
Prediction Markets Lose in 6th Circuit: Well, this was a bummer to see the 6th Circuit side with state gaming regulators and, unlike the 9th which was largely dependent on CFTC Rulemaking changes, create a true split in authority form the 3rd Circuit. This puts prediction markets at 1-2 (or 1-1-1 depending on how you read the 9th Circuit Opinion) in appeals courts and comes as the Senate is looking to focus on the prediction market sector in this session or (more likely) next.
Polymarket Sued by New York: In other news, New York has now sued Polymarket as well bringing largely the same claims it earlier brought against Kalshi. It was going to be a hard discussion if New York had been forced to explain to a judge why it singled out Kalshi (other than in response to Kalshi’s political speech against the New York leadership) when there were other prediction markets headquartered and operating in New York as well.
Hester’s Last Day: SEC Commissioner Hester Peirce has her last day coming up this upcoming Friday. She was often the lone shining light during the Gensler era pushing back in dissents when nobody else would and as late as last week pushing for the value of digital assets including the ability to privately self-custody your own assets free of forced intermediation or warrantless surveillance. She has been a true public servant and will be missed.
Another Exchange Theft: Yet another theft of an exchange has me wishing the crypto privateer bill could get here sooner rather than later. It sucks to always be on the defensive against state-sanctioned hackers instead of going on offense.
Federal Reserve Stablecoin Rules: Last but not least, the Fed has finally released their proposed stablecoin implementation rules and they largely mirror the OCC’s. Not sure why it took so long just to mostly copy=paste other agency rulemaking, but glad to see this out there even though, like the OCC, The Digital Chamber will have some pushback on some of the proposals.
ETH World Computer: Hard not to be bullish on ETH when Vitalik releases his plans for the network through 2030 which includes network native privacy and the functionality to be the “world’s computer” which was promised.
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.
