It was a HUGE week in digital asset legal developments last week, with multiple announcements coming out of the Fordham Blockchain Summit, Predict, the Chicago Signal Forum, and Token 2049. The biggest update was the CFTC’s Regulation Crypto Asset Transactions and Regulation Crypto Asset Markets on where the CFTC has (near) spot regulatory authority. But there was also some swap rulemaking that came out of the CFTC important to prediction market operators, and FinCEN finally withdrew its proposed self-hosted wallet rulemaking proposal.
Here’s everything that happened in Crypto Law last week:
CFTC Drops Advanced Notice of Spot Market Regulations
The Commodity Futures Trading Commission released its advance notice of rulemaking consistent with the agency’s intent to establish a comprehensive regulatory framework for CFTC-regulated spot retail digital asset commodity transactions. The CFTC proposes to use existing authority granted under Dodd-Frank, which requires CFTC-registered exchange trading for certain retail commodity transactions offered on a leveraged or margined basis unless actual delivery occurs within 28 days. By interpreting the statute to cover transactions merely offered with leverage, even when fully paid, and concluding that internal exchange bookkeeping generally does not constitute actual delivery, the CFTC identifies a novel pathway to regulate spot crypto trading without additional congressional authorization.
Tl;dr– This represents a significant step toward establishing a federally regulated market for crypto assets, potentially reducing reliance on fragmented state licensing regimes while providing stronger market integrity and customer protections. While the CFTC’s jurisdiction would not be exclusive on the spot market, it does provide a federal pathway towards offering spot and leveraged crypto exchange activities. Importantly, it demonstrates the CFTC’s commitment to use existing statutory authority to advance digital asset market structure reforms, potentially achieving important objectives previously pursued through the Clarity Act without new legislation. I do wonder, if these will be utilized with most digital asset exchanges being comfortable at this point with the burdensome but workable state-by-state money transmission law compliance.
OTHER STORIES
CFTC Swap/Sportsbook Rulemaking: The CFTC was also busy putting out guidance regarding the extent of the CFTC’s swap exclusivity making it clear that swaps based on outcoming of sporting events does not preempt state-law regulated sports books who can continue such retail transactions under state law. Great job by the agency, which had to have been working on this even in advance of the 6th Circuit ruling which seemed to center on claims that the CFTC was claiming authority to regulate all sports-based event wagers.
Mashinsky Settles with New York: In something that made headlines but is a meaningless victory, former Celsius CEO Alex Mashinsky settled the case brought against him by the New York Attorney General which carries fines he will never actually pay because all his money has already been seized through the federal cases and as claw backs for investors. Nothing like spending state resourced for a headline I guess, though.
Ledger Reseller Breach: It appears a reseller of Ledger cold wallets in southeast Asia was confidentially acquired a while back and the buyer put malicious hardware in the wallets before resealing them and selling them to unsuspecting victims. Terrible situation, where people who thought they were being safe with cold storage ended up getting victimized. This is why I always suggest people just use their old/wiped iphones without a service plan/wifi only for cold storage devices.
SCOTUS Anti-Prediction Market Amicus’ Filed: The deadline for people wishing to file amicus in support of state authority to regulate prediction markets came in and “Charmain” Gensler of course had to weigh in, but surprisingly the NFL also asked the Court to hear the matter. Meanwhile, the NBA and every other major sports league is in favor of a single nationwide market for event contracts vs. 50-state sportsbook laws ruling the space.
Bunker Mode: There was a viral post from an Ethereum Foundation researcher about how risk of AI developments in cryptography may put crypto at risk ahead of even quantum computing. If AI has broken the cryptography that underlies most blockchain private keys then then we are in far bigger trouble than people losing their Bitcoin.
USDT Freeze Challenge: As stablecoin adoption rises, I do think we are going to see a lot more challenges to “improper” freezes and seizes by stablecoin issuers like this recent action that made news last week. This is why, as much as it sucks for victims, issuers wait for official government or court orders to freeze to insulate themselves from civil damages if the freeze is later determined to have been improper.
FinCEN Withdraws Self-Hosted Wallet Proposal: The Financial Crimes Enforcement Network (“FinCEN”) is withdrawing proposed rules which would have effectively banned the use of self-hosted wallets or certain privacy preserving protocols by most individuals and institutions. It’s a step in the right direction, but still need to free Roman Storm.
Community Banking Trade Sues OCC: The Independent Community Bankers of America have brought an Administrative Procedures Act Challenge to the OCC’s recent chartering decisions picking out the Protego conditional charter as the focus of the case. I am still waiting for community banks to push back against their trade organizations that are going against their own interests since innovation is one of the ways community banks can actually catch up with the monoliths that have taken community bank market share for years.
L2 Shutdowns: Both Blast and Abstract announced plans to shut down their L2 blockchains. Which signals the market is healing from when everybody was pushing some new Optimism roll-up which had no differentiation other than farming for native tokens without product market fit for anything actually using the blockchain productively. There needs to be more to the tech than people trying to game it for air drops.
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.
