Merry Christmas, to those who celebrate! And no, as much as I love a big turkey dinner, the most wonderful time of year doesn’t wait for a meal. Christmas szn starts November 1.
In good news from crypto last week, the New York Stock Exchange is looking for ways to bring Hyperliquid pools onshore and available for U.S. users. Huge positive step for DeFi and on-chain financial markets generally. In bad news for crypto…(points to everything else). There was the largest theft potentially in human history which was perpetuated against Binance, and Utah is looking to send prediction market operators and participants to jail. In the words of Pete Campbell “Not great, Bob!” But the world turns on, as people turn their attention to the midterm elections this week and what that means for the next Congress.
Here’s everything that happened in Crypto Law last week:
CFTC Sues Utah Over Criminal Charges Against Prediction Market Participants
Utah Attorney General Derek Brown filed a civil lawsuit and criminal charges against prediction market Kalshi and affiliated market makers, specifically naming Susquehanna and other trading firms for acting as counterparties to trades. The CFTC has stepped in seeking to block Utah from enforcing its contradictory laws against CFTC-regulated financial markets. There is expected to be a hearing later this week as the CFTC seeks preliminary injunction against ongoing state actions while the courts across the country weigh in on the applicability of state laws to federally regulated exchanges.
Tl;dr– It is worth noting that Utah doesn’t just take issue with prediction markets based on the outcoming of sporting events, but other markets as well including the election markets that the D.C. Circuit ruled the CFTC was arbitrary and capricious in denying under the prior administration. The argument that states stepping in to regulate sports prediction markets had bigger implications for the larger financial derivatives ecosystem is coming to a head as The Digital Chamber predicted in our amicus in the 6th Circuit. Sports books offer odds on just about anything these days, so something being available for wagering on sports books (such as election outcomes) is not a distinguishing factor between where federal preemption ends and state law begins. Good for the CFTC stepping in to protect financial markets from this turf war grab by the states.
Binance Exploit is Biggest Theft in History
There are still ongoing investigations into how it happened, but what is clear at this point is that Binance had at least one of its hot wallets breached resulting in over $6 billion of assets across blockchains being stolen by what has been confirmed to be DPRK state-sanctioned hackers. The current theory is that a developer laptop was breached as one of the primary threat vectors, but there is likely more to the story than a single engineer leaving his laptop unattended. Over $3 billion of the stolen assets were frozen thanks to fast actions of many in the crypto space, and Binance has stated it has the funds to cover the full $6+ billion without effecting customer funds.
Tl;dr– The good news is that no U.S. customer funds were ever at risk here. The bad news is the comprehensive legislation from the Clarity Act which could have put cybersecurity standards in place for exchanges serving U.S. customers is unlikely to pass this year. The Digital Chamber sent a letter to Congress urging legislators to give the CFTC regulatory authority over U.S. digital asset exchanges immediately, to protect U.S. consumers while the thornier market structure issues like DeFi are subject to ongoing debate. While this attack was not due to some new AI exploit, which the rise of such threat vectors there is no time to waste in ensuring digital asset exchanges serving U.S. customers are not at risk of a similar breach. Good week for Google to roll out its private key sharding services for institutional customers, though. Also a good time for the digital privateers proposal to be explored again to hack back against the hackers.
OTHER STORIES
More Companies Object to Tokenized Stock: At this point, a vast majority of companies who were approached to have their stock tokenized for trading through the innovation exemption have rejected it. Their loss. Not sure why having more venues for liquidity for your shares is a bad thing. But some people are very publicly (while anonymously) making the push against this.
Kalshi $40 Billion Valuation: Kalshi’s latest raise was at a $40 billion valuation which seems right for a company that was at the forefront of prediction markets and has since also become leaders in perpetual futures. Also was cool to see their first fundraising deck and see how far the company has come. Congrats on the raise!
Hyperliquid Onshoring: Trade[XYZ] and ICE, owner of the New York Stock Exchange, are joining forces to bring 24/7 perpetual futures on Hyperliquid to the United States. Still very little details on the contents of this deal, but many expect it will include HLP-3-enabled wallet-gated and KYC’ed pools. More to come I am sure, and it’s certainly an exciting development.
Polymarket Exploit: It is hard to pay attention to the multi-million exploit of Polymarket the same week Binance was hit for over $6 billion, but it is a story worth noting. What is interesting is that neither of these exploits were tied to some new AI-powered breach which I think crypto-platforms are uniquely steeled against due to being battle tested for years.
NBA Information Sharing for Prediction Markets: The NBA is the latest to sign a memorandum of understanding with the CFTC to enable information sharing and protect market integrity against abuse. That leaves the NFL as the only one of the major 4 U.S. sports league to not sign a memorandum of understanding on this topic with the CFTC.
CFTC Holds AI Roundtable: The CFTC hosting the first event in its Frontier Forum to discuss the rising important of AI (or SI, according to the executive branch) in finance. Agentic trading is coming so it is great to see the CFTC getting out in front of this and developing the subject-area expertise needed to regulate in the age of AI.
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.
