Edition No. 16
Polygon's new Chief of Legal; SEC v. Dragonchain; OFAC's power; Coinbase's Motion to Stay; The road ahead for Celsius, and much more. Here's what happened from 8/16/2022 - 8/22/2022.
Welcome to another edition of Around the Blockchain, the weekly letter dedicated to keeping readers like you up to date on the fast-paced world of Crypto & Law by airdropping current stories and projects directly to your browser.
Table of Contents:
1. On the Docket (Top 5 Stories of the Week)
2. Podcasts, Videos, & Blogs (The faces, voices, and pens of Web3’s brightest contributors)
3. Voices of Women in Crypto (We need more women in Crypto - this is our small contribution: A bi-weekly segment dedicated to the women changing the space).
4. Bird Watching (Tweet, tweet!)
5. Motion to Compel (Meant to provoke thought and action)
6. The Public Ledger (Highlights from our weekly library of sources, built by our Feedly AI)
7. Closing Statements
On the Docket
Five things you might have missed last week:
Polygon, a scaling platform for the Ethereum blockchain, hired veteran crypto lawyer Marc Boiron as its Chief Legal Officer. Boiron has been a blockchain and securities attorney since 2015 and most recently served as general counsel for the decentralized exchange dYdX.
Polygon recently tweeted:
“Despite the looming ‘crypto winter’ and precarious macroeconomic landscape, Polygon continues to recruit top-tier talent from leading companies, including EA, Amazon, Meta, and Google.”
Boiron’s hire follows a series of major additions to the Polygon team. Polygon Studios–the NFT, metaverse, and gaming arm of Polygon–hired Nick Snow, a former member of Amazon’s legal team in June.
These hires come in the wake of Polygon raising $450 million last year by selling its MATIC token to several VCs and investors including Sequoia Capital India, Tiger Global, Accel Partners, and Reddit Inc. co-founder Alexis Ohanian.
In addition, Polygon recently announced several significant partnerships with major brands including DraftKings, Meta, and Disney, to name a few. Polygon states that it:
“…stands at the forefront of decentralized innovation, constantly striving to push the industry forward in a productive and meaningful way.”
Boiron's experience and insight as a seasoned blockchain attorney will undoubtedly be a valuable asset to Polygon as they attempt to navigate Web3’s developing regulatory and legal landscape.
Big Brother is Watching:
On August 16, the SEC charged John Joseph Roets and three affiliated entities– Dragonchain Inc., Dragonchain Foundation, and The Dragon Company–for allegedly raising over $16 million via unregistered crypto asset securities offerings.
Seattle-based Dragonchain is an enterprise blockchain startup that grew out of a platform originally developed by the Walt Disney Co. in 2014 before going open-source in 2016. The 17-page complaint filed in the U.S. District Court for the Western District of Washington alleges CEO John Roets and his codefendants violated the Securities Act of 1933 by raising millions of dollars from the sale of dragon (DRGN) tokens in a 2017 initial coin offering (ICO) predominantly marketed to crypto investors. The SEC will seek:
“…permanent injunctions, disgorgement with prejudgment interest, civil penalties against and conduct-based injunctions.”
The suit comes as no surprise to Dragonchain and Roets. After more than four years of communications, the SEC informed Dragonchain on April 27 investigators would recommend pursuing legal actions for the alleged sale of unregistered securities, according to a post by Roets that linked to a lengthy preemptive defense.
2017 saw numerous crypto startups raise capital via ICOs, and the following years have seen the SEC bring a series of related enforcement actions. In the 2013 Supreme Court case Gabelli v. Securities and Exchange Commission, the Court clarified the 5-year statute of limitations applicable to SEC enforcement actions seeking financial penalties begins to accrue when the alleged violation occurs–not when the SEC discovers the violation.
The SEC has taken what many call an aggressive approach with crypto and is likely to bring more enforcement actions for ICOs as the statute of limitations continues to run.
Article title of the year candidate.
The crypto industry has long aspired to follow Uber's business strategy of ignoring regulations until it becomes too big to govern - known as "regulatory escape velocity." With Uber, the main tactic was to blatantly break the taxi laws in thousands of separate towns and dare the local authorities to take enforcement action. When it comes to cryptocurrencies, the standard defense is to simply "build code" that seemingly disregards centuries of financial law before unleashing it on the world.
The Office of Foreign Asset Control (OFAC), has now come into contact with the cryptocurrency ecosystem. The virtual currency mixer "Tornado Cash" and all of its wallets were added to the Specially Designated Nationals and Blocked Persons List (SDN list) of organizations on August 8.
Author Nicholas Weaver of the Lawfare Blog concludes:
“Overall, the cryptocurrency community’s attempt at regulatory escape velocity has run into a huge obstacle: There is no escape velocity from the surface of a black hole. Things are now entering the “Find Out” stage of OFAC Around and Find Out.”
Motion to Stay // Staying in Motion
The Supreme Court dismissed cryptocurrency exchange Coinbase's request to suspend litigation in two instances and to expedite consideration for a writ of certiorari. Coinbase's certiorari request will be decided this year.
Abraham Bielski, a Coinbase user, claims his crypto wallet was hacked, resulting in the loss of $31,000. Bielski claims he tried to contact the corporation through several means but was unsuccessful, and argues Coinbase failed to protect its consumers against fraud under the Electronic Funds Transfer Act. A California judge determined that Coinbase's arbitration restrictions are unenforceable under California contract law, allowing the matter to go to trial.
Coinbase challenged Bielski and another similar ruling to the Ninth Circuit and urged it to suspend district court proceedings while the appeals were continuing. When the Ninth Circuit refused to stop district court litigation, the crypto exchange sought the Supreme Court to hear the cases (writ of certiorari), to accelerate its review, and to suspend district court proceedings throughout its review.
“Hard is the way up and down another man’s stairs…” - Dante Alighieri
In a bankruptcy hearing, Celsius's attorney, Joshua Sussberg of Kirkland & Ellis, stated that the two new board members, David Barse, the former CEO of Third Avenue Management, and Alan Carr, the founder of the restructuring services company Drivetrain, could "take remedial action" based on the outcomes of their investigation.
Since its 1.7 million users make up the majority of its creditors in the bankruptcy, the Celsius bankruptcy docket has filled with hundreds of letters from users, many of whom claim they were duped by the founders Alex Mashinsky and Nuke Goldstein's upbeat rhetoric.
These emails referred to optimistic signals such as a blog entry from June headlined "Damn the Torpedoes, Full Speed Ahead," which promised Celsius users that the company "has the reserves" to serve them, that they may make withdrawals, and that the company has a "world-class risk management staff."
This news comes as Celsius Gets Court Blessing to Sell Mined Bitcoin in an attempt to regain financial standing after filing for bankruptcy. Trial attorney Shara Cornell notes:
“What we’re really concerned with in this case is transparency and we don’t have that type of visibility into the mining operations. For example, we have no understanding at this point in time what the debtors’ utility-related costs are for running these mining rigs.”
Podcasts, Videos, and Blogs
The brightest voices & sharpest pens:
Jacob sits down with Yitzy Hammer and Samuel Goldfaden in episode #58 of Law of Code: co-founders of DLT Law and two crypto-focused lawyers based in Israel. Yitzy has been working with tech companies for the past 6 years on M&A, IP, privacy (CIPP/E certified), and corporate and commercial law-related legal issues. Samuel specializes in AML compliance and financial regulation.
The Bankless Podcast team covers the Tornado Cash fallout, the Ethereum Merge, a16z’s latest investment, Sudoswap NFTs and more in this weeks ROLLUP:
Bloomberg Crypto examines President Biden’s approach to crypto:
In the Unchained Podcast Ep. 386, Laura and cast discuss the Tornado cash sanctions:
Can you sanction a smart contract? $1.9bn stolen in crypto hacks this year. Fiduciary duties for open source devs? US Fed guidance on master account for crypto banks. CCO license for NFTs. Author Ann Sofie Cloots covers this and more in CryptoLaw Newsletter #62:
The Voices of Women in Crypto
By Nicole Fernandez Prada
A Chat with Jamilia Grier
This week on the Voices of Women in Crypto we spoke to the inspirational Jamilia Grier.
Jamilia Grier is a force to be reckoned with. A powerhouse lawyer-turned-crypto-entrepreneur – she is passionate about blockchain technology and its potential to change the world for the better.
Jamilia's journey into crypto began in 2014 when she started exploring the possibility of launching an app to facilitate international trade transactions in the chemical industry. She was immediately drawn to the potential of blockchain technology to streamline processes and bridge the gap across a number of industries.
However, it was not until later she made the decision to leave her corporate job and launch her own legal services firm specializing in the blockchain and digital assets. Since then, she has been on a mission to educate and empower others to embrace this new technology.
Jamilia is a founding member of ByteBao, a leading legal and business consulting firm that helps Web3 and blockchain clients comply with legal and ethical standards in the Web3 landscape. She believes lawyers must continue to work together in a decentralized manner to provide clients with real value–no more gatekeeping, no more ivory towers.
Jamilia is a strong advocate for the power of decentralization and the need for more diversity in crypto. She believes crypto is for everyone and we all have a role to play in its development.
Jamilia mentioned she used to experience imposter syndrome earlier in her career. Not due to any inadequacies on her end, but simply because she was the only woman or black woman in certain settings. She came to realize such situations were a testament to her own resilience and ability to navigate all kinds of dynamics. Whether it was speaking Chinese to government officials in Shanghai or holding high-level meetings with executives of large MNCs, she began to realize she was not an imposter, she was simply a unicorn. She would encourage other women to stop viewing themselves as imposters and start seeing themselves as the amazing badasses they are.
As a woman of color, she is especially spirited about increasing access to and participation in the crypto space for underrepresented groups. She sees meaningful improvements to the space as actually doing what is needed, not just simply talking about it! We echo her sentiments that no matter your expertise, now is the time to learn and grow into new roles and disciplines!
She left me with these incredible words
“Don’t wait for a seat at a table - create your own table.”
Jamilia is an inspiration to us all. She is proof that blockchain technology is not just for large corporations or wealthy investors. It is for everyone willing to learn and embrace its potential.
To see Jamilia’s direct answers to our questions, read here.
We hope this segment inspires women from all backgrounds to learn and grow within the crypto space! If you have educational links to share we’d love to show them to the public! Reach out to us via Discord or @Octopape on Twitter.
Tweet, Tweet, Tweet!
@Lawtoshi breaks down Burt v. Travelers Commercial Insurance Co.:
@exlawyernft offers a prediction:
@legalwritingpro noticed something “strange” in this Preliminary Junction:
Motion To Compel
Thought-provoking questions and arguments for your consideration each week:
By: Nick Corso
Decentralization is a fundamental principle of blockchain technologies and Web3 at large. It also plays a crucial role in a protocol’s conformance with securities laws. Courts employ the four-pronged Howey test to determine which agreements constitute an investment contract. The United States Supreme Court held in SEC v. Howey Co., 328 U.S. 293 (1946) an investment contract:
(1) involves an investment of money
(2) in a common enterprise
(3) with a reasonable expectation of profit
(4) solely based upon the efforts of others.
Lower courts and regulators have since interpreted the fourth prong such that the reasonable expectation of profits is derived primarily–not merely solely–from the entrepreneurial or managerial efforts of others. For the fourth prong to remain unsatisfied, “sufficient decentralization” must be achieved. The genesis of this idea originates from William Hinman, a former director of the SEC’s Division of Corporation Finance. Hinman stated:
“If the network on which the token or coin is to function is sufficiently decentralized where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.”
The Framework for the Investment Contract Analysis of Digital Assets by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) formalized this idea by concluding that if a person has a reasonable expectation of profit from an uncoordinated and wide range of people–the protocol is sufficiently decentralized and thus, not an investment contract subject to SEC registration and jurisdiction.
To continue reading, please follow the link HERE.
Nick is a fellow Blockchain Barrister Law Student, and is a 2L at the University of Miami School of Law. Coming from an engineering background, Nick is interested in intellectual property law and crypto law. Twitter: @nick_corso2.
The Public Ledger
Highlights from the hundreds of sources gathered each week by our research AI. Always DYOR - but in case you don’t have time, here’s some of ours:
General News and Opinion
U.S. - Federal
U.S. - State Law
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New segment alert:
We’re excited to introduce our new educational segment Blockchain 101 in next week’s letter. The goal of this segment is to reduce the barrier to entry for the crypto-legal space for all, and to onboard new community members with simple and effective educational overviews of the foundations of Web3.
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Quote of the Week:
“Cryptocurrency currencies take the concept of money, and they take it native into computers, where everything is settled with computers and doesn't require external institutions or trusted third parties to validate things.” - Naval Ravikant
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