Edition No. 20
The White House Framework on Digital Assets; Gensler and Benham's continuing power struggle; Do Kwon on the run; the US Justice Department's new "Crypto Sheriffs", and more. 9/12/22 - 9/19/22
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. Blockchain 101 (Our new weekly educational segment! Written by law students)
6. Motion to Compel (Meant to provoke thought and action)
7. The Public Ledger (Highlights from our weekly library of sources, built by our Feedly AI)
8. Closing Statements
On the Docket
Five things you might have missed last week:
1. White House Releases Comprehensive Framework on Digital Assets
The Results are in - what’s next?
After six months of research pursuant to President’s Biden’s March 9 Executive Order, the White House recently announced the “First-Ever Comprehensive Framework for Responsible Development of Digital Assets. ” The Framework encompasses nine reports from relevant federal regulatory agencies, such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
The reports outline recommendations for protecting consumers, investors, and the environment, in addition to promoting financial stability and national security. Like President Biden’s initial executive order, the “Comprehensive Framework” doesn’t enact new regulation, but does provide a clearer vision of U.S. crypto regulation and development.
Claiming to reflect “the input and expertise of diverse stakeholders across government, industry, academia, and civil society” the Framework is broken down into various sections : “Protecting Consumers, Investors, and Businesses,” “Promoting Access to Safe, Affordable Financial Services,” “Fostering Financial Stability,” “Advancing Responsible Innovation,” “Reinforcing Our Global Financial Leadership and Competitiveness,” “Fighting Illicit Finance,” and “Exploring a U.S. Central Bank Digital Currency (CBDC).”
Some highlights include:
The SEC and CFTC will continue coordinating efforts to enforce laws and share data on consumer complaints in the crypto space.
The U.S. Treasury expects to complete an illicit finance risk assessment on DeFi by the end of February 2023 and on NFTs by July 2023.
The Environmental Protection Agency, the Department of Energy, and other agencies will consider further regulating digital assets’ environmental impacts.
The President will evaluate whether to call upon Congress to amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers.
The federal government is exploring “a potential U.S. CBDC” alongside an “interagency working group” led by the Treasury “to consider the potential implications of a U.S. CBDC”.
Although the White House Fact Sheet did not include links to the full agency reports, Gregory Schneider aka Lawtoshi, Deputy General Counsel at Hedera and founder of the crypto law treatise the Cod3x, did the research and linked to the various individual reports. Schneider also advised the crypto industry should not have a knee jerk reaction to the fact sheet and instead fully digest agency reports before responding substantively. Here are the report links on Twitter courtesy of Lawtoshi.
Though garnering mixed reaction, the long-awaited direction from Washington has captured the crypto industry’s attention and represents a sign the U.S. federal government intends to support the growth of digital assets through interagency regulation. With a clear focus on consumer protection, preventing cybercrime, and possibly launching a digital dollar, it is becoming more clear the White House wants to capture the myriad opportunities crypto creates while mitigating its potential risks.
What this ultimately looks like depends heavily on the details of each report, as well as the implementation of any recommendations they contain.
By: Evan Santos
2. SEC Chairman Gensler Testifies Before Senate Banking Committee as SEC Continues Pursuit of Crypto Enforcement
SEC Action Last Week
On September 15, SEC Chair Gary Gensler gave testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs. Gensler's testimony covered a number of topics on the SEC’s agenda including market structure and equity markets, special purpose acquisition companies (SPACs), SEC Rule 10b5-1, and of course, crypto regulation.
On crypto regulation, Chairman Gensler defended his agency’s stance on digital tokens, arguing nearly all such offerings available today fit the definition of a traditional security and therefore should be registered and regulated accordingly.
The Chair also restated his belief bitcoin has the properties of a commodity. In a viral exchange, Senator Pat Toomey (R-PA) questioned Gensler to provide an explanation of the features which would make an asset like bitcoin a commodity rather than a security.
In the exchange, Senator Toomey noted crypto tokens have varying degrees of decentralization, as they usually do not have a financial claim on the issuer and typically can be settled in real time without intermediary. The senator stated, “these are very major and important differences from traditional securities and they merit a clearly stated and tailored regulatory framework.”
Given Gensler's belief most crypto tokens are not commodities, he testified he has asked SEC staff to “work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities.” He further stated many intermediaries, such as exchanges, broker-dealers, and those with custodial functions, deal in securities and should be registered with the SEC “in some capacity.” Chair Gensler has repeatedly argued existing regulations are adequate and has relied on them in regulatory enforcement actions against crypto firms.
Just last week, SEC Chairman Gary Gensler again broke down the ways in which his agency has already provided guidance, asserting more rules specially designed for cryptocurrency would not be forthcoming. And the SEC continues to crackdown on alleged bad actors in the crypto space.
On Wednesday, the agency sued a Chicago-based crypto company that allegedly sold $1.5 million in unregistered tokens and misled its investors about the nature of the sales. On Thursday, the SEC sued two crypto advisory firms and their owner for misappropriating investors’ funds. See SEC v. Chicago Crypto Capital LLC, et al; see also SEC v Gabriel Edelman et al. While many of the SEC crypto prosecutions like the ones filed last week may be warranted, the increasing volume of lawsuits is noteworthy. Be on the lookout for more crypto news coming out of the SEC in coming weeks.
By: Evan Santos
3. CFTC Chairman Benham Testifies Before Senate Agriculture Committee on Bill that Would Give CFTC Authority to Regulate Crypto
The Battle Rages On
At the exact same time SEC Chairman Gary Gensler was testifying before the U.S. Senate Committee on Banking, Housing and Urban Affairs, CFTC Chairman Rostin Behnam was testifying before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry regarding the Digital Commodities Consumer Protection Act (DCCPA).
The hearing reviewed the bipartisan bill from committee chair Senator Debbie Stabenow (D-MI) and ranking member Senator John Boozman (R-AR), which would grant oversight of so-called “digital commodities” to the CFTC.
The Stabenow-Boozman bill–the DCCPA–is separate from the Responsible Financial Innovation Act by Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY). Notable differences include the DCCPA’s alternative definition of a "digital commodity," the effect of which would place many cryptocurrencies under CFTC jurisdiction.
As Senator Kirsten Gillibrand, (D-N.Y) has pointed out, the DCCPA only applies to digital commodities, meaning other federal agencies will still need to be involved in regulating digital assets as a whole. CFTC Chairman Behnam agreed, calling it "one piece of the puzzle."
"We need to complete the larger puzzle because if we're going to see advancements in the technology, in the innovation, coupled with the customer protections, the market resilience, and ultimately financial stability, depending on the size of the market, we need to have this patchwork all plugged together," Behnam has said.
Critics of the bill are concerned the DCCPA could preempt state efforts at heavy crypto regulation, like in New York and California. On the other hand, supporters say the importance of getting some oversight in place for these unregulated facets of the crypto market supersedes any concerns about forum-shopping or regulatory turf wars.
In the testimony, CFTC Chairman Behnam said, "the volatility in the market, and its impact on retail customers—which may only worsen under current macroeconomic conditions—emphasizes the immediate need for regulatory clarity and market protections." Similarly, staff from groups like Citadel Securities and the Center for American Progress attended the hearing to testify and make a similar case.
Both symbolically and literally, the conflicting hearings of SEC Chairman Gensler and CFTC Chairman Benham last week represent the continuing battle over crypto jurisdiction in the U.S. Such testimony illustrates the differing approaches the CFTC and SEC are taking on crypto and further highlights the need for regulatory clarity. Stay tuned for more updates as the regulatory landscape of crypto continues to take shape.
By: Evan Santos
4. South Korea issues arrest warrant for fallen 'crypto king' Do Kwon
Catch me if you can (crypto edition)
Chosun Ilbo, a South Korean news outlet, said on Wednesday that a Seoul court had issued arrest warrants for the founder of Terra and five other individuals. According to a text message from the prosecutor's office, the warrants charged that Kwon and his associates violated Korean capital markets law.
Terra 2.0, the blockchain that Kwon's company Terraform Labs launched after the collapse of the previous Terra blockchain, has been severely impacted by the report. Since the news surfaced, the value of the network's native LUNA token has plunged by more than 33%.
The collapse of Terra prompted investigations by the U.S. Securities and Exchange Commission and Korean regulators, in addition to a number of class-action lawsuits. Janet Yellen, the U.S. Treasury Secretary, mentioned the incident in a recent speech in which she advocated for stronger stablecoin regulation.
The arrest order for Kwon follows the widely reported collapse of the Terra blockchain in May. The blockchain's ecosystem disintegrated after investors lost faith in the dollar peg of the network's UST stablecoin, after briefly becoming the fifth-largest cryptocurrency by market capitalization. Since UST was not backed by actual money and instead maintained its value through an algorithmic relationship with LUNA, the loss of confidence caused a death spiral and sent the prices of LUNA and UST to fractions of a penny, erasing more than $40 billion in value.
By: Kyler Wandler
5. US Justice Dept forms national network of prosecutors focused on crypto crime
Taming the Wild West
Officials announced that the U.S. Justice Department has hired more than 150 federal prosecutors across the country to bolster law enforcement's efforts to battle the surge in crimes tied to the usage of cryptocurrencies.
The Digital Asset Coordinators Network aims to designate subject-matter specialists at U.S. attorney's offices on the technical and legal complexities of cryptocurrency cases, according to officials. The Biden administration is introducing the new initiative alongside the introduction of a broader set of regulatory frameworks from other agencies regarding the development of the digital currency ecosystem on Friday.
Eun Young Choi, the first director of the Justice Department's national cryptocurrency enforcement team, stated that the network was motivated in part by the high level of technical expertise required to prosecute cryptocurrency cases, as well as the growing popularity of digital currencies across a spectrum of criminal activities. She noted that these areas of corruption include money laundering or sponsoring terrorism, a payment mechanism for ransomware hackers, and a direct target of theft. According to Treasury Secretary Janet Yellen:
“As we have seen over the past few months, risks stemming from improper conduct related to the trading of crypto assets continue to present an especially grave area of concern. This includes frauds, thefts and scams. We recommend that agencies continue to rigorously pursue their enforcement efforts focused on the crypto asset sector.”
By: Kyler Wandler
Podcasts, Videos, and Blogs
The brightest voices & sharpest pens:
The Voices of Women in Crypto - Q&A with Vikki Vander Woude
By Nicole Fernandez Prada
1. How did you get started in crypto?
Vikki: In Fall of 2021, I attended a trial lawyers’ conference where one of the topics was non-fungible tokens. I had no background whatsoever in crypto or gaming, and left curious about the technology and potential use cases. I spent the next few months researching and collecting NFTs and the rest is history.
2. What accomplishment in Web3 are you most proud of and why?
Vikki: I am most proud of the friends and connections I have made in Web3, and all that I have learned and continue to learn that will help me to continue to contribute to elevating the Web3 community as blockchain technology evolves to mass adoption.
3. Has it been difficult for you as a woman to engage and retain an audience in this space?
Vikki: Women are still a minority in the Web3 space. I have made it one of my missions to try to bridge the gap between the vast ages, backgrounds and genders in the space because we can all learn from each other and come together for the overall benefit of the entire space. The space is overly divided and distracted by support for individual NFT projects, and news of the day, and so many miss the importance of supporting each other. I have definitely noticed that women led projects receive less engagement and attention in the space, and that is frustrating. But I am optimistic that as mass adoption occurs and the space becomes less about trading for short term profits and more about significant use cases, those issues will diminish.
4. Have you ever experienced imposter syndrome? If you have, how did you overcome it?
Vikki: I have definitely experienced imposter syndrome and am a firm believer in the concept of facing your fears and, if necessary, “faking it until you feel it.” I don’t mean to be disingenuous. Rather, it is important to push through your doubts and fears and carry yourself as though you already are the person you eventually want to be. That feeling that you are improvising will eventually disappear as you become that self-confident, competent, person tackling whatever challenge it was you doubted you could achieve.
5. What are you working on now that you’re excited about?
Vikki: Right now, I am using the bear market to continue to learn and support the NFT community as we approach the next stages of its development. I continue to practice law full time, write, teach, support projects and people in the space that I respect, and create opportunities to develop ideas.
6. What would meaningful improvements to this space (in regards to gender equality) look like to you?
Vikki: I would like to see greater equality regarding securing seed funding for women-led projects.
7. What advice would you give to other women looking to enter into the space?
Vikki: My advice to women entering the space is to not be afraid to find their own voice and role. Nothing is set in stone and we are all still early. Learn as much as you can about the culture and technology, and find the communities that you connect with the most. Personally, I think it’s beneficial as a woman to diversify your connections and not just immerse yourself with women-led projects, but join multiple communities and learn from the diversity of the space. It is only from the inside that we can create change.
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!
Blockchain 101 is the product of our team’s desire to reduce what has typically been a significant educational barrier of entry into the crypto space. Our goal is to create a digestible and understandable curriculum accessible to anyone - while simultaneously helping our own nascent members to expand their understanding of the fundamentals of Web3.
Lesson No. 4: Introduction to ERC Standards and NFTS
By: Suryavir Dawar, Tamara Szulc, and Janet Yihm
Welcome back, readers! Last week, we covered the Merge, Ethereum’s transition from Proof of Work to Proof of Stake, which took place successfully on September 15th. Ethereum’s network of developers must be given immense credit for pulling off an unprecedentedly complicated technological feat. Today’s edition is all about non-fungible tokens (NFTs). Specifically, we’ll cover:
Different types of ERC tokens;
An introduction to NFTs
Real-world application of NFTs;
To learn more, read HERE.
Motion To Compel
Thought-provoking questions and arguments for your consideration each week:
Tarantino v. Miramax: Stare Decisis in the Land of the Stars?
By Violet Flocks
Earlier this month, acclaimed film director Quentin Tarantino settled a copyright suit with Miramax LLC, a production company, over the director’s “Pulp Fiction” non-fungible tokens. The NFTs in question provide access to digital copies of never-before-seen handwritten Pulp Fiction scripts and commentary from Tarantino, with the first of the seven tokens selling for $1.1 million in January.
As the distributor of the 1994 film, Miramax felt they were entitled to considerations earned in the sale of the NFTs and sued Tarantino in November 2021 after Secret Network announced it would be selling a one-of-a-kind NFT collection based on the academy-award winning screenplay on their private blockchain. Miramax alleged only specific rights were reserved by Tarantino, and NFTs were not on the list. Tarantino responded by claiming the NFTs are based solely on his screenplay, which was covered under a separate copyright. It is common in the entertainment industry for studios to seek as many rights and protections as possible regarding intellectual property emanating from their projects, while the creator often reserves far fewer rights. Some creators are savvier than others, however; George Lucas infamously reserved his right to merchandising when negotiating the purchase agreement for Star Wars, and continues to profit off every toy lightsaber sold worldwide (galaxy wide?).
Digital assets have taken the world by storm, and now Hollywood wants their bite of the blockchain. Or rather, they’ve realized how big the bite could potentially be and want to set precedent in their favor.
According to the Miramax complaint,
“Tarantino’s reserved rights were limited to the ‘soundtrack album, music publishing, live performance, print publication (including without limitation screenplay publication, ‘making of’ books, comic books and novelization, in audio and electronic formats as well, as applicable), interactive media, theatrical and television sequel and remake rights, and television series and spinoff rights.’”
Miramax claimed Tarantino’s reserved rights do not contain any forward looking language, but can the same be said about their broad rights “now or hereafter known…in all media now or hereafter known”? Does an NFT constitute an “interactive media” as defined in the rights agreements which quietly permeate the development and production processes behind every television show and movie we consume?
While many legal web3 enthusiasts might have enjoyed the arguments and precedent of the Miramax suit, both parties are expected to file dismissal papers. In a joint statement, Tarantino and Miramax said they look forward to future collaborations, including future NFT projects. Money talks, after all.
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
“Trust the Process”? – Privacy and Cybersecurity Issues With Court Service of Process via NFT
Hackers Put Ethereum Founder on Italy Ministry Twitter Profile
Binance Teaches Law Enforcement Agencies How to Track Crypto Crime
Expect Greater Regulatory Scrutiny Of Crypto-Asset Activities
U.S. - Federal
App Store Protected by CDA Immunity (and Limitation of Liability) for Losses from Fraudulent Crypto Wallet App
Justice Department Announces Report on Digital Assets and Launches Nationwide Network
Fla. Atty May Skirt Prison For $5M Crypto Scam Due To Health
Crypto contributions to US election campaigns require legal navigation
FTX Is in the Lead to Buy Crypto Lender Voyager Digital’s Assets Out of Bankruptcy: Source
U.S. - State Law
BitGo enters into legal battle with Galaxy Digital over breach of contract
An Under-the-Radar California Bill Could Transform Crypto Nationwide
BitGo Accuses Galaxy Digital of ‘Intentional Breach’ of Contract in $100M Suit
'Love Island' stars and Web3 enthusiasts mingled at New York Fashion Week, where some new looks got the metaverse treatment
Anchorage Digital Offers Japanese Yen Stablecoin Approved by New York’s DFS
Top 10 U.S. States That Are Most Interested in Cryptocurrency
Regulatory Roundup: Florida Warns of Crypto Scam, Louisiana Helps with $129 Million in Additional Claims, Connecticut Weighs in on Federal Subsidies
Brad Sherman, California Congressman, Continues Tirade Against BTC
Crypto Miners From US, EU Stay Put in Russia Despite War, Sanctions
Possession of Bitcoin still legal in China despite the ban, lawyer says
1 Year of Bitcoin in El Salvador: The Bad, the Good and the Ugly
China plays both sides in crypto: Trading is legal, crypto payments illegal
Chinese Court Approves Litecoin but Not Its Use as Legal Tender
Crypto Unit of Japan's SBI Wins Capital Markets License in Singapore
Crypto class actions alert as Victoria becomes forum of choice
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We hope you enjoyed our newest segment Blockchain 101! Blockchain 101 is the product of our team’s desire to reduce what has typically been a significant educational barrier of entry into the crypto space. Our goal is to create a digestible and understandable curriculum accessible to anyone - while simultaneously helping our own nascent members to expand their understanding of the fundamentals of Web3.
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Quote of the Week:
“Justice? You get justice in the next world, in this world you have the law.” - William Gaddis
Ok, all done! You can go ahead and check your P/L now (Coin Market Cap)