Edition No. 21
Edition No. 21
CFTC v. OoKi DAO; Ethereum jurisdictional concerns; CA Governor vetoes 'BitLicense'; MiCA submitted for grading; SEC v. XRP drawing near an end, and more. Here's what happened from 9/19/22 - 9/26/22.
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. Bird Watching (Tweet, tweet!)
4. Blockchain 101 (Our weekly educational segment! Written by law students)
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:
1. CFTC Announces First of its Kind DAO Lawsuit
More Regulation by Enforcement - this time from the CFTC
On September 22nd, the Commodity Futures Trading Commission (CFTC) announced a lawsuit against Ooki DAO, a crypto margin trading and lending platform, for allegedly engaging in unlicensed digital asset margin trading and failing to adhere to Know Your Customer (KYC) requirements prescribed under the Bank Secrecy Act (BSA).
The CFTC leveled the same charges against Ooki DAO’s predecessor bZeroX (bZx) and disclosed it settled charges against the founders of the company Tom Bean and Kyle Kistner for $250,000.
In an unprecedented move, the CFTC asserts Bean and Kistner are liable for the DAO’s allegedly illegal behavior because they held Ooki tokens and voted on governance proposals related to DAO operations. Though Bean and Kistner settled, neither admitted nor denied the charges. The CFTC is seeking penalties against the DAO, including disgorgement, fines, and potential trading and registration bans.
Ira Rothken, a veteran high tech attorney and founder of the Rothken Law Firm, noted in a tweet the CFTC bZx/OoKi case is a very important lesson for the various DAO communities because it shows non compliant conduct by a DAO can put all stakeholders at risk of personal liability in the absence of certain protections.
The CFTC’s action presents two important legal developments for the crypto industry. First, the holders of governance tokens who vote in a DAO can be held personally liable for the DAOs actions. And second, certain tokens like the ones on Ooki exchange will be labeled as commodities, giving the CTFC the necessary jurisdiction for enforcement.
According to Decrypt, the enforcement action is already having a chilling effect on certain DAOs. Gabriel Shapiro, General Counsel at Delphi Labs tweeted he is “already seeing DAO delegates talking about quitting their roles.” Shapiro also cautioned “if you are a DeFi founder threatened by regulatory action, please consider that you might have options beyond settlement.”
In a dissenting statement, CFTC Commissioner Summer Mersinger broke ranks and called the action “blatant regulation by enforcement” and said it fails to “rely on the legal authority” of the Commission’s mandate.
Whether other decentralized protocols fit within the scope of the Commodity Exchange Act presents novel and important legal questions for crypto. In addition, the way in which the CFTC defined the Ooki DAO as an unincorporated association and determined the bZx founders’ liability could have far-reaching implications in the world of DeFi and DAOs.
In the absence of crypto-specific legislation by U.S. lawmakers, the jurisdictional battle over crypto continues.
By: Evan Santos
2. SEC Claims All Ethereum Transactions Fall Under U.S. Jurisdiction in Balina Complaint
Jurisdiction a la ‘node’
In a complaint filed with the U.S. District Court for the Western District of Texas on September 19th, the SEC alleged crypto influencer Ian Balina sold unregistered securities in 2018 in the form of SPRK tokens.
Beyond the arguments on the merits, the SEC complaint appeared to suggest because more of Ethereum’s validating nodes (47.36% according to Etherscan) currently operate in the United States than in any other country, all Ethereum transactions globally should be considered subject to U.S. jurisdiction and securities laws.
The SEC reasons nodes “are clustered more densely in the United States than in any other country” and “as a result, those transactions took place in the United States.” The potentially unprecedented argument buried in the lawsuit’s 69th paragraph caught the attention of the crypto industry and has been the subject of broad discussion.
Importantly, the SEC did not solely rely on the node cluster argument for jurisdiction over the case because Balina is a U.S. citizen and jurisdiction had already been established. Additionally, at this stage, a judge has not considered the SEC’s arguments. As such, while the statement may be revealing of the SEC’s position, it does not as yet create any binding legal precedent.
Brian Fyre, law professor at the University of Kentucky College of Law, told Decrypt while the statement in Balina’s case holds some significance, the complaint itself bears no legal weight and due to the nature of the SEC’s suit against Balina, the court in this case is unlikely to weigh in on this specific issue.
“I think they may be trying to get their vision of what Ethereum is, and how it works, out into the judicial ecosystem,” Fyre told Decrypt. “It’s the SEC saying, ‘This entire body of financial activity is within the scope of the stuff that we regulate, and therefore we’re going to regulate all of it.’”
As we’ve reported, the SEC has recently ramped up cases against cryptocurrency projects from years prior, many of which are built on the Ethereum blockchain. Indeed, the SEC has long argued most cryptocurrency are securities.
During a congressional hearing last week, SEC Chairman Gary Gensler said most crypto firms are transacting in securities and should register with the SEC. He also hinted Ethereum could be classified as a security after the completion of its merge to a proof-of-stake consensus mechanism. Despite these statements, the SEC has yet to offer comprehensive official clarity on Ethereum under Chair Gensler.
By: Evan Santos
3. California “BitLicense” Bill Vetoed by Governor Gavin Newsome
California Crypto Lives On
On Friday, California Governor Gavin Newsom (D) vetoed a bill similar to New York's "BitLicense" bill that would have established a licensing and regulatory framework for digital assets.
Assembly Bill 2269, sponsored by Assembly member Tim Grayson (D), would have created a state licensing regime for anyone hoping to facilitate crypto transactions, similar to how money transmissions are currently overseen by the Money Transmission Act.
The California assembly unanimously passed the bill last month. If it had been signed into law, it would have required California-licensed entities to only interact with stablecoins issued by banks or otherwise licensed by the state Department of Financial Protection and Innovation (the ban would have been phased out by 2028). It also would have forced stablecoin issuers to remain fully backed by reserves according to CoinDesk.
In a letter of rejection to the California State Assembly, Governor Newsome cited his Executive Order N-9-22 issued on May 4, 2022, seeking to position California as the first state to establish a transparent regulatory environment that both fosters responsible innovation and protects consumers. In the letter, Governor Newsome recommended a “more flexible approach” that would evolve over time while considering the safety of consumers and related costs, asserting “it is premature to lock a licensing structure in statute without considering both this work (in-house efforts to create a transparent regulatory environment) and forthcoming federal actions.”
Newsom highlighted the need to wait for federal regulations to “come into sharper focus for digital financial assets” before working with the Legislature on crypto licensing initiatives.
How the federal government will regulate digital assets and related blockchain technologies remains to be seen. Federal agencies and White House offices recently released various reports on different aspects of digital assets ranging from crypto mining to CBDCs, but state reaction to these reports is only beginning to play out.
At least for now, digital asset firms in California will continue to enjoy the flexibility of not having a “BitLicense” requirement like in New York.
By: Evan Santos
4. EU Finishes Drafting MiCA
It’s ready. But is it right?
The Markets in Crypto Assets (MiCA) legislation has been finalized and a leaked copy of the text has been seen and verified by CoinDesk. The draft is still open for comments, but officials have told the media that it is, in effect, finalized.
Once passed into law, MiCA will require crypto platforms to publish detailed whitepapers, register with authorities and require stablecoin issuers to hold capital and be prudently managed. The EU is looking to take a ‘substance over form’ approach to the law, meaning enforcers will look at the real mechanics of crypto projects, not just the language they use to describe their operations. This could mean that provisions apply to assets categorized as NFTs but which in practice behave more like securities. For example, fractionalized assets - where a set of fungible tokens are issued to represent one NFT - are likely to be regulated under MiCA. The legislation will not apply to NFTs which are genuinely unique and incapable of being trading with each other.
“The issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility,”
the final compromise text says in a Recital, even if the issuer gave it a unique identifier.
The new draft also features changes that could indicate how the EU might treat algorithmic stablecoins, which were notably excluded from MiCA's scope when it was first introduced in 2020.
By: Kleb
See also: crypto.news, coindesk.com
5. SEC and Ripple Post Motions for Summary Judgment
Enough is enough. Who won SEC v. XRP?
The Securities and Exchange Commission (SEC) and Ripple Labs have both filed motions for summary judgment asking a federal judge to rule either that Ripple violated securities laws or to otherwise dismiss the lawsuit without requiring a trial.
The SEC sued Ripple labs on allegations that it raised over $1.3 billion by selling XRP in unregistered securities transactions. Ripple has always maintained that XRP sales did not meet the tenets of the Howey Test, and that XRP is in fact a currency.
"Ripple publicly touted the various steps it was taking and would take to find a 'use' for XRP and to protect the integrity and liquidity of the XRP markets,"
the SEC said in its filing.
Both parties have filed multiple discovery motions over the past two years, without litigating the underlying issue of whether Ripple violated securities laws. Now, both sides are asking the court to decide whether they have provided enough evidence to prove either way whether there was a violation.
By: Kleb
See also: coinspectator.com, bitcoininsider, coindesk
Podcasts, Videos, and Blogs
The brightest voices & sharpest pens:
Bird Watching
Tweet, Tweet, Tweet!
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.
Lesson No. 5: Stablecoins - what are they and how do they work?
By: Suryavir Dawar & Tamara Szulc
Welcome back, readers! Last week, we covered different token standards on the Ethereum network before diving into NFTs and their real-world applications. Today, we’re going to cover:
Introduction to stablecoins
Types of stablecoins
Terra-Luna crash
To learn more, read HERE.
Motion To Compel
Thought-provoking questions and arguments for your consideration each week:
Anti-crypto regulatory efforts grow more apparent in latest “Stable Ban”
By Nick Corso
The House is reportedly in the process of drafting an egregious, anti-industry bill that would ban all algorithmic stablecoins for two years. House representatives have been looking to propose stablecoin legislation for a few months, and a draft of this bill could be voted on within the week.
Under this bill, it would be illegal to issue or create new “endogenously collateralized stablecoins,” defined as stablecoins that represent a fixed monetary value and rely on another digital asset from the same creator to maintain a fixed price. Also, the bill requires research on algorithmic stablecoins from the Treasury, in cooperation with the Securities Exchange Commission (SEC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC).
Banning algorithmic stablecoins is the latest anti-industry step proposed in the House threatening to hinder continued innovation in the crypto space. Algorithmic stablecoins are very controversial in the industry. Some believe the technology could create a censorship resistant, decentralized medium of exchange while others see it as an asset backed by thin air destined for failure. However, the House’s proposed ban seeks to make the decision for us, effectively saying algorithmic stablecoins contain more risk for consumers than utility.
But this is the wrong approach because a ban will halt continued innovation and prevent the free market from determining the utility and value of algorithmic stablecoins. No developer or company is going to provide resources to develop an asset that is banned for two years, perhaps longer. While action does need to be taken to help protect consumers against the catastrophes reminiscent of Luna, this is far from the light regulatory touch Web3 would like to see.
The bill also calls for research on a potential central bank digital currency (CBDC), in addition to allowing banks and non-banks to issue stablecoins. If you are cynical about the US government's intentions for crypto regulation–as many in web3 are–the ban could seem like a way to halt innovation of decentralized stablecoins and usher in the CBDC, or at a minimum allow for stablecoins collateralized only by the US Dollar to ensure control over the stablecoin market. The CBDC itself raises several concerns for consumers, especially the potential erosion of privacy involving US citizens’ day to day transactions.
This legislation should raise concerns for anyone who thinks pro-innovation regulation allowing developers the autonomy to experiment is vital for crypto to reach its fullest potential.
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
Move Fast and Make (Break?) Things: IP-Related NFT Litigation Trends
Wintermute Asks Hacker To Return Stolen Funds — Or Face Legal Action
What is the future for crypto? | Cryptocurrencies & regulation in 2022
Crypto Lawyers Bet Big on Class Action Lawsuits as Market Slides
Crypto Law Firm Roche Freedman Fights to Stay in Bitcoin Case After Videos Surface
Terra Co-Founder Do Kwon’s Legal Troubles Unlikely to Affect Broader Crypto Markets, Analysts Say
U.S. - Federal
New DOJ Crypto Report Laser-Focused on Law Enforcement's Role in Biden's Crypto Framework
The SEC is Angling to Take Authority Over All Ethereum Transactions in SPRK Suit
CFTC Penalizes Blockchain Protocol $250K, Files Action Against Successor DAO
Blockchain Domain Owners Clash Over Trademark Infringement Claims
SEC Wants to ‘Remake the Law,’ Rather Than ‘Apply it,’ Says Ripple General Counsel
DOL asks judge to toss lawsuit over its 401(k) 'cryptocurrency guidance'
US Legislation Would Temporarily Ban Algorithmic Stablecoins Like Terra
U.S. - State Law
Blockchains’ Smart Contracts Could Be the Future of Gun Control in the States
Colorado Becomes the Latest US State to Allow Residents to Pay Tax in Bitcoin
Colorado Becomes the First US State Accepting Taxes in BTC and ETH: Report
International
Bank of Russia, Finance Ministry Agree on Crypto Mining Regulation, Law Expected Soon
Liverpool expands partnership with NFT fantasy sports startup Sorare
Crypto Exchange Coinbase Secures Registration From Netherlands' Central Bank
French Banking Giant Launches Bitcoin Fund Services For Asset Managers
Indian Government Working on How GST Tax Could Be Applied to Crypto
EU Finalizes Legal Text for Landmark Crypto Regulations Under MiCA
Closing Statements
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Quote of the Week:
“At his best, man is the noblest of all animals; separated from law and justice he is the worst.” - Aristotle
Ok, all done! You can go ahead and check your P/L now (Coin Market Cap)
This newsletter is written, curated, annotated, and edited by Christopher Foreman (@CryptlessInSEA), Kyler Wandler (@KylerW56), Nicole Prada (@octopape); Nick Corso (@nick_corso2); Evan Santos (@evansantos4); and Kleb (@kleb_33); with consultation and input from Jacob Robinson of the Law of Code Podcast; editing courtesy of TΞxas ₿l◎ckchain LawyΞr ; in collaboration with Ann Sofie Cloots; and support from the Blockchain Barristers Law Student Collective.
The articles and opinions in this newsletter are not legal or financial advice. For legal and financial guidance, please consult a qualified attorney or financial advisor.
Special thanks / image credits:
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