Edition No. 25
Ripple v. SEC continues; SBF in the hot seat; Craig Wright; 9th Circuit Californication; Celsius meets billable hours, and more. Here's what happened from 10/18/2022 to 10/24/2022.
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. Bird Watching (Tweet, tweet!)
4. Motion to Compel (Meant to provoke though and action)
5. The Public Ledger (Highlights from our weekly library of sources, built by our Feedly AI)
6. Closing Statements
On the Docket
Five things you might have missed last week:
1. Ripple Labs Obtains Long-Sought Hinman Documents
The Saga Continues
On Oct. 21, after months of proceedings, the SEC agreed to release documents Ripple claims will shed light on the regulator’s thinking and strengthen its arguments against the agency. The case over whether XRP is a security remains closely watched, as it could set a legal precedent affecting the entire industry.
Ripple general counsel Stuart Alderoty confirmed on Twitter his company finally has the elusive Hinman documents after, “18 months and 6 court orders.” Though he noted they remain confidential at the SEC’s insistence. “It was well worth the fight to get them,” Alderoty stated.
The documents concern former SEC Corporate Finance director William Hinman and a much-publicized speech he delivered in 2018 declaring Ethereum—like Bitcoin—was "sufficiently decentralized" and thus not subject to federal securities regulation.
Last month, a federal district judge overruled the SEC’s repeated attempts to prevent Ripple from accessing the documents. Counsel for Ripple also expect to hear from Hinman directly, having won the opportunity to depose the former SEC director last year.
This latest development comes as both Ripple and the SEC recently called for a summary judgment in lieu of a trial. While XRP is still down 87% from its all time high, the push for an expedited resolution in the case has driven an increase in XRP’s value in recent weeks. Stay tuned as this potential precedent setting case continues to move forward.
See also: blockworks.com
By Evan Santos
2. FTX’s Sam Bankman-Fried proposes standard for sanctions, licensing for DeFi protocols
SBF Under Fire Over Proposed Centralized Industry Standards
On Oct. 19, crypto billionaire and FTX CEO Sam Bankman-Fried (SBF) tweeted his “current thoughts on crypto regulation” alongside a more detailed set of Possible Digital Asset Industry Standards posted to FTX’s Policy website.
In the blueprint, SBF explains how he believes hacks can be limited and how FTX plans to decide which crypto assets are securities. He also proposes customer protection standards, a stablecoin auditing mechanism, and regulation using “blocklists” to ban blockchain transfers between sanctioned parties.
On its face, SBF appears to be suggesting mostly logical rules to safeguard consumers–especially vulnerable retail investors. He nonetheless drew stark criticism from many in the crypto industry. Detractors of SBF’s proposal believe the regulatory measures he espouses will inevitably limit DeFi’s potential and ultimately lead to its demise.
One of the first to respond was Bankless founder Ryan Sean Adams who said, “Sam. With respect. This absolutely sucks.” Erik Voorhees, an early Bitcoin investor, also outlined numerous concerns with SBF’s proposal and penned a response explaining his position. Voorhees agrees with the need for transparency and scam prevention but has opposing views on two key elements: following OFAC sanctions and licensure for DeFi-related activities. Voorhees and other critics assert both would completely remove the “decentralized” part of DeFi, simply transforming it back into CeFi/TradFi.
Blockchain analysts Chainalysis recently reported the US leads the world in DeFi activity, claiming a 37% share to runner-up Europe’s 31%. SBF’s critics claim the US’s frontrunner status would vanish if regulators heed his advice. While it is unknown whether any of SBF’s suggestions will gain transaction in Congress, the responses to his proposal demonstrate the deep divide over how crypto should be regulated.
By: Evan Santos
3. Crypto Community Reacts to Hodlonaut Historic Win in Legal Battle Against Craig S. Wright
Nakamoto? Not so fast:
On October 20, 2022, Norwegian Judge Helen Engebrigtsen found that Hodlonaut had sufficient grounds to say that Wright lied about being Satoshi Nakamoto. Consequently, she exonerated Granath and ordered Wright to pay him approximately $383,000 in legal fees.
The judge's decision arrives far sooner than anticipated. After the seven-day trial concluded on September 21, 2022, she tentatively scheduled the judgment for November 8, 2022. Regardless, the complete Norwegian translation of the judgement can be viewed here.
After Hodlonaut's victory, attorney Preston Byrne expressed his admiration for the horse. According to Byrne, he served as Granath's pro bono attorney in 2019.
4. Ninth Circuit Rules California Financing Law Applies to Crypto
Californication
The California Financing Law prohibits anybody without a license from the Department of Financial Protection & Innovation from engaging in the business of a "finance lender." California Financial Code section 22100 (a). A "finance lender" is defined by the CFL as "any individual involved in the business of making consumer loans or commercial loans." California Financial Code Section 22010 (a). In addition, the Act specifies that "may involve lending money" and accepting security. Id.
In Jeong v. Nexo Cap. Inc., 2022 WL 3590329 (N.D. Cal. August 22, 2022), the plaintiff based an unfair competition claim on Nexo Capital, Inc.'s purported inability to secure a CFL license. Nexo stated that "the CFL defines 'money' as 'a means of exchange that is approved or adopted by the United States or a foreign government,' Cal. Fin. Code 2003(p), but Plaintiff fails to plead his loan was in 'money,' as opposed to a non-fiat currency' stablecoin' such as USDT or USDC." The definition of "money" provided by the defendant is located in the California Money Transmission Act, not the CFL, despite the fact that the court did not make this distinction. In any case, Judge Beth Labson Freeman ruled, "In accordance with the CFL provision that it should be "liberally construed and applied to promote its underlying purposes and policies," one of which is "to protect borrowers against unfair practices by some lenders," Cal. Fin. C. 22001(a)(4), the Court finds that Plaintiff is not required to allege that his loan was denominated in fiat currency.
While it is true that the word "include" is typically regarded as a term of expansion rather than limitation, the difficulty is that this renders the statute completely open-ended.
5. Bankrupt Crypto Lender Celsius Pays More Than $3 Million in Legal Fees
Billable hours
The insolvent cryptocurrency lender Celsius (CEL) has paid more than $3 million in legal fees to date, with a single law firm responsible for the vast majority of the cost —for barely two weeks of work.
Two recent court filings indicated that the amount of over $3 million was comprised of close to $2.6 million charged by the law firm Kirkland & Ellis for services performed between July 13 and July 31, and $750,000 charged by the law firm Akin Gump.
Celsius incurred the legal fees as it continues to pursue bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.
In June of this year, after experiencing huge money outflows under unstable market conditions, Celsius temporarily suspended customer withdrawals. One month later, the company filed for bankruptcy.
Customers of Celsius, who hope to receive at least a portion of their initial deposits back as a consequence of the court proceedings, are undoubtedly dissatisfied with the substantial legal fees. However, little is known about how and when payments would be made to creditors.
Podcasts, Videos, and Blogs
The brightest voices & sharpest pens:
This episode outlines Pre-DAO and Post-DAO Legal Risk Assessment, an article written by Kevin Chen (@anothrkevinchen) in collaboration with the DAO Research Collective (@DAOResearchCo).
Bankless on SBF:
This is episode 100 of the Bloomberg Crypto podcast. “When we launched, in June, Bitcoin was trading around $30,000. Celsius and Three Arrows Capital hadn’t yet filed for bankruptcy. People knew where Do Kwon was. Celebrities cared about NFTs. It was a different time. When we launched, we knew what we wanted to do: every day, we’d take a look at all things digital assets.
Do Kwon, cofounder of Terraform Labs, discusses the charges against him, gives a message to Terra victims, answers allegations about potential fraud and non-transparent business practices, and much more.
frisson & tommy bring you one last banger of an episode before the duo takes some time apart :/ but do not fret! tommy has a stacked line-up of DT guest hosts lined up while frisson is out on leave. until then, sit back relax and enjoy the smooth tones of your favorite DAO podcast.
Bird Watching
Tweet, Tweet, Tweet!
Motion To Compel
Thought-provoking questions and arguments for your consideration each week:
Opposing Views Surrounding the DCCPA Draft
By Nick Corso
Controversy has broken out amid the apparent division in views on the DCCPA (Digital Commodities Protection Act) between Sam Bankman-Fried, FTX CEO, and others in the industry. Ultimately, the divergence of opinions originates from the potentially deleterious effects on the DeFi industry the DCCPA could cause–coupled with skepticism about Fried’s intentions for alleged support of the bill and recent lobbying efforts.
Alliance DAO asserts this bill kills DeFi by potentially placing compliance requirements on decentralized exchanges (DEXs). To this point, Alliance cites a provision in the DCCPA that would likely consider DEXs to be “trading facilities” which require the authority to liquidate positions and halt trading of certain commodities in consultation with the CFTC (Commodities Futures Trade Commission). Were this the case, DCCPA would place compliance requirements on open-source software–forcing human activity and intermediaries resulting in DEXs no longer being strictly decentralized and peer-to-peer.
In contrast, Sam Bankman-Fried claims the DCCPA does not concern DeFi, save for the extent to which interacts with centralized entities. From Fried’s perspective, the bill mainly proposes regulation on centralized entities like FTX. He further states the bill is not making claims about what DeFi devs, smart contracts, and validators must do. Fried further expresses his support for the bill due to legislators’ responsiveness to industry input and an understanding regulation is needed for centralized entities–like FTX–to interact with DeFi.
Some have questioned Fried’s motives, and whether his efforts primarily benefit FTX or Web3 and DeFi more broadly–a rather important consideration in light of Fried’s recent considerable lobbying expenses. .
DAO Alliance and others have a compelling argument laying out the concerns for DeFi if DCCPA were to pass. Fried has expressed an understanding of this perspective’s concern but still thinks the bill is moving the industry in the right direction.
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
Prosecutors argue ‘insider trading’ claim in the OpenSea case is accurate
Celsius Under Federal Investigation in 40 States for Pending Crypto Withdrawals
Ripple Obtains Vital Hinman’s Internal Documents From the SEC
Crypto Leaks Risks Roche Freedman Losing More Class Action Work
CFTC chairman, Sens. Gillibrand, Lummis say crypto legislation could pass within months
Crypto Venture Capital Fund Paradigm Also Wants CFTC to Serve Ooki DAO's Members
U.S. - State Law
Ninth Circuit Rules California Financing Law Applies to Crypto
Why the jurisdiction of choice for trust planning with digital assets has to be Wyoming
Cryptocurrency firm FTX, billionaire CEO focus of Texas securities investigation
FTX, CEO Sam Bankman-Fried investigated by Texas securities regulator
U.S. State Regulators Issue Cease And Desist Order To Slotie On NFT Sales
New York-based forex broker Oanda launches crypto trading services in US
California isn't the No. 1 state for cryptocurrency enthusiasts—but it still ranks in the top 7
Pro-crypto Wyoming Not Yet Pro Enough To Attract Bitcoin Miners
Four U.S. states order a metaverse casino to halt sale of NFTs
International
Not like China: Hong Kong reportedly wants to legalize crypto trading
Hodlonaut Wins Landmark Bitcoin Court Case Against Craig S. Wright
Kraken Joins List of Crypto Firms to Comply With EU Sanctions Against Russia
Bitcoin Fail - 80% Of El Salvador’s People Believe The President's Crypto Program Is A Disaster
EU Takes Aim At Bitcoin Mining Industry With Upcoming Draft Law
Report: Macau Discusses Bill That Proposes to Make Digital Currencies Legal Tender
Closing Statements
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Quote of the Week:
“Only one thing is impossible for God: To find any sense in any copyright law on the planet..” - Mark Twain
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), with consultation and input from Jacob Robinson of the Law of Code Podcast; editing courtesy of TΞxas ₿l◎ckchain LawyΞr .
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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