Edition No. 37

Hermès wins in court; Kraken settles with SEC; UK & South Korea issue crypto guidance; FTX wants political donations back; and more. Here's what happened from 2/4/2023 - 2/11/2023

Welcome back to 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 directly to your browser.

Table of Contents:

1. On the Docket (Top Stories of the Week)

2. The Public Ledger

3. Podcasts, Videos, & Blogs (The faces, voices, and pens of Web3’s brightest contributors)

4. Bird Watching (Tweet, tweet!)

5. Closing Statements

On the Docket

Five things you might have missed last week:

1. Court Rules in Favor of Fashion Brand Hermès in Landmark NFT Case

Hermès Sends a Message to NFT Artists

A New York City jury ruled in favor of Hermès against digital artist Mason Rothschild in a first-of-its-kind dispute over NFT trademark rights. The dispute over the fashion house's trademark rights in the Birkin handbag saw the jury award Hermès $133,000 in damages for trademark infringement, dilution, and cybersquatting. Ultimately Rothschild’s First Amendment rights did not shield him or  his MetaBirkins NFTs project from liability. Parties to the suit contested each other's characterization of the MetaBirkins NFTs, with Hermès viewing them as an exploitation of their assets and Rothschild viewing them as digital art and commentary on consumerism and animal cruelty. The jury found the MetaBirkins NFTs to be more like commodities subject to trademark laws, as opposed to protected  art. The outcome of the case is likely to influence the basis of the emerging law regarding IP rights and NFTs.

See Also: Blockworks; NY Times; Hollywood Reporter

Photo by Tingey Injury Law Firm on Unsplash

2. Kraken Agrees to Discontinue Staking-As-A-Service Program in Settlement With SEC

SEC Leashes Kraken’s Staking Program

The US Securities and Exchange Commission (SEC) has charged crypto exchange Kraken for failing to register the sale of their crypto staking-as-a-service program, which offered returns of up to 21%. To settle the SEC's charges, Kraken agreed to pay $30 million and immediately cease offering or selling crypto asset staking services or programs. The SEC complaint states Kraken has been offering its crypto staking services to the public since 2019. SEC Chair, Gary Gensler, says crypto intermediaries, when offering investment contracts, need to provide the proper disclosures and safeguards required by securities laws. The SEC's Division of Enforcement states investors are harmed when they lack the proper disclosures and the agency's actions protect retail investors by shutting down unregistered crypto staking programs.

“Today, we take another step in protecting retail investors by shutting down this unregistered crypto staking program, through which Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all. All the while, it provided them zero insight into, among other things, its financial condition and whether it even had the means of paying the marketed returns in the first place.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

Frequent dissenter, SEC Commissioner Hester Piece, was among those disagreeing with Gensler, questioning if registration would have even been possible in the current regulatory climate.

“Most concerning, though, is that our solution to a registration violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service in the United States, registered or not. A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.”

Hester M. Peirce, Commissioner, US Securities & Exchange Commission

See Also: Decrypt; CoinSpectator; COINTELEGRAPH

Photo by Mahdi Bafande on Unsplash

3. UK Government Issues Policy Statement On Crypto Promotions

UK Cracks Down on Crypto Ads

UK-based cryptoasset firms and those overseas marketing to UK consumers must comply with soon to be in place UK financial promotions regime. The government has issued a policy statement on its approach to cryptoasset financial promotions regulation and intends to introduce a bespoke exemption in the Financial Promotion Order for cryptoasset businesses registered with the FCA under Money Laundering, Terrorist Financing, and Transfer of Funds Regulations (MLRs). The government intends to reduce the implementation period for the regime to four months. 

Firms must be authorized under the MLRs or meet an exemption in the Financial Promotion Order, to promote their cryptoassets  to UK consumers. If a promotion is not made through one of these routes it will be in criminal violation of the Financial Services and Markets Act 2000 The FCA will have enforcement power over cryptoasset businesses and will take robust action against firms in noncompliance.

Subject to Parliamentary approval, when the regime comes into force there will be 4 routes to communicating cryptoasset promotions to UK consumers:

1. The promotion is communicated by an FCA authorized person.

2. The promotion is made by an unauthorized person but approved by an FCA authorized person. Legislation is currently making its way through Parliament which, if made, would introduce a regulatory gateway that authorized firms will need to pass through in order to approve financial promotions for unauthorized persons.

3. The promotion is communicated by a cryptoasset business registered under the MLRs with the FCA.

4. The promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.

…[p]romotions that are not made using one of these routes will be in breach of section 21 of the Financial Services and Markets Act 2000 (FSMA), which is a criminal offense punishable by up to 2 years imprisonment.

See Also: UK Gov. Policy Statement; BanklessTimes

Photo by Shane Rounce on Unsplash

4. South Korea Issues Guidance on Regulation of Security Tokens

South Korea Ramps Up For Crypto On-Ramping

South Korea's Financial Services Commission (FSC) has issued guidance on the regulation of digital assets as securities, stating tokens matching the characteristics outlined in the country's Capital Markets Act will be regulated as such. The act defines securities as financial investments where investors don't have to make additional payments after their original investment. Examples provided by the FSC include tokens that provide a stake in business operations, give holders rights to dividends or residual assets, or provide profit to the investors. The FSC noted token issuers and brokers such as crypto exchanges will evaluate the classification of each token on a case-by-case basis. The new guidance is in preparation for the legalization, issuance, and distribution of security tokens in the country.

See Also: The Register

Photo by Shubham Dhage on Unsplash

5. FTX Attempts to Recover Donations to US Politicians

Mo Money, Mo Problems

FTX has threatened to sue politicians who received its political donations if the money is not returned. Lawyers for FTX have reported the company donated $93 million to politicians and political groups. FTX debtors are seeking remittance by the end of the month and have warned of legal consequences if the money is not returned. FTX founder and former CEO Bankman-Fried, along with Ryan Salame, CEO of FTX digital markets, were two of the largest political donors to both Democrats and Republicans alike in the 2022 election cycle, with nearly one in three members of Congress receiving a donation from the company.

Photo by Fabian Blank on Unsplash

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Bird Watching

Tweet, Tweet, Tweet!

1. SEC announces Kraken charges

U.S. Securities and Exchange Commission @SECGov

Today we charged Kraken with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent.

2. The Web3 legal industry has some thoughts on the SECs charges

Jason Gottlieb @ohaiom

I find the SEC’s “all crypto projects have to do is come in and register” line unbelievably insulting. It assumes there’s this vast quantity of sophisticated securities lawyers advising clients, “nah man, screw the SEC, yolo baby, do whatever you want.” 1/6

3. Congress has some of their own announcements for the agency

   Rep. Bill Huizenga @RepHuizenga

   Since @GaryGensler won't abide by his own polices to "come in and talk”, the House GOP will hold him accountable. Today, as promised, our oversight of the @SECGov begins with a request for documents surrounding their interactions with @SBF_FTX, @FTX_Official, and @TheJusticeDept

   

   

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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

• Trial Lawyer Breaks Down Legal Considerations for NFTs and Trademark Law

• Decentralized, Not Deregulated — The Future Of DeFi Is Changing Following Onslaught Of Lawsuits And Criminal Investigations

• New UCC Article 12: Foreseeable Issues with Using Cryptocurrencies and NFTs as Collateral

U.S. - Federal

• United States: SEC Division of Examinations Announces 2023 Examination Priorities

• FTX gets court approval to subpoena founder Bankman-Fried, other insiders

• In the First Use of Its Section 9714 Powers, the U.S. Treasury Designated Bitzlato as a Russian-Linked Primary Money Laundering Concern

U.S. - State Law

• New Hampshire could become an alternative for crypto firms moving to the Bahamas

• SDNY Wants SEC, CFTC To Postpone Cases Against Bankman-Fried

• Crypto Drama Spawns Array of State Consumer Protection Bills

International

• Proposed Israeli law to classify crypto as securities will ‘kill the industry’

• New law will harmonize crypto rules in Europe

• Russian Hacker Pleads Guilty to Crypto Money Laundering

NOTE: For your convenience, we have started identifying articles that require a subscription or site registration (paid or free) with ** preceding the article link, and the linked site in () after.

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Podcasts, Videos, and Blogs

The brightest voices & sharpest pens:

1. Law of code - Jacob Robinson sits down with Jason Gottlieb, a Partner at Morrison Cohen LLP, to discuss DAO member liability, legal wrappers and much more!

2. Bankless - The Bankless team discusses all the crypto news that took place in the second week of February including NFT loans, the SEC banning staking and FTX donations.

3. Bloomberg Crypto - Stacy-Marie Ishmael, Bloomberg’s managing editor for crypto, sits down with senior editor Anna Irrera to discuss Britcoin, disputes among crypto billionaires and crypto ads at the Super Bowl this year.

4. Unchained - Chris Blec, DeFi researcher and founder of the Blec Report, does a deep-dive into a16z’s involvement with a Uniswap governance proposal, the problem with the current design of DAOs and whether that will encourage regulators to target them.

5. DaoTalk - DAO Talk analyzes on-chain treasury diversification, VC’s trying to sway DAO votes and the fallout from a16z voting ‘no’ on the Uniswap x BNB proposal.

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Closing Statements

We want to hear from you:

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If you didn’t enjoy it, let us know why! We value the opinion of our readers above all else. After all, this letter is for you. - Kyler, Chris, and the Around the Blockchain News team.

Quote of the Week:

A true democracy is one that operates on faith-faith that government officials are forthcoming and honest, and faith that informed citizens will arrive at logical conclusions.

Detroit Free Press v. Ashcroft, 303 F.3d 681, at 711 (6th Cir. 2002)

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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.