Legal Bi-Weekly Update
Friday 24 March
Never a dull moment in the legal crypto sphere, it seems.
From a Well’s notice to Coinbase and a Sushi subpoena to the arrest of Do Kwon, and the lawsuit against Justin Sun, lots of crypto legal news coming from the US.
Read on for updates also from the EU, Hong Kong, Taiwan, Nigeria, India, the UAE and Australia, including on crypto ads, NFTs, privacy and CBDCs and DeFi.
• Coinbase received a Wells Notice from the US Securities and Exchange Commission. The Notice covers “an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet", according to a Coinbase blog. A Wells Notice is not an enforcement action in itself, but may lead to one. Coinbase’s Paul Grewal talked to Laura Shin on the Unchained podcast. A few days before the SEC’s Notice, Coinbase published an open letter to the SEC arguing that its staking services are not an investment contract under the Howey test.
• The 6th largest hack in DeFi targeted the Euler protocol: over US$200 million was taken through a flash loan attack.
• Terra founder Do Kwon was arrested in Serbia, reportedly attempting to leave the country with false documents. He was charged with securities fraud, wire fraud, commodities fraud and conspiracy in a US court a few hours later.
• Tron founder Justin Sun and three of his wholly-owned companies were charged by the US Securities and Exchange Commission. The charges allege an “unregistered offer and sale of crypto asset securities Tronix (TRX) and BitTorrent (BTT)" “fraudulently manipulating the secondary market for TRX through extensive wash trading" and “orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation". Lindsey Lohan is one of the 8 celebrities charged for “illegally touting TRX and/or BTT without disclosing that they were compensated for doing so".
• Hong Kong plans to launch its licensing regime for virtual asset service providers in June. As of the end of last month, Invest Hong Kong has received expressions of interest from over 80 virtual asset-related Mainland and foreign companies in establishing their presence in Hong Kong, and 23 companies from the Mainland, Canada, the EU, Singapore, the UK and the US have indicated plans to establish a presence in Hong Kong, said Hong Kong’s Secretary for Financial Services and the Treasury, Mr. Christopher Hui. The Monetary Authority is also working on a stablecoin regime scheduled for 2024, Mr. Hui said.
• Sushi and its ‘head chef' Jared Grey received a subpoena from the US Securities and Exchange Commission. Sushi did not disclose details of the subpoena. The Sushi DAO voted last year to incorporate three entities, each running succinct activities for the DAO: a Cayman Islands foundation, a Panamanian Foundation (“Panamanian Foundation") and a Panamanian Corporation for the front-end. The legal structure was promoted as limiting legal risk. 15 voters voted at the time.
• Certain NFTs should be taxed as collectibles, according to the US Treasury and IRS. The proposal would subject NFTs of which “the associated right or asset is a collectible", such as digital art NFTs, to a net capital gains tax rate of up to 28% - higher than the tax rate on securities and many other assets.
• Delphi Digital ventures into a (US) regulatory proposal for “public, permissionless blockchain-based networks that we believe will have strong public and political resonance while actually promoting decentralization: a disclosure based-model with antitrust-like policy underpinnings focused on regulating systemically important vertically-integrated centralized actors who dominate crypto-ecosystems". Such “VICE's", examples of which include FTX, “have amassed significant power within the industry and thus are positioned as sources of hidden centralization and systemic risk" but are also “positioned to adopt, propagate, and enforce best practices within the crypto ecosystem".
• Binance employees and volunteer staff reportedly helped Chinese customers bypass the crypto exchange’s KYC checks.
• A US White House Economic Report dedicated a chapter to digital assets, which suggested crypto assets “to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient; instead, their innovation has been mostly about creating artificial scarcity”. This is a “damning indictment of the space that makes [the administration's] policy position crystal clear", according to Matt Homer. "The amount of attention given to digital assets is substantial, especially when viewed in comparison to other areas of financial services that have arguably been far more detrimental over the past few weeks.
• Crypto ads are once more on the regulatory radar. In Belgium, a new regulation requires mass crypto campaigns to be notified in advance to the financial regulator, FSMA. The crypto ads must be accurate, non-misleading and contain mandatory disclosures on crypto risks. The new rules enter into force on 17 May.
• France is a step closer to outlawing crypto promotions by influencers. An amendment passed in a parliamentary committee that would prohibit online influencers from promoting crypto asset services from unlicensed providers.
• Circle, meanwhile, is planning to make France its European hub in preparation for the EU’s proposed MiCA Regulation.
• The EU’s MiCA Regulation, in turn, is set for a debate in the European Parliament on 18 April, bringing it ever closer to final adoption.
• Nigeria’s eNaira uptake has shot up due to cash shortages.
• The Reserve Bank of India is pushing for legislation to protect user privacy for a retail version of the digital rupee. It proposes that users can delete transactions on the ledger to maintain anonymity.
• In Taiwan, crypto will be regulated by the main financial regulator and initial draft rules are expected to be tabled by the end of the year.
• The US CFTC discussed DeFi with crypto executives, including from TRM Labs and Fireblocks. According to Cointelegraph, TRM’s Ari Redbord remarked that DeFi was “stress tested during FTX [...] and did not fail. DeFi is absolutely here to stay".
• The UAE wants to complete the first phase of its CBDC by mid-2024.
• Australian regulators reportedly asked banks to provide daily updates on their exposure to crypto start-ups, in the wake of SVB’s collapse.
• A UK High Court ruling allowed jurisdiction for a consumer’s crypto-related claim, although the Claimant previously consented to arbitration and the arbitration had already been concluded. CMS analyses the case of Chechetkin v Payward Ltd and others  EWHC 3057 (Ch).
Around the Blockchain’s latest crypto-law newsletter.
Law of Code episode #87 with Paradigm’s Rodrigo Seira on DAOs and legal wrappers.
Bankless podcast episode #163 with ‘CryptoMum’, US SEC Commissioner Hester Peirce.
Bankless podcast episode #164 on the FBI agent who took down the Silk Road.Bankless podcast episode #164 on the FBI agent who took down the Silk Road.
The Unchained podcast episode #472 with Laura Shin and Coinbase’s Paul Grewal on the SEC’s Wells Notice.
Decentralized Autonomous Organizations (DAOs) under English Law by M. Schillig on the Oxford Business Law Blog. Shillig looks at DAOs and English law on partnerships: “it seems reasonably clear that users and validators (as such and without more) will not be partners in a DAO partnership. By contrast, for a ‘typical’ DAO that seeks to provide one or more financial products as part of the DeFi universe, developers and possibly also governance token holders may qualify as DAO partners under English law.”
Staking Your Crypto: What are the Stakes? By M. Lehmann and others, discussing the rights a former crypto-asset holder has in the event of its investment intermediary's insolvency.
March 24, 2023