LexNews+ Weekly No. 14
SAB121 Repeal passed in the Senate; first MEV lawsuit; Tornado Cash Dev Alexey Pertsev found guilty, sentenced to 5 years; CFTC and SEC continue turf war; LexDAO announcements!!! and more.
Sections:
1. Headlines (The top stories in legal engineering and cryptolaw this week)
2. Podcasts
3. LexDAO weekly updates (Governance, Events, Membership, Study Group)
4. Closing Statements
Headlines
1. Hostility Arises Against Congressional Move to Heal Administrative Overreach - but in the end SAB121 repeal sails through
who says red and blue can’t get along?
Charm
Sparks are flying in multiple branches of the federal government after a House vote approved House Joint Resolution (“HJR”) 109, a bill to nullify SEC Staff Accounting Bulletin (“SAB”) No. 121 regarding the custody of customers’ crypto assets by financial institution. The bill’s approval provoked a Statement from President Biden stating he would veto should it pass on to his desk.
Controversial since its release in March of 2022, SAB No. 121 presented guidance on how custodians of customers’ crypto-assets report those assets. Perhaps foremost in controversy: the recommendation that customers’ crypto-assets be reported as liabilities on a custodian’s balance sheet and thereby framed as property of the custodian, not customers. Commentators cited this aspect of SAB No. 121 as reinforcing bad jurisprudence during the bankruptcy of the Celsius lending platform when similar framing applied by the court transformed value stored in customers’ Celsius Earn accounts into property of Celsius itself.
Other aspects of SAB No. 121 provoking ire from the likes of the Conference of State Bank Supervisors and the SEC’s own Commissioner Hester Peirce included confusing risk-reporting recommendations (confused by the SEC itself, no less) and disproportionate pressure to raise funds for leverage ratios not needed to keep custody of other types of consumer assets.
The Government Accountability Office joined the SAB No. 121 smackdown in October of 2023 when it dubbed the “Bulletin” as actually constituting illegal rulemaking under the Administrative Procedure Act. The GAO’s assessment identified the particular “recommendations” of SAB No. 121 as holding inappropriate sway over market participants given a climate of heavy-handed SEC enforcement Still, SAB No. 121 has continued to remain in effect.
After over two years of wide-ranging censure, the presentation and preliminary success this year of HJR 109’s quest to rescind SAB No. 121 would seem a great demonstration of U.S. government’s ability to heal from error. Yet the refusal of Gensler’s SEC to merely roll back the Bulletin to this point and the Biden Administration’s pledge to guard it beyond demonstrate that administrative harm and hostility are, unfortunately, no error when it comes to crypto.
UPDATE:
On May 16, the U.S. Senate passed H.J.Res. 109, a resolution to overturn the SEC’s Staff Accounting Bulletin No. 121 (SAB 121), with a vote of 60 to 38. This bipartisan effort saw support from 12 Democratic Senators alongside all Republicans. The resolution now heads to President Biden's desk, where it faces a potential veto. The President has stated that repealing SAB 121 would hinder the SEC’s ability to safeguard financial stability and protect crypto investors (Crowdfund Insider) (Blockworks) (Cointelegraph).
Senator Cynthia Lummis, a key proponent of the repeal, celebrated the Senate’s decision as a win for financial innovation. Conversely, opponents like Senator Elizabeth Warren criticized the move, highlighting ongoing concerns about the risks associated with crypto custody. The debate underscores a broader clash over regulatory approaches to digital assets, with significant implications for the industry’s future (Crowdfund Insider) (Cointelegraph).
2. Brothers Anton & James Peraire-Bueno Arrested and Charged in DOJ’s First MEV Related Lawsuit
oh brother
In a landmark case, the U.S. Department of Justice (DOJ) has charged brothers Anton and James Peraire-Bueno with orchestrating a sophisticated attack on the Ethereum blockchain. This case marks the first time such a scheme, involving maximal extractable value (MEV), has been prosecuted.
Anton, 24, and James, 28, allegedly exploited vulnerabilities in MEV-boost, a tool created by Flashbots, to steal $25 million in cryptocurrency within 12 seconds. MEV refers to the maximum value that can be extracted from transaction blocks beyond standard rewards and fees. The brothers manipulated MEV bots by pushing invalid signatures, allowing them to reorder transactions and siphon profits from other traders (Justice.gov) (Blockworks).
The charges include conspiracy to commit wire fraud, wire fraud, and conspiracy to commit money laundering. If convicted, each brother faces up to 20 years in prison. U.S. Attorney Damian Williams emphasized the novelty of the charges and the DOJ's commitment to pursuing financial fraud regardless of technological complexity (Justice.gov).
The crypto community is divided on the implications of this case. While some see it as necessary to protect the integrity of blockchain systems, others argue that MEV itself exploits users. Hudson Jameson, a former Ethereum Foundation and Flashbots employee, noted the brothers violated both formal and informal MEV rules by running their own validator while extracting MEV (Justice.gov).
Bill Hughes from ConsenSys highlighted the technical sophistication of the DOJ's argument, indicating that the prosecution is focused on the unfair advantage gained by the brothers rather than MEV or Ethereum itself. Many believe this case could help illuminate and potentially minimize MEV practices on Ethereum, making the process more transparent and fair (Blockworks).
For more details, you can read the DOJ’s press release here.
3. Tornado Cash dev Alexey Pertsev found guilty, sentenced to 5 years in prison
codesnotlaw (yet)
In a significant blow to the crypto development community, Tornado Cash developer Alexey Pertsev has been sentenced to 64 months in prison by a Dutch court on charges of money laundering. This landmark case has far-reaching implications for the future of crypto protocols and their developers.
Alexey Pertsev, a 31-year-old Russian national, was found guilty of laundering $1.2 billion in cryptocurrency through Tornado Cash from July 2019 to August 2022. The court's three-judge panel sentenced Pertsev to five years and four months in prison, emphasizing the perceived criminal intent behind Tornado Cash's operations .
One judge stated, "Tornado Cash in its nature and functioning is a tool intended for criminals." This strong condemnation underscores the judiciary's stance on the use of privacy-enhancing technologies in the crypto space.
Pertsev is not the only Tornado Cash developer under scrutiny. Roman Storm, co-founder of the protocol, is facing similar charges in the U.S. and is set to stand trial in New York this September. The case against Pertsev and his colleagues highlights the increasing legal pressures on developers of privacy-focused crypto tools .
Pertsev’s legal team has 14 days to appeal the decision, and the developer's representatives have not yet commented on the conviction. This window for appeal presents a critical moment for Pertsev and his defense team to contest the court's findings.
The crypto community is viewing Pertsev's sentence as a dangerous precedent. Critics argue that the conviction is part of a broader crackdown on crypto protocols and developers, potentially stifling innovation and the development of privacy-centric technologies. Just this week, U.S. House Democrats introduced a bill targeting mixing services, and rumors stirred as to what the implications in the EU may be, further indicating a global tightening of regulations around such platforms. Alexey Pertsev's conviction and sentencing mark a pivotal moment in the intersection of technology and law. As legal frameworks struggle to keep pace with rapid advancements in crypto technology, developers are finding themselves in increasingly precarious positions.
4. CFTC and SEC continue battle for jurisdictional custody of crypto
see also: Rumpelstiltskin
Under the leadership of Gary Gensler, the SEC has been vigorous in its regulatory efforts, recently issuing a slew of Wells Notices to prominent crypto exchanges including Coinbase, Uniswap, and Robinhood. This move signals the SEC's intent to crack down on what it perceives as securities violations within the crypto industry. Gensler has consistently argued that most cryptocurrencies should be treated as securities, thus falling under the SEC’s purview (CoinDesk) (Crypto Academy).
Meanwhile, the CFTC, led by Rostin Behnam, has also been active, notably pursuing charges against entities like Falcon Labs for illegal crypto activities. Behnam asserts that many digital assets are commodities and should be regulated by the CFTC. This stance has been highlighted by the CFTC's recent lawsuit against Falcon Labs, reinforcing their claim over crypto jurisdiction (Crypto Academy) (Decrypt).
The ongoing jurisdictional battle has drawn significant attention from lawmakers and the crypto community. Senator Cynthia Lummis, a proponent of crypto regulation clarity, has supported efforts to delineate the roles of the SEC and CFTC. However, this conflict has also sparked criticism, with some industry players arguing that the lack of clear regulations hinders innovation and growth within the crypto space (Crowdfund Insider) (Decrypt).
Despite the fervent efforts of both regulatory bodies, the broader question remains: are these actions truly benefiting the crypto industry? Critics argue that the current regulatory ambiguity and enforcement-heavy approach are stifling innovation rather than fostering a secure and compliant market environment. (Crypto Academy) (CoinDesk).
Podcasts
Too tired to read, anon? We feel that. Try these instead:
LexDAO weekly:
Events
MCON
What?: Metacartel is hosting MCON III, “…a [three day] gathering of dynamic DAO Operators, Governerds, and Builder-Philosophers to reconnect to the vision and values of decentralization, and dive deep into innovative onchain experiments and the spiciest topics of Web3.”
When?: September 26 - 28th, 2024
Where? Detroit, MI
Who?: We are joining the event as co-organizers and sponsors, so any and all LexDAO members interested in attending should reach out today to get involved!
Consensus 2024
What?: Consensus is the world’s largest, longest-running and most influential gathering that brings together all sides of the cryptocurrency, blockchain and Web3 community. LexDAO’s Operator, Tertius, will be live on scene, so if you’ll be there too, hit him up!
When?: May 29th - May 31st
Where?: Austin, TX
EthBerlin
What: LexDAO member Paolo Gangi is speaking at Q's ETHBerlin side event. If you’re going to be at EthBerlin, let him know!
When?: May 24th - 26th
Where?: Berlin, Germany
Law at the Limits Video Series (LexDAO at Eth Denver)
Catch up on all the action from our work on the ground in Eth Denver at the Law at the Limits event this past spring!
LexDAO USPTO Hackathon
Adventure, Glory, Loot* - LexDAO Hackªtho®n 10-12th May
By Dr Llau
* Prize for most valued contributor from a prominent open source advocate.
Hackathons are essentially the digital equivalent of community barn-raising. The last two hackathons were the Wyoming DAO LLC submission and Kali spin-out. This time, in addition to working on the response to USPTO, we also profiled as side events the many active but invisible contributions since the start of the year:
The work for membership … with Chris being promoted to full membership, we are pleased to bring forward another two candidates who are looking at web3 governance with reference to popular media, trying to bring complex legalities to an understandable human level.
Expansion of study groups with Luis and compatriots proposing a spanish stream for our LatAm colleagues coming this week. Shuuly will be presenting her work on social and institutional trust as well.
We welcome the appearance of Eliana Torres who defected from the land of sha🅓🅞🅦 (ex-USPTO) to join the side of truth, justice and lex automata, pro publica (automated law as public good). Due to mother’s day, some participants couldn’t finish (and BoazLex I accept his justification of traffic accident and two weddings the same weekend) but there is still space to help in tidying up citations and PDF assembly.
This is an opportunity to practice gathering evidence, preparing administrative appeals and marshaling arguments. Many of the tasks can be done by non-lawyers and would be suited for project leaders, business development or corporate communications to understand the standards required for record keeping and judicial review. Oh, and all active participants get a technicolored POAP which will link to the final USPTO exhibit demonstrating law as public good. We have a prize of a signed copy of Lawrence Lessig’s book Code 2.0 for the most valued contribution so join in the fun to get a real collectable and not just NFT.
Fireside Chat - In Code(rs) we T(h)rust
During the hackathon we were fortunate to have a square-off between @drllau and guest Sophie Amat from Crypto-Sense. We debated the merits of Angela Walch’s proposition that coders should be treated as fiduciaries, occupying the (top-right) space between law, regulatory authority and organisational remediation/mitigation. A … robust discussion will be made available for members to replay in line with the other schools of thought in blockchain governance:
Nick Szabo code’slaw
Vlad Zamfir hum’in’loop
Gavin Wood <trust, truth++
Membership
June 1 2024 - Prior Token Deprecation
Tertius
LexDAO's 2022-2023 Polygon "Cred" Token is being sunsetted June 1 2024! Re-up your membership and get a membership token today!
If you do not already have one, go to https://lexdao.org/membership. The LexDAO membership token is a 365-day expiring erc-721 token on Polygon Mainnet (PoS).
You can self-mint your membership token today by following the link on our website, providing a little information about yourself, and paying 300 DAI on Polygon Mainnet (PoS) through Unlock Protocol. You may also purchase one with a credit card or with Google Pay or Apple Pay through Unlock. If you have any trouble or questions, please tag @deleted-role in the LexDAO membership channel. Additional payment methods forthcoming, but you may pay for membership by sending $300 of Eth, 300 DAI, 300 USDC, or 300 USDT to LexDAO's Eth Mainnet Treasury at:
0x5a741ab878Bb65f6AE5506455FB555eaf3094B3F
which resolves to joinlexdao.eth and email operator@lexdao.org for manual minting and confirmation of information and directory entry. Token sunsetting will involve the removal of discord roles and snapshot voting eligibility tied to the prior token.
Study Group
Paolo Gangi
Our upcoming, highly anticipated study group will be about Kleros - the decentralized arbitration center. There will be amazing speakers. The event will be June 3rd at 10.30 am PST/ 1.30 pm EST / 7.30 pm CEST and this is the link to join the event: Kleros Study Group Monday, June 3 Google Meet joining info Video call link: https://meet.google.com/qfy-prpt-gak
Speakers:
Moderator: Paulo Gangi
Panelist: Ines Braganza
Panelist: Stephen Palley
Panelist: Alexandre Perez
Panelist: Alexandru Stanescu
Panelist: Facundo Trotz
Fideicomiso - The Mexican Land “Trust” - May 21st
Luis Miranda
“Hola a todxs, los espero en este grupo de estudio para la comunidad latina, hablaremos del fideicomiso, figura legal necesaria para adquirir una propiedad en la playa para extranjeros en México.”
As a special treat for our LatAm compatriots, we are pleased to support Luis in bringing LexDAO a more international perspective (Tues May 21st). Whilst there are similarities with the anglox-saxon trust (as this is reinterpreted by IRS as agency), there are some nuances that only a local l’expert can expound upon. Video call link: https://meet.google.com/ihg-dhyv-smy
Closing Statements
Cimply
LexDAO is organized to form a club of legal engineering professionals, united to innovate and bring the traditional legal settlement layer to code, and coded agreements to the masses. We believe that everyone deserves access to justice provided in a quick and efficient manner. If legal services were easier to use, verify, and enforce, we could live in a fairer world. Distributed ledger technology offers solutions to many problems in the legal space.
Our mission is to research, develop and evangelize first-class legal methods and blockchain protocols that secure rules and promises with code rather than trust. We do this by training LexDAO-certified legal engineers and building LexDAO-certified blockchain applications. We strive to balance new deterministic tools with the equitable considerations of law to better serve citizens on a cooperative and nonprofit basis for the primary and mutual benefit of its members and common good.
Law is a public good.
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