Shalini Nagarajan

<div id="highlights-block_6351059f58fa4" class="highlights">
        <ul>
                <li>Draft shows modifications to language that drew criticism for being incompatible with DeFi</li>
                <li>Sam Bankman-Fried said the bill will provide customer protection without jeopardizing DeFi</li>
            </ul>
    
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<p>Details around Bitcoin and Ethereum regulation have been “circulating secretly” in Washington, DC. Now, a copy of draft language for the Digital Commodities Consumer Protection Act (DCCPA), a bill in the US Congress, was <a href="https://github.com/LeXpunK-Army/Crypto-CaseLaw/blob/main/DCCPA%20Markup%20Latest%2010.19.22.pdf" target="_blank" rel="noreferrer noopener">uploaded to GitHub</a> by crypto attorney Gabriel Shapiro. Views on the potential impact on decentralized finance (DeFi) are mixed.</p>



<p>The latest draft appears to cushion language perceived to be detrimental to DeFi — a category of blockchain-based solutions that aim to improve finance by replacing central intermediaries with software code.</p>



<p>It lays out what constitutes digital commodities, brokers, custodians, dealers and platforms. Also included in the document are rules and the core principles that apply to players in the digital commodities sphere.</p>



<p>Shapiro noted that the draft excludes people who develop or publish software from the term “digital commodity trading facility” — a move he said could be beneficial to the crypto industry by protecting software engineers.&nbsp;</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">I have long been a believer in transparency and open discussion of the future of cryptolaw.<br><br>Accordingly, I have obtained a copy of a draft of the notorious DCCPA circulating secretly in D.C. and am hereby making it available to the public. <a href="https://t.co/JdyomquQi6">https://t.co/JdyomquQi6</a></p>&mdash; _gabrielShapir0 (@lex_node) <a href="https://twitter.com/lex_node/status/1582814734587265024?ref_src=twsrc%5Etfw">October 19, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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<p>But he expressed doubt over the origin of this exclusion, calling for other commentators to review the draft and voice their opinions. The attorney, general counsel at Delphi Labs, said he shared the draft in the interest of “transparency and open discussion of the future of cryptolaw.”</p>



<p>The <a href="https://cms.blockworks.co/bitcoin-ether-to-be-regulated-as-commodities-by-cftc-per-new-senate-bill/" target="_blank" rel="noreferrer noopener">bipartisan bill was introduced</a> by Sens. Debbie Stabenow (D-MI) and John Boozman (R-AR) in August. Their legislation clarifies that bitcoin and ether are to be classified as commodities, as opposed to securities that come under the ambit of the Securities and Exchange Commission — implying that the Commodity Futures Trading Commission (CFTC) would have exclusive jurisdiction over them.</p>



<p>After the introduction of the bill, <a href="https://www.washingtonpost.com/business/2022/08/03/stabenow-boozman-bitcoin-cftc-bill/" target="_blank" rel="noreferrer noopener">The Washington Post</a> reported Boozman said in a press call that the crypto industry “almost universally” prefers to be regulated by the CFTC.</p>



<h3 class="wp-block-heading">Sam Bankman-Fried believes draft bill won’t kill DeFi</h3>



<p>FTX CEO Sam Bankman-Fried has expressed support for the framework, saying he was excited to see a “strong bill” that addresses customer protection in crypto.&nbsp;</p>



<p>On Wednesday, the crypto billionaire <a href="https://twitter.com/sbf_ftx/status/1582539579168419840" target="_blank" rel="noreferrer noopener">tweeted</a> that he was optimistic the Stabenow-Boozman bill would not jeopardize “the existence of software, blockchains, validators, DeFi, etc.”</p>



<p>He also shared his thoughts in a <a href="https://www.ftxpolicy.com/posts/possible-digital-asset-industry-standards" target="_blank" rel="noreferrer noopener">blog</a> on what crypto regulation should look like, specifically saying it’s important that “on-chain code and DeFi remain free and open, and uncensored.”</p>



<p>Even so, Bankman-Fried, chief of a centralized crypto exchange, has been <a href="https://twitter.com/richardchen39/status/1580617610789814277" target="_blank" rel="noreferrer noopener">criticized</a> for supporting a bill that appears to threaten decentralized protocols.</p>



<h3 class="wp-block-heading">Concerns about Congress choking decentralization</h3>



<p>On the critical side of the debate, Web3 startup accelerator Alliance DAO disparaged the DCCPA bill, saying it forces human intermediation and compels projects to sacrifice decentralization.&nbsp;</p>



<p>The DAO reckons the bill does not clarify what a digital commodity is, or make clear the distinction between tokens that are commodities and those that aren’t.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">The DCCPA greatly threatens DeFi innovation.<br><br>The proposed bill: <br><br>&#8211; gives CFTC new powers to regulate spot markets<br>&#8211; forces human intermediation <br>&#8211; forces projects to sacrifice decentralization<br><br>It favors centralized incumbents and kills startups.<br><br>Alliance opposes the DCCPA. 🧵</p>&mdash; Alliance 👽 (@alliancedao) <a href="https://twitter.com/alliancedao/status/1582800340520312833?ref_src=twsrc%5Etfw">October 19, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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<p>Framework Ventures’ co-founder Vance Spencer also <a href="https://twitter.com/pythianism/status/1582816353634832385" target="_blank" rel="noreferrer noopener">voiced opposition</a>, saying the venture capital firm “opposes the DCCPA and the shadow cabal that is trying to make it a reality.”</p>



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow"><p><strong>“DCCPA kills DeFi and cedes market share to the centralized exchange that is pushing it,” Spencer added.</strong></p></blockquote>



<p>Most crypto exponents hope the draft can be amended to treat DeFi fairly.</p>



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Alliance DAO

Leaked Draft of US Congress’ ‘DeFi Killer’ Bill Sparks Debate

Sam Reynolds

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        <ul>
                <li>Terraform Labs has filed a response to the SEC’s litigation against it, arguing that its Singapore-registered entity and Do Kwon are not subject to its jurisdiction as non-US residents</li>
                <li>The firm also argued that it doesn’t issue securities itself, rather its software allows others to do the minting and thus issuance</li>
            </ul>
    
</div>



<p>Terraform Labs (TFL) has <a href="https://drive.google.com/file/d/1rSfy79JSqipzelFmJZa-pSl1sY7OVgMB/view" target="_blank" rel="noreferrer noopener">responded</a> to the SEC’s case against it and its founder Do Kwon arguing that they are both outside of their jurisdiction, Kwon was improperly served by a process server, and the software itself isn’t in the business of issuing securities because of its open source nature.</p>



<p>At the crux of the issue is whether the SEC has the legal authority to sue foreign nationals. In the docket, TFL argues that as a Singapore registered entity — and Kwon, a South Korean national residing in Singapore — they are not subject to US law.</p>



<p>“By statue, the SEC cannot serve administrative subpoenas outside the United States,” the docket reads.</p>



<p>Initially, Kwon denied being served by the SEC at the Mainnet Conference in New York before <a href="https://cms.blockworks.co/sec-subpoenaed-terra-founder-do-kwon-at-mainnet-2021/" target="_blank" rel="noreferrer noopener">court filings in October</a> said otherwise. Kwon said that, when asked about the incident, he was unaware that the SEC’s courier was in fact attempting to serve process in New York, and he was not trying to deceive journalists.</p>



<p>“I don’t feel like we lied…Right when we walked off stage, that’s when we were asked the question and then, as we were given the packet right before I was about to walk on stage, I wasn’t entirely sure what had happened at that point in time,” Kwon <a href="https://www.coindesk.com/tv/first-mover/first-mover-december-9-2021/" target="_blank" rel="noreferrer noopener">told Coindesk</a>.</p>



<p>TFL and Kwon maintain that these subpoenas were improperly served and thus invalid.</p>



<p>Lawyers for TFL argue in the docket that the Court should discard these served subpoenas because the SEC already knew that TFL and Kwon were represented by counsel. Rule 150(b) of the SEC’s Rules of Practice, the lawyers argue, prohibit SEC staff from serving investigative subpoenas on an individual who is represented by counsel without seeking special permission to do so, which the Commission apparently did not do.  </p>



<p>“The SEC essentially claims the equivalent of harmless error on the theory that it “served” TFL and Mr. Kwon’s counsel with courtesy copies after the fact,” TFL’s lawyers wrote. “This ignores the function of securing jurisdiction, which the SEC had not previously done, that lawful service addresses.”</p>



<h3 class="wp-block-heading"><strong>SEC and Foreign Jurisdiction</strong></h3>



<p>The question over whether Kwon and TFL were properly served changes the dynamics of the case. Should the Court agree with the argument that improper service was conducted, it would be a significant setback for the SEC as if Kwon does not return to the US and remains abroad it would be impossible to serve him again.</p>



<p>But as Blockworks has previously reported, should the Court disagree with this argument and maintain that the service was valid, the SEC has a supranational mandate.</p>



<p>“Whilst the SEC’s regulatory perimeter is not infinite, it is nonetheless quite broad, and exercises authority over securities transactions that occur in or are directed towards the US,” Preston J. Byrne, partner at Anderson Kill, previously told Blockworks in an interview.</p>



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow"><p><strong>“Even though a project may be based principally overseas, projects wanting to remain outside of the American regulatory perimeter and avail themselves of the Regulation S exemption need to take great pains that they don’t engage in directed selling efforts into the US.”</strong></p></blockquote>



<p>Regulation S, as Byrne mentioned, is a series of rules that clarifies how securities offered outside the US do not need to be registered with the SEC.</p>



<p>“If you’ve got a foreign company issuing securities or trading securities that are all offshore and the purchasers of those securities are all offshore, then the SEC should not really have any hook to go after them, but if any kind of a prong of a securities transaction touches the US, then the SEC generally views itself as having jurisdiction,” Daniel Payne, fintech and blockchain attorney at Murphy and McGonigle, also told Blockworks in a previous interview.</p>



<h3 class="wp-block-heading"><strong>Does Terraform Labs issue securities?</strong></h3>



<p>The next question that the response from TFL addresses is whether the company actually sells securities in the first place.</p>



<p>TFL’s lawyers argue that the firm does not sell mAssets — synthetic derivatives of other assets on the <a href="http://mirrorprotocol.app" target="_blank" rel="noreferrer noopener">Mirror Protocol app</a> — it only has created software that allows for others to mint said assets. <strong> </strong></p>



<p>“Users mint or claim them from the protocol, and TFL earns no revenue from users’ activity,” their lawyers write. “This front end activity merely allows access to the underlying decentralized protocol which TFL does not control.”</p>



<p>The lawyers also point out that TFL’s own terms of service say that US residents are prohibited from purchasing mAssets in the first place. They also argue that even if some US residents accessed TFL’s website it doesn’t show the “purposeful availment” of soliciting US customers.</p>



<p>“Because websites are equally accessible everywhere, the mere availability of the site to users in New York, standing alone, does not amount to transacting business in the state,” TFL’s lawyers write, citing prior caselaw from Royalty Network Inc. v. Dishant.com, LLC, a case regarding the “purposeful attempt to take advantage of the New York market” from a national online advertising campaign.</p>



<p>Gabriel Shapiro, General Counsel for Delphi Labs, which is not involved in this case, <a href="https://twitter.com/lex_node/status/1472718942884052992" target="_blank" rel="noreferrer noopener">pointed out on Twitter</a> that the SEC has yet to explain how creating software which enables others to mint tokens is the same as selling and issuing securities.</p>



<p>“These topics hint at the really critical issues with ‘regulating DeFi’.&nbsp; Even though decentralization is not yet perfect, it dispenses with trusted intermediaries, is peer-to-peer and puts power into the people&#8217;s hands. It mostly does not fit with current regulations,” he tweeted.</p>



<p>Terraform’s Luna token is set to open the US trading week down about 1% at $77.30, after reaching a new all-time high early Monday, according to <a href="https://www.coingecko.com/en/coins/terra-luna" target="_blank" rel="noreferrer noopener">CoinGecko</a>, while the Mirror Protocol is <a href="https://www.coingecko.com/en/coins/mirror-protocol" target="_blank" rel="noreferrer noopener">down approximately 5%</a>.</p>




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<p>There has yet to be a trial date set for the lawsuit between TFL and the SEC.</p>



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Gabriel Shapiro

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