GM. Welcome to Degen's Newsletter, your weekly shot of legal insights and regulatory updates in crypto and emerging tech. Our expert lawyers serve up curated analysis, breaking news, and expert commentary.

In this week’s edition:

1. Updates from around the world

2. Courtroom Watch - SEC v. Ripple

3. Weekly Breakdown - This week we explain the term ‘Blockchain Oracles’

4. Article in the spotlight ‘Code is Law: Exploring the Intersection of Code and Traditional Law’

5. Crypto Chronicles

Updates from around the world

• Celsius ex-CEO Mashinsky arrested

• Indian online gaming industry hit by 28% GST blow

• After Google’s BARD and OpenAI’s ChatGPT, Meta steps us with CM3LEON

• Spot Bitcoin ETF application moves forward as the SEC dockets it for public review

Courtroom Watch

SEC v. Ripple 💥

The decision we've been waiting for is here. In the world of cryptocurrency, the answer is not very straightforward. It's a win for altcoins, but it doesn't mean that all tokens are always considered non-securities in every situation.

Here’s the breakdown-

• Institutional sale of XRP

• Programmatic sale of XRP

• Takeaways

INSTITUTIONAL SALE OF XRP

• On analyzing the ‘Howey Test’, the court found that there was an existence of a 'common enterprise' because there was a pooling of assets.

• More importantly, the fortunes of the Institutional buyers were tied to the success of XRP.

• Ripple’s communication, marketing & the nature of statements made to institutional investors led them to believe that profit would be derived from the token.

• The court concluded that sale to institutional investors constituted an unregistered sale of investment contracts.

PROGRAMMATIC SALE OF XRP

• The court drew a distinction between programmatic investors and institutional investors by stating that the latter expected the sales to be invested to improve the XRP ecosystem, the former had no such expectations.

• As a Programmatic purchaser, retail investors were in fact secondary market purchasers & did not know to whom the money was being paid.

• As a less sophisticated buyer, such investors would not have the same level of knowledge & therefore not the same expectation of profit.

TAKEAWAYS

• The token in itself is NOT a security

• Court did not address the point of whether the secondary market re- sale is legal.

• Ripple is still on the hook for institutional investors. (They will definitely appeal this part).

• SEC will not be happy about this outcome and is definitely going to appeal the programmatic part.

• The court essentially said what lawyers have been saying forever - i.e. As long as you're not using it to make money and the company isn't profiting, you'll be fine.

• Bounties, investments in others using XRP, grants using XRP and transfers to execs in XRP - not securities.

Overall very important decision, quite a big win for the space. But more litigation is sure to follow.

Weekly Explainer

Blockchain Oracles

Blockchain oracles are like trustworthy messengers that bring real-world information into blockchain networks. They enable smart contracts to access data from outside the blockchain, making them more powerful and useful.

For example

An oracle can provide stock prices for automated trading, weather data for insurance contracts, or sports scores for betting applications. Real-world oracles include Chainlink, which connects blockchain to various real-world data sources, and Oraclize, which provides real-world data for smart contracts on the Ethereum blockchain.

To learn more about such concepts, visit our resource page linked below:

Article in Spotlight

Code is Law: Exploring the Intersection of Code and Traditional Law

Introduction:

The concept of "code is law" has gained prominence in the realm of blockchain technology disputes and offenses, necessitating a re-examination of the applicability and limitations of traditional law in the blockchain sphere.

This article delves into the history, relevance, and implications of 'code is law' on traditional legal systems, considering the increasing litigation surrounding blockchain technology.

What is code is law?

The notion of "code is law" asserts that the values and behaviors embedded in code govern interactions in cyberspace.

Code, being binary, either implements or negates certain values, enabling or disabling specific behaviors.

This perspective highlights the need for collective involvement in determining code values, ensuring a broader influence on its development.

Is code and law at odds with each other?

Code and law have fundamental structural differences that create tensions between them. Code operates in a binary and unambiguous manner, while legal rules are conceptual and require interpretation.

Code lacks the ability to account for all possible eventualities, motivations, and moral considerations, unlike the flexible and inclusive nature of legal rules.

Additionally, code's self-enforcing nature leaves no room for discretion, which can be crucial in complex human interactions.

Lessig's view - Major points of concern:

Lawrence Lessig, in his work "Code and Other Laws of Cyberspace," argues that cyberspace is not a lawless realm and that code regulates human interactions within it. He emphasises the need to embed values consistent with traditional law in code development, ensuring that constitutional values are not overridden.

Lessig's main concerns are that code can both enable and disable certain behaviors and that the collective participation of people is essential in shaping code to prioritize shared interests.

How does code govern contractual situations?

Smart contracts, written in code, serve as self-executing agreements stored on a blockchain. These contracts automate the enforcement of terms and conditions, relying on if/then logic to progress through various stages.

The deterministic nature of code reduces the likelihood of disputes, offering efficiency and transparency.

How does law govern contractual situations?

Traditional law governs contractual situations through legal rules and systems. Legal principles and standards, interpreted by judges, guide the application of law to specific circumstances.

Traditional legal systems allow for discretion, consideration of intent, good faith, and morality. Legal rules are subject to interpretation and semantic analysis, providing flexibility to encompass various eventualities that may arise in contractual interactions.

Courtroom cases - Ethereum DAO Hack and Indexed Finance:

The Ethereum DAO Hack of 2016 exemplified the clash between the "code is law" perspective and fairness concerns.

A vulnerability in the code allowed an attacker to transfer a significant amount of cryptocurrency, prompting a debate on the legitimacy of the transactions. The subsequent hard fork in the Ethereum blockchain reflected the challenge of translating traditional law into code and highlighted the need for semantic information that code lacks.

The Indexed Finance exploit case involved a teenager allegedly exploiting a flash loan to distort asset prices and make a substantial profit. While some argued that the code's permissibility justified the exploit, legal plaintiffs claimed fraud.

The case showcased the belief that code should govern agreements, but ultimately the court granted interim relief and recognized the application of traditional law to the dispute.

Conclusion:

While code has the potential to regulate cyberspace, it cannot replicate the complexities and virtues of traditional legal systems. The future is likely to involve a coexistence of law and code, where courts and lawmakers interpret rules and make decisions based on the intent and consequences of code implementation.

To read more, visit our website.

Crypto Chronicles- Stories from the wild world of Crypto

In this weeks edition of Crypto Chronicles, Alex Mashinsky, arrested- YES WE FINALLY GOT HIM

The United States Securities and Exchange Commission (SEC) filed a lawsuit against Celsius on the same day as Mashinsky's arrest.

The U.S. Department of Justice (DOJ) has indicted the “Don’t Trust your Banks” poster boy on charges of fraud and intention to manipulate the market.

Let’s take a look at some of the allegations-

1. False Marketing:

   Mashinsky allegedly falsely marketed Celsius as a safe and secure platform, misleading investors about the risks associated with depositing assets with the platform.

2. Misrepresentation of Yield-Generating Activities:

   Celsius and Mashinsky misrepresented Celsius's yield-generating activities, profitability, and the risks involved in depositing assets with the platform.

3. Manipulation of $CEL Token Price: 

   Mashinsky and Celsius's former Chief Revenue Officer, Cohen-Pavon allegedly used customers' assets to buy CEL and inflate its price. Mashinsky gained $42 million, and Cohen-Pavon gained $3.6 million during this period.

4. Withdrawing Funds Before Pause: 

   Before Celsius paused customer withdrawals in June 2022, Mashinsky lied about the platform having sufficient liquidity to meet customer withdrawals. At the same time, he withdrew $8 million worth of his non-CEL tokens from the platform.

5. Bankruptcy and Frozen Customer Assets:

   Celsius filed for bankruptcy in July 2022, as it did not have enough funds to repay customers. Approximately $4.7 billion in customer assets were frozen on the platform at the time of the bankruptcy filing.

If found guilty, Mashinsky could face a lengthy prison sentence and significant monetary penalties. The arrest and legal actions against Mashinsky are part of a larger trend of increased scrutiny and legal actions against cryptocurrency executives and companies!

Thank you for reading!

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