crypto tax broker rules finalized; not sure what it's in it yet, but it's likely very very bad:

stay tuned, also check @CryptoTaxGuyETH and @DumbApe69420 posts

public-inspection.federalregister.gov/2024-30496.pdf @CryptoTaxGuyETH @DumbApe69420 at a quick glance, looks like nearly all DeFi web app providers will be covered--some wallets will as well (e.g. if they have an integrated swaps feature, but not otherwise)

good article, but like most it misses an entire category of risks, which depend on an understanding of law

first, what is the legal analysis of Ethena?

(1) what entity(ies) own(s) all the 'backing assets'? no one knows this, there is no official position on this afaict

(2) almost certainly it is some Ethena-owned entities that legally own all of the backing assets (deposits). why? because custodians and CEXs need a counterparty they can KYC, and can only hold assets owned by that counterparty--the fact that custodians and CEXs are willing to hold these deposits strongly suggests that one or more Ethena entities is the legal owner of all deposits, perp positions, etc. Furthermore, the USDe terms and conditions themselves state "We do not ever have custody, possession, or control of your digital assets at any time," which means depositors do not own these assets--an Ethena entity (presumably Ethena GmbH, the named counterparty of the USDe Tos) does.

(3) in other words, when you make a deposit into Ethena to mint USDe, it is not like making a deposit into a bank--you are *selling* those assets to Ethena GmbH, and getting USDe in return (BTW, are you reporting that as a capital disposition on your taxes, anon?)

(4) USDe also has no express legal rights--i.e., there is no right of redemption per se (maybe one could argue some rights are implied by Ethena's communications, but this is always tricky). The terms of service only state that a USDe holder may *request* a redemption, and then provide a long list of subjective criteria (KYC etc.) that must be satisfied to be even *eligible* to make this *request*.

(5) an entity can lend against or rehypothecate assets that it owns--*note*, this can even happen *involuntarily*...for example, if the entity incurs legal liabilities (to other entities, humans, or governments), then the holders of those liabilities can claim all or a portion of the entity's assets

Now, when you add all these things up (assuming my analysis is correct, which is impossible to know for sure due to Ethena's legal-security-by-obscurity), what are the unsurfaced/undiscussed risks?

(a) one or more Ethena entities (presumably at least Ethena GmbH) can borrow against any or all of the deposits, offchain, and no one (potentially not even the CEXs nor custodians) would know about this until it is too late--if the creditors have security interests in the collateral, they would be clearly and obviously 'ahead' of every other claimant (including USDe holds) in an insolvency scenario; if not, then at minimum they would be pari passu and you have a race condition. Note that Ethena is not audited--like Tether in its early more sussy days, Ethena only gets attestations of asset holdings, which means the liability side of Ethena's balance sheet is not audited/attested to. Moreover, the attestations do not state what entities own what assets, instead they speak of "assets held in off-exchange custody solutions...for Ethena-related accounts"; the term "Ethena" is also not defined and so it is unclear whether this refers to the 'project' in some sense or to one or more specific business entities

(b) alternatively, one or more Ethena entities can get into liabilities involuntarily (class action lawyers sue them successfully, a government sues them successfully, an employee dies due to overwork and their estate sues them, a competitor sues them for antitrust violation, a stockholder of Ethena sues them for breach of fiduciary duties, a protocol DAO gets bad debt from them due to the liquidity issues mentioned in the article and sues them, whatever) and a similar result can occur

(c) finally, Ethena can simply, for whatever reason, decide not to redeem USDe or to haircut USDe claimants--since USDe have no rights, this would not *clearly* be illegal, and could result in protracted court battles on gray-area issues....this could happen, for example, if there is indeed a significant market downturn and depeg event as noted in the article, and Ethena governance (whether ENA holders or just the companies themselves) decide, well, for the future of the Ethena project it is much better if USDe holders are haircutted...similar things have happened in the past with Bitfinex, Tether, etc....Note that this becomes much more likely as Ethena expands into an actual blockchain where there are applications built on top of it and lots of governance processes and dependent applications etc. that care about the value of ENA (consider how when UST depegged, instead of truly having Luna absorb all losses, the recovery fork also made UST holders bear some pain so that the chain had a chance of surviving by giving value to LUNA holders)

All of these, like the other risks mentioned in the article, sort of *feel* unlikely (as I do believe the Ethena team are well-intentioned operators, and even if you don't agree with that, their main incentive should be to be honorable as if trust in the project is lost, it will be less valuable). But the risks are nonzero and how much above nonzero is currently unknowable and unquantifiable to the public.

More to the point though, unlike the risks noted in the article (which are intrinsic emergent properties of the overall design), these risks are *unnecessary*. The assets should not belong to random privately owned Ethena entities with arbitrary operating freedom, they should be held in a bankrupty-remote SPV with USDe holders as direct beneficiaries, and USDe holders should have direct clear rights of redemption without a million weasel words and conditions and broad limitations of liability that undercut any such right. There is no real reason *not* to do this other than that no one is *forcing* Ethena to do this and it's better for them if they own the assets, as then they have more flexibility with them. Furthermore, attestations are insuffiicient--full audits are necessary, so that the liability side of the solvency equation is known.

@leptokurtic_ please feel free to correct me if I'm wrong about anything I also realized the list of potential legal claims by third parties isn't super compelling. I'm trying to think of what are the riskiest/most plausible...to me, the biggest and most plausible one is a tax claim, which, given the broad distribution of USDe, sUSDe, and ENA, could even come from the U.S. Patent claims? Claims by investors or other commercial counterparties (a CEX who feels they were betrayed in some way by Ethena and wants a bigger piece of the pie?) And of course, the SEC/CFTC, etc.--as we saw with SEC vs. TFL, the SEC has no compunction against driving a major entity into bankruptcy and screwing over the actual asset users in the process. Again, these are "black swans", I don't *expect* them, and I def think anything catastrophic with Ethena has a minority (if not minor) probability, but I feel people should understand these risks and I also feel that since they preventable, Ethena should just take these risks off the table with proper structuring.

26 / (continuing thread)

https://twitter.com/lex_node/status/1790550776391110909

29/ Rebuttable Presumptions - This flexible judicial test could be applied with some rebuttable presumptions--for example, that if some person or affiliated group owns more than 20% of tokens or controls more than 50% of validating nodes, the system is presumptively centralized.

1/ **Thread** 🚨 We need to get back to decentralization and autonomy in crypto law and policy arguments. I'm against ETH and XRP being regulated the same. One is equity in a decentralized autonomous system (Ethereum), the other is a shadow-equity-style bet on one corporation (Ripple). 2/ Crypto policy people and the SEC have completely lost the lesson of Bill Hinman's speech on why ETH is not a security--because its value drivers are sufficiently decentralized. Reviving and refining this approach is more important than ever now that the SEC is attacking ETH.

hard to explain this well on X, but yes, code must be law for DeFi to work

these systems would need to be designed completely differently if they are meant to be subservient to offchain understandings

you can't reference that offchain understanding only in the case of 'hacks' For example, if Aave is meant to merely implement an offchain loan agreement, and thus the code of Aave may differ in performance from that agreement, then Aave needs to code jurisdictional usury limits on the interest rates or else that offchain agreement is itself void

ETH vs SOL the real issues, a thread I've been wanting to write this for a while and have been thinking about these issues ever since digging into Solana (and its sources of centralization at the DApp level) a year ago

https://twitter.com/lex_node/status/1601956819315957761

https://twitter.com/lex_node/status/1601966276125016065

Get Hyped! - We’re Hiring to Build BORGs

I’m working with @delphi_labs and @LeXpunK_Army to hire a super saiyan lead developer for a special new project:

Building a cybernetic law platform for DAOs.
Our initial focus will be on cybernetic organizations, aka 'BORGs' 🤖

BORGs are real-world business entities intrinsically bound to smart contracts (and, eventually, AI). They create a new design space of cybernetic law bridging onchain and offchain worlds.

Purported "tokenization" of purported "RWAs" is mostly fake/impossible--a brief thread 3 kinds of 'RWAs':
1. "real" securities (e.g. shares of stock, bonds, etc.)
2. ownership titles to offchain assets (e.g., a real property deed; registered IP can also fall in this category)
3. receipts/certificates of deposit for an offchain asset (e.g. a specific gold bar)

in 5 years crypto governance will be better than TradFi governance by every metric

I am devoted to making this happen

we've already made progress--in MolochDAOs people can ragequit; DAOs can defund a BORG; yearn's yETH vault has depositor governance

much more to come BTW, this is how you get good regulation for crypto--actually deliver objectively fairer and less trust-requiring results

the rest is noise

most tokens should be more like stock

*no premine, just mint as needed

*mints must be approved by existing tokenholders

*add series & convertibility

permanent supply cap is not meaningful (there can always be forks) & not needed (most tokens aren't vying to be money)

https://twitter.com/spreekaway/status/1704557785323548874

*the trend of minting the entire supply on day 1 and holding it in a treasury, but only releasing a small portion to circulation (i.e., 'low float high FDV'), inflates network valuations in a misleading way--let's stop doing it

if you run any kind of interface etc. for a DeFi credit protocol, block the U.S.

many people told me I was crazy when I said that the CFTC's case against OokiDAO simply makes DeFi illegal under the CFTC's view of U.S. law; I was right--they were wrong

cftc.gov/PressRoom/Pres… thedefiant.io/100-of-defi-co…

Proposed treasury regs for crypto asset 'brokers' just dropped and do indeed explicitly characterize various persons involved in DeFi (including operators of websites that communicate with wallets) as brokers . I'll need to dig in more but it looks pretty bad.





Many DeFi web apps with U.S. users would need to track users' PnL and issue them tax statements every year--disastrous.

This could be a devastating blow to the use of P2P protocols in the United States. It could even sweep in Etherscan since it can be used with smart contracts.

whatever you think of Hinman emails and Ripple's chances of wining/losing, I think we can all agree SEC policy, tactics, everything on crypto has been an absolute mess--even before Gensler--inviting arbitrary application of law through nebulous 'morphing' non-guidance we cannot have arcane priests going token-by-token through elaborate analyses of facts and circumstances deciding these issues every time--we need Congress to step up and create a clear, reasonable, easily navigated set of fit-for-purpose rules for crypto

Hinman emails are a nothingburger though great for ETH. No idea why Ripple thinks these emails help Ripple's case.... to everyone getting mad:

1. facts don't care about your feelings (or mine--I'd love it if this helped Ripple's case but it just doesn't)

2. vitalik talking to hinman pre-speech was a well known fact among cryptolawyers+ for years, this is not new information

I'm seeing some misleading takes on yesterday's OokiDAO decision. Here are some notes/clarifications from my understanding:

1. this is a *default* judgment--OokiDAO didn't defend itself, so the CFTC won without needing to prove its theories

limited precedential significance 2. *no OokiDAO members were held to be personally liable for anything*

I can't stress this enough. Nearly every commentator is getting this wrong.

OokiDAO *itself* was held to be liable for the alleged violations--not its members

three things I think 'the cryptolaw bar' (including myself) has gotten way too behind on while focusing on regulatory nightmares:

1. MEV
2. zkProofs & associated privacy solutions
3. interchain / app-chain

a lot of dialogue still implicitly premised on old tech, old issues great article on MEV from @zin_esq . . . the legal arguments / conclusions could be debated but it is a great introduction to all the moving parts involved in the block chain-of-production these days and how they challenge standard cryptolaw narratives:

zzzin.substack.com/p/where-the-ru…

okay, as promised, here is my long/stream-of-consciousnessy thread on the proposed crypto market structure bill

CAVEAT: this is one of the most of complex & ambitious financial laws ever written. I might miss stuff. I am paraphrasing some things for ease of readability. first, we need to step back & realize what this bill is trying to do-->unlike the EU's MiCA, it is *not* a 'let's figure out how to regulate crypto from scratch from first principles' kind of thing.

a key challenge with this market structure bill will be explaining to legislators that every idea they bake in about what blockchains, decentralization, etc. are supposed to look like are setting an incentive for them to be designed that way--not always for the better for example, a "decentralized network" is not SEC-regulated (you want to be that), but to have your system be considered a "decentralized network" you must, inter alia, not contribute to the code base for 3 months...

why incentivize this? what if there is a big security issue?

highlighted is a key modifier in the market structure bill I think some are ignoring

you might see "20%" and think 'oh that's not so bad, 30%-20% is a normal % for project teams to retain even now"

this is 20% of OUTSTANDING supply, not TOTAL supply IOW, this is an incentive (arguably in some sense a requirement) to release almost all token supply at once, otherwise devco can only take a very small % of total supply (far less than 20%)

but is that what's best?

good detail here and directly contradicts analysis of former SEC Chairman Joseph Grundfest that a given token is sometimes a security and sometimes not

that approach was also the foundation of Blockstack's SEC-qualified Reg A+ offering...

https://twitter.com/MeatTC_/status/1647980125118406656

if this is true then the SEC failed its job in the Blockstack qualification as IIRC Blockstack's model depended on treating the tokens as non-securities when held by Blockstack...I'll need to dig up those old letters between WSGR and the SEC re Blockstack...

I just read SEC's case against Bittrex & am floored...more aggressive than could've been imagined and goes directly against Dash's no-premine model, saying DASH is a security despite the fact that the devco is funded by validators out of block rewards... ofc some distinctions could be drawn b/w Dash (masternode model) and more open validator sets but I believe even relatively conservative cryptolawyers would've thought DASH is not a security