Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Reg Crypto

So, good news! Bitcoin is currently at nearly $80,000. When I first started working with CoinDesk in 2024, the editors told me that asset prices were the best predictor of interest in articles they published, which was, and is, a little grim.

Crypto sometimes feels like a boomtown. Explosive in the good times, haunted in the bad. When I started writing this article, it felt like the latter. Now, after Clarity’s apparent defeat, a wave of victories seem to be buoying the industry.

Most consequentially, the SEC recently announced crypto rulemaking meant to address the hole left by Clarity. On August 18, the SEC announced Reg Crypto, a tiered system for issuing tokens outside of existing securities law frameworks. Basically, Reg Crypto creates two paths to issue new tokens. The first is a one-time, four-year exemption for selling or distributing up to $5 million of tokens. The second is Reg A with a crypto wrapper. Reg A already exists and sucks a lot, so don’t expect too much from that.

While I’ve seen some of the OGs trumpeting these developments as revitalization of the dreary industry, I think that most of the first-thought reactions are not only too optimistic, but also increasingly orthogonal to the cryptocurrency industry as it exists today.

The truth is, much of the promise that I was writing about in 2024 has dissipated. I no longer think that tokens are likely to be a defining fundraising modality of a new digital age. If anything, it seems likely to me that the form of security will be increasingly abstracted as buyers are indifferent to substrate.

While some native crypto assets, project tokens like SOL or ETH, are likely to retain long-term value through their instrumental uses to those networks, and it is also likely that new assets will emerge in this native class, I do not expect the total number of valuable assets existing in this class to grow by an order of magnitude in the immediate future or possibly ever. If this is true, it meaningfully limits the growth hypothesis of the industry as a whole.

It is always the case that most entrepreneurs will fail, but five years ago, it did not seem likely that substantially all new token issuers would fail (non-HYPE division), but it turned out that that was what happened.

On the other hand, five years ago, one might have doubted that the legal, institutional adoption of cryptocurrency technology as the basis for regulated financial products was likely. It turns out that this has occurred, and I don’t see a strong reason to doubt its durability in coming years. The United States government has an extremely strong incentive to continue to promote stablecoins as a captive buyer of Treasury debt, and this on-chain money will likely demand on-chain assets to drive yield. This will continue to force investment in high-grade products that can produce market returns, which will in turn promote investment in legal and technological strategies at major institutions. This is coming.

That, I think, is actually a massive victory. But it must feel a slightly pyrrhic one for the many oddballs and iconoclasts that carried cryptocurrency this far. Begging the first question I want to answer today.

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Is Cryptocurrency Dead?

In recent months, before Reg Crypto dropped and BTC spiked, a question was murmuring through conference halls in New York and Washington D.C. Professionals have been quietly running for the exits. “Should I pivot to AI?”

An easy account of the poor vibes around town is that asset prices are down, so sentiment is low, but there may be more to it.

It isn’t fly-by-night memecoin entrepreneurs that we lost this crypto winter. It is real heavies. Kyle Samani, the highly visible founder of Multicoin, a leading crypto VC, was the first in a series of major leaders to break away from the industry.

Then followed Friend-of-the-Newsletter Bill Hughes, who did the same a few months later when he left Consensys to work with physical AI firm Robostrategy Advisors. Next was Paul Grewal, Coinbase’s GC who spearheaded its critical litigation strategy during the Biden administration, who now leads legal at the AI firm Cognition.

I’m not calling out any of these attorneys, people can and should do whatever they want with their careers, but with them gone, I feel a bit like Paul Simon in You Can Call me Al.

And while not all of us have left the industry completely, those of us with the luxury have pivoted in a gentler way. Brogan Law redesigned our website to move emphasis away from crypto first, instead targeting emerging companies and regulated businesses. Over the last year, it has become harder and harder to feed ourselves on crypto work alone, and as we have naturally developed complementary skills in regulated businesses and emerging companies, it makes more sense now to emphasize those.

Even though we are still working on a variety of projects built on blockchain, the idea of crypto as a self-contained industry with its own professionals and culture feels dated now. And while it might come around again, as it always has in the past, something feels different this time.

In a world where just a year ago there was a palpable sense of momentum, giving up the metonym “crypto lawyers” makes us just lawyers again.

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What Happened Here?

In 2016, Jennifer Garner was going through a divorce with Ben Affleck, and did an interview with Vanity Fair where she talked about her struggle. One quote in particular, which it turned out was plagiarized from the 1999 film “The Talented Mr. Ripley,” stuck with me.

Describing Affleck, Garner said “When his sun shines on you, you feel it.’ But when the sun is shining elsewhere, it’s cold. He can cast quite a shadow.”

This, I think, is a little bit what approbation from the venture capital community can feel like for emerging tech founders. In years past, cryptocurrency was a popular darling of the VC community, and so money was plentiful in the startup communities, which drew talent and interest. Or maybe it was the other way around.

In either case, there was once excitement about cryptocurrency technologies. That is what brought me into the industry, along with many of my contemporaries. Back in 2020, 2021, and again in 2024 and 2025, a meaningful segment of people saw crypto as building something new.

What exactly that new thing was was the subject of debate, and sometimes shifted over the years, but as long as there was excitement, VCs would give youths money to go find out.

What has happened in recent years is that this environment has shaken out to a few very good use cases like stablecoins, tokenized securities, and Hyperliquid, while the plurality of other once-frothy applications lost favor.

On some level, that must be the mature state of a competitive environment. Entrepreneurs tried to build products, some succeeded, some failed, and now with the dust cleared, we have a good idea of which are which. You might expect that seed money is harder to come by in that environment.

At the same time, while an early surge in asset prices accompanied the second Trump administration’s ascendency, we gave all those gains back when it became clear that the Trump family’s transparent graft was polarizing support for the industry. It is dumb that Democrats don’t want ETH because of WLFI, but that’s life. Bad press crowded out optimism.

And this industry was always built on the back of financial strategies that work best when asset prices are rising. Instruments like vaults and especially DATs succeed when there is momentum. But as rapacious capital flooded in, sponsors of these products were left exposed, so when prices fell, they cascaded. There is probably still more pain cooked into the economy that we haven’t seen yet. And it left many individuals who saw these strategies as a way forward jaded.

What made this a perfect storm was the emergence of a superior substitute for investor attention, AI. Everyone is looking for the next big thing, and when there were no great candidates, Web3 and other crypto-nonsense was able to gather support. But AI has become so undeniable, and attracted so much talent and capital, that it is starting to meaningfully crowd out crypto. Well known crypto VCs like Paradigm are refocusing spending, and even as quantum computing threatens to enfeeble the Bitcoin network, miners are converting their rigs to serve as data centers.

The whole thing feels like it is coming apart at its seams, and talking to others who have made a living next to us in recent years, it is just so much easier to find deals and enthusiasm in the AI world than in crypto. For the picks and shovels crew, it’s an easier meal.

Maybe the signs were there the whole time. The cosplay. The industry events at strip clubs. The obvious ponzi schemes. When everyone was making a lot of money, it was easy to overlook the buffoonery. Now, not so much.

Still, it is a funny posture, because while the enthusiasm remains dreary, the industry really, really is not dead at all right now.

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Success Breeds Professionalism

Something I’ve been writing for a long time is, no matter how bad the sentiment is, we won. The regulatory environment for cryptocurrency businesses is just much better today than it was in August 2024, when this firm was still young. It is literally night and day.

That has been obscured by the noise of the industry seemingly evaporating around us, but it is not lost on the professionals who have entered the industry in recent years. We touch far more institutional payment rails now than we did two years ago. There are far more credible opportunities to move real assets on chain now than ever before.

Inflows to stablecoins continue to increase, and their value proposition is so good that I would be very surprised if they did not continue to do so. Notwithstanding any noise about treating AI hardware as an investible asset class, interest in crypto trading has stayed level or increased in our practice. In other words, a lot of things are growing, they just tend not to be the kind of splashy things that attract retail interest.

The difference is that the get rich quick token schemes look increasingly lost. But the users who lost money in the crypto bankruptcies of ‘22, then lost money on memecoins, are once bitten twice shy, which means the price of project tokens built on enthusiasm is once again meandering towards zero.

At the same time, the retail set has little interest or use in an on-chain asset backed security. Practically, they mostly wouldn’t be allowed to invest even if they were interested. But RWA businesses are thriving, and there are serious professionals making those products work as we speak.

The result is a transition. Perhaps a maturation. In 2026, more serious, low publicity projects are being built, and fewer projects rely on retail enthusiasm. That makes the market less frothy, but not necessarily smaller.

This mature onchain financial industry will produce meaningfully long term free cash flows. Institutional products are not exciting, but global payment and financial flows are massive, and its builders will reap the fees. There may be more money to be made there than there ever was in XRP, but it won’t be made on Twitter. There is every reason for optimism, but things have changed.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Introducing Aristotle Mannan

Hi all, I’m Ari. Having been a subscriber of the Brogan Law newsletter since its inception, it is a great privilege to finally write a post here. This is technically my fourth time working with Aaron. We overlapped in BigLaw, he served twice as outside counsel when I shifted to GC roles, and I am now excited to support Brogan Law as Of Counsel. Prior to law, I spent a decade at startups, initially in operating roles and then as a founder. While my roles have shifted, from operator to counsel, and more recently as an early-stage investor, my core motivation has been nurturing emerging companies and technologies. Aaron shares this sentiment and it has been inspiring to watch him bootstrap Brogan Law from the ground up. Just like sports, you have to play the game to truly appreciate and understand it. Aaron gets it and Brogan Law is for Builders

California’s Crypto Crossroads

I need to start with a disclaimer. I really want (and expect) the Bay Area to become a global hub for crypto. Why, you ask? I moved here this past Fall and, despite the AI billboards all along Highway 101, I know firsthand how much is happening in local crypto circles. I also believe that the entire industry is healthier when crypto is thriving in the Bay Area. This is not “a rising tide lifts all boats” sentiment, but the more practical notion that Silicon Valley is a tried-and-true cauldron for technological innovations. Just as college coaches recruit lacrosse talent out of Mid-Atlantic high schools or budding country musicians find their way in Nashville, it feels inevitable that the Bay Area, and its robust “builder” ecosystem, will emerge as a cornerstone for crypto. But maybe, as they might say up in Petaluma, I’m counting my chickens before they hatch.

Enter California’s Digital Financial Assets Law (“DFAL”), arguably the most consequential regulatory framework since New York enacted its BitLicense regime in 2015.

While we await rulemaking for the GENIUS Act and anxiously monitor arrhythmic Polymarket charts for the Clarity Act, DFAL matters today. After years of speculation, the grim day has come in California. The law has been in effect since July 1^st, with potentially immutable implications for builders (and my dreams of a Bay Area crypto oasis). Ever since Executive Order 14178 formalized the Trump administration’s pro-crypto stance and the current DOJ shifted away from its predecessor’s approach of “regulation by prosecution,” the landscape of federal crypto enforcement actions has largely gone quiet. None of this, however, precludes state crypto enforcement actions. Under DFAL, the Department of Financial Protection and Innovation (“DFPI”), California’s crypto regulator, is armed to the teeth.

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While California has a tradition of strict consumer protection laws, early crypto treatment was sympathetic to builders. In May of 2022, shortly before the collapse of Terra Luna and at the precipice of crypto winter, Governor Newsom issued Executive Order N-9-22 to encourage “responsible innovation” in crypto and a “proactive approach” for California to maintain “its status as a global innovation hub.” Several months later, in September of 2022, when the first iteration of DFAL (AB 2269) reached Governor Newsom’s desk, he vetoed the legislation on the basis that it was “premature to lock a licensing structure in statute” that did not “harmonize with federal rules” and it was essential for California to remain a “competitive place for companies to invest and innovate.”

Just seven weeks after Governor Newsom’s veto of AB 2269, the bottom fell out of the crypto industry with FTX filing for bankruptcy on November 11, 2022. At this very moment, the regulatory pendulum in California shifted away from builders. By December 5, 2022, Assemblymember Grayson, who had previously authored AB 2269, introduced AB 39 – substantially the same legislation as AB 2269, which would become DFAL. While DFAL exempts certain banks and SEC-registered entities, it broadly prohibits entities from engaging in “digital financial asset business activity” with California residents. The enactment of DFAL on October 13, 2023 was arguably reactive as it does not entail harmonization with federal rules and creates a statutory licensing structure.

The law is intended to be as inclusive as possible. It is not a stretch to construe DFAL as BitLicense 2.0, particularly since DFPI will grant conditional licensure to BitLicense holders approved on or before January 1, 2023. As a new process, it is yet to be determined how long DFAL applications will take for approval, but in New York the BitLicense process often take 12-24 months.

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Perhaps more permissve than the BitLicense regime, §3103(b)(9) of DFAL carves out a laughable de minimis exemption for entities that reasonably expect annual volume less than $50,000. But on the other hand, New York levies civil penalties of only $2,500/day for unlicensed activity under NY Banking Law §44(1) compared to DFAL’s confiscatory $100,000/day penalty for unlicensed activity. Although DFPI expects several dozen DFAL applications, it is evident that they are tracking at least several hundred entities that interact with California residents. The lucrative penalties could make it worthwhile for DFPI to pursue enforcement actions, though we have yet to see any thus far.

A decade in, there are still only 40 BitLicensees in New York. Reading the tea leaves, it’s hard to expect DFAL licensees to exceed this number. Simply put, entities outside the scope of reciprocity will have to evaluate the time and costs to proceed with a DFAL application. Moreover, California and New York are vastly different markets from a strategic standpoint. While there is a larger consumer base of around 40 million Californians, or nearly twice as much as New York, a BitLicense provides access to New York capital markets that are many orders of magnitude greater than that of California.

Practically, the simplest workaround to this new regime might be geofencing California and/or New York, but that comes at the cost of collectively restricting up to 60 million residents from accessing a platform.

But more than the commercial concern, as it relates the Bay Area, something just does not feel right about builders shipping products that cannot be used locally. So much of the builder ethos here entails iterative feedback from consumer inputs. After all, the founders of Airbnb first started by renting out their own air mattress in San Francisco and the original drivers of DoorDash (formerly Palo Alto Delivery) were the founders themselves. Much of what makes the Bay Area so special is the ability to consume new technologies as they are built. Will this remain the case if DFAL prompts geofencing of California residents?

Should DFPI pick up steam with enforcement actions, Bay Area builders will invariably catch arrows along the way. It would essentially be an attack on our greatest natural resource and could prompt an exodus, at least in the crypto ecosystem. But where would they go? As more states begin to explore and implement their own regulatory regimes, effectively recreating the money transmitter license patchwork for crypto, it might just become the case that there are costlier entry points into any market. It is among the strongest arguments for federal legislation to both harmonize with state legislation and potentially preempt deviations. Until we get there, DFAL is here to stay and should be firmly on everyone’s radar.

It should be clear that we aren’t big fans of the new regime around here, but the reality is that operators must contend with it from here on. Here at Brogan Law, we advise clients every day on issues of licensing and operating crypto businesses in the United States, and with our increased presence in California (me) we are hoping to reach more and new businesses on the West Coast. If your business is considering the implications of DFAL, reach out to me at ari@broganlaw.xyz and let’s chat.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

I have a tattoo of an eagle on my right arm. When I was a child, growing up in Portland, Maine during the Iraq War, that kind of symbolism would have probably been seen as jingoistic, or at least declassé. I remember protests on the Casco Bay Bridge of the war, and early viral videos portraying George W. Bush as a moron.

Sadly, Bush II was a moron and the Iraq War went on to discredit our post-WWII project of power projection. But I think that instinct that was so pervasive among liberal elites in the early to mid-aughts, to reject American symbolism as crass, was misguided and corrosive. My tattoo isn’t a symbol of anything other than love and admiration for our union. It is 250 years old today, so let’s take a moment to reflect.

In the long arc of history, great powers rise and fall. Rome controlled much of Western Europe and the adjacent Mediterranean, only to be sacked and abandoned. It is now a kind of stone Disneyland. Dynasties rose and fell in China over thousands of years only to succumb to a “century of humiliation” before rising again. Things fall apart.

Europeans have always liked to look down their noses at the United States, believing us tasteless neophytes on the world stage when we were their peers, and now resenting us as vulgar buffoons from our shadow. But while European cities are much older than their American counterparts, almost no European government comes close. But the United States is old. Proper old.

The British Parliament is older. Sure. But they still have a monarch making meaningful governance decisions as recently as 1834, when William IV dismissed a prime minister.

The French government, for its part, formed in a revolution subsequent, and inspired by, ours. Since that first revolutionary government formed in 1792, there have been something like fifteen constitutional orders, and the present one has only been in place since 1958.

It’s difficult to say why the United States has been so durable, in part it is likely due to a constellation of favorable circumstances. Thomas Jefferson bought large parts of the United States from Napoleon in 1803 because Napoleon wanted the money to fight the British. That’s luck.

But there is an underlying quality, an Americanness, that has been remarked upon since the outset, and which seemed to predispose the nation to succeed. The French diplomat Alexis de Tocqueville, travelling the United States in the early 1830s, wrote the seminal Democracy in America, in an attempt to decipher what went on here.

In France, Tocqueville observed, public life was organized from above by the state; in England, by inherited social rank. “Everywhere that, at the head of a new undertaking, you see the government in France and a great lord in England,” he wrote, “count on it that you will perceive an association in the United States.”

The founders of the United States knew that self-governance was a fragile thing. “A republic, if you can keep it” Benjamin Franklin famously remarked. James Madison in Federalist 10 wrote that “The instability, injustice, and confusion introduced into the public councils, have, in truth, been the mortal diseases under which popular governments have everywhere perished.” It is a rare and special thing to have survived so long, and it is worth celebrating today.

Before the United States, the Dutch had a republic, but it was dissolved by Napoleon in 1806. Before the Dutch, there was just a smattering of city-states, and before all of them Rome, which lasted some 500 years before it fell to Julius Caesar.

Donald Trump tried similarly to smother American Democracy in the months between November 2020 and January 2021, and may try again, but he has so far failed, and so our political experiment survived.

If we want it to continue, preserving the idea of America is existential.

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Democracy in America

The United States is and has been many things to many people. At the founding, 250 years ago today, Thomas Jefferson famously wrote about “self-evident truths,” and equality. That was a pretty radical idea in 1776! As it grew, America became a land of economic opportunity, a melting pot where immigrants came for better lives. And they got it. And still do. Immigrants and their children founded 46% of the Fortune 500 companies as of 2024. In the last century, too, we became a global military hegemon extending an umbrella across Europe, Asia and indeed the world.

While leftists chafe at this “imperialism,” it sure seems to have raised the material living conditions of the world. There is an old joke about the best way to get rich: lose a war to the United States. American citizens paid tax to fund a military that allowed much of the world to free ride for decades. NATO Europe spent merely ~1.5% of GDP on defense in 2015, while Japan spent roughly 1% of GDP or less for most of the postwar period from 1960 to 2024. Now those days are over, those governments will spend more, and the material living conditions of their people will experience relative decline as a consequence.

Here is the truth, the United States really was an empire of its own kind. But the idea that empire is a fundamentally exploitative form of governance is misguided. Nationalism, which has succeeded empire as a model of governance in Europe and Central Asia, is plainly worse for virtually any instrumental goal. Small nations draw uncertain borders and end up killing each other over them. Did anyone in the Balkans benefit from the dissolution of the Austro-Hungarian Empire? No. They’re left weaker, poorer, and more vulnerable to political violence.

And what for? The abstract idea that ethnic, linguistic, or religious communities should be independently governed. There is no iron law, or even evidence, that that makes any sense. It’s just a meme that found unusual success. It has no more fundamental moral weight than any other mode of organizing societies.

When I was a teen first reading the political history of the 19th and 20th centuries, I found discussions of nationalism bizarre. The “nation” as an organizing feature of international affairs was so ubiquitous in the early 21st century, that I had no frame of reference for any alternative. But the political idea that governance should be administered based on shared ethnic, linguistic or religious features is not the historical norm, and doesn’t have to be the future. It is an idea that gained influence because it is salient to lay people and so becomes a useful tool for organizers to gain power. And its ascendency left a trail of war and destruction in its wake.

This is what the United States stands against. I say the United States is an empire because it is a conglomeration of diverse geographies, people, and languages under a single government. Obviously, we don’t have an emperor, but the basic value proposition that held historical empires together is present. Ours is a nation built on liberal values, it protects minority rights by design, and rejects the idea that ethnic, or more pointedly religious, factions require full governing autonomy. That is anti-nationalist.

And guess what? Approximately everyone in the United States benefits from this. If there were no federal government, the states would almost certainly fight amongst themselves for territory. It feels insane to imagine Wisconsin and Illinois going to war over a chunk of german-descended people on the wrong side of a border, but this is what Europe and the Middle East have done ceaselessly since the collapse of empires there. The monopoly on violence is so firmly held in Washington D.C. that such conflict is unthinkable.

But it isn’t just internal strife that the United States government has protected its citizens from. By creating a single base of power across a vast land and population, our federal system increases the international power of our citizens. What would Vermont’s negotiating position be as a 650,000 person nation-state? None, obviously. Our lives in a fractured union would be more expensive, and less safe from foreign influence, than they are now.

Much ink has been spilled about the innumerable accomplishments of individuals and organizations in the United States, so I’ll just link Noah Smith and not repeat them here. But I reckon that those achievements are uniquely facilitated by the free movement of people and goods within the United States. 3300 miles across and you drive the whole way without dreaming of paying a duty. This, again, we all take for granted, but is not the historical geopolitical norm. There are no Peace Lines or Berlin Walls in the United States.

Of course, China gives its citizens many of these advantages too, as did the Soviet Union before its collapse. Big countries are stronger. Easy call. But we are unique in maintaining that central authority over massive land masses without widespread repression. If any honest observer were to play John Rawls’ veil of ignorance game, and imagine themselves dropped as a random person in China, the Soviet Union, or America, there would be no question. If you found yourself a soldier in Berlin in the Spring of 1945, would you run West or East?

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Barbarians at the Gate

But today, our Union is weakening. Demagogues find purchase in populism. The far right attempted a coup in 2021, and the far left is gaining influence by advocating for that old saw of ethnic nationalism. Last week, leftist career-student Darializa Avila Chevalier won the Democratic Primary in New York’s 13th Congressional District on the back of rhetoric like “the pyromania associated with anarchism.” At Columbia, she founded an organization that called for the “total eradication of Western civilization.”

Leftist identity politics is poisonous because it is fundamentally divisive. If the thing that matters most is a person’s skin color, ethnicity, or religion, then politics is an existential zero-sum conflict.

That isn’t a moral judgment, it is just a structural reality of government organized in this way. There can be no common ground if participation by a minority group would invalidate the political project itself. By the same token, no ethnic minority will blindly accept permanent suppression. Ethnostates kill.

America is different, because our government is designed to expressly prohibit minority suppression, but our norms maintain that the identity that matters in political life is American. It is absurd to imagine Evan Mock being treated differently in New York because he was born in Hawaii. Mitt Romney was born in Michigan, governor of Massachusetts, and senator from Utah. To put it bluntly, nobody fucking cares. We’re all Americans. That is why immigrants can come from any corner of the world and take up a life here, participate fully in economic life, like Elon Musk, or political life, like Ilhan Omar. Nobody fucking cares. We’re Americans.

There are malign forces on the left and right that want to change that. And the American political project of the 21st Century should be to stop that. Because a fractured Union is worse, clearly, for everyone.

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The Social Network

Here is my prescription.

Much has been made of the rise of political polarity in the United States. Some have suggested that it comes from changing economic circumstances, increased cost of healthcare, housing, lack of social mobility, elite overproduction, and so on. These are real social problems, no doubt, but they fundamentally miss the point. It’s the phones. It is the phones.

Media is a true zero-sum game. The total daily amount of possible media consumed is the amount of time in a day multiplied by the number of people to consume it. Generally, both of these variables are inelastic on commercial timeframes. That means that the only way that media can grow is by outcompeting other media. We humans are the product, and there is a war going on for our attention.

This creates incentives that are misaligned from the public interest. A basic model of media is something like, people prefer consuming things that are good, so creators will be incentivized to make better content to get attention. And that has a whiff of truth, but it misses a much bigger and more important truth of media. The thing that really gets people’s attention, much more than content that is good, is content that activates the human limbic system by provoking fear and anger.

Media businesses have a powerful incentive to show you things that make you angry and afraid in order to extract advertising money from your eyeballs.

This has always been true, of course, but the structural barriers to entry to producing and consuming media helped counterbalance this incentive structure through history. Televisions, which also received this criticism I should note, are large and cumbersome. Terrestrial distribution of television stations limited competition. Books are cheap but hard to consume. The phones changed this. Now everyone has a receiver in their pocket, and so the signal comes through loud and clear wherever you go.

So sure, there is fertile ground for discontent in the contemporary economy. But the far more important truth is that far-left and far-right politics are based on anger and fear, and so the people who espouse them are systematically promoted by algorithmic promotion of highly engaging content. And here is the thing with ideas, we do not actually have a very strong internal model for parsing them for accuracy, fidelity, or wisdom. If most people hear extremist politics all the time, the ideas will spread, gain purchase, and grow.

That is what is happening here. The anti-American ideas of the far-right and far-left are being promoted every day. And as these ideas spread, as the 20th Century saw in Europe, there will be no natural brake on their purchase. These ideas haven’t repeatedly arisen because they are banal. Wrong though they may be, they are intoxicating.

Politicians like Donald Trump and Darializa Avila Chevalier will continue to have every incentive to turn up the rhetoric, to gain more social promotion, more influence, and so more power. Social media companies will have every incentive to continue to promote them to gain more attention, and so more revenue.

This is contrary to American interest. It is contrary to each individual’s interest who lives here, except for the few demagogues who will use these systems to gain influence and power. And so it should be the political project of Americans in the 21st century to stop it.

There is a rhetorical idea that I’ve often seen in neoliberal writing, that humans haven’t yet gained antibodies to social media. That these technologies are so new that people don’t know how to handle them yet, and so our generation will suffer while future ones will incorporate them more healthily.

From Paul Graham:

Societies eventually develop antibodies to addictive new things. I’ve seen that happen with cigarettes. When cigarettes first appeared, they spread the way an infectious disease spreads through a previously isolated population. Smoking rapidly became a (statistically) normal thing. There were ashtrays everywhere. We had ashtrays in our house when I was a kid, even though neither of my parents smoked. You had to for guests.

As knowledge spread about the dangers of smoking, customs changed. In the last 20 years, smoking has been transformed from something that seemed totally normal into a rather seedy habit: from something movie stars did in publicity shots to something small huddles of addicts do outside the doors of office buildings. A lot of the change was due to legislation, of course, but the legislation couldn’t have happened if customs hadn’t already changed.

This idea is a half-measure too cute. It embeds a diffusion of responsibility. That society will just become less susceptible to the dangerous thing with long term exposure as knowledge spreads.

But it doesn’t work that way at all! We aren’t going to simply evolve out of limbic-vulnerability. We have to do the hard work of stopping the bad thing. Cocaine didn’t become a less prevalent social ill in the 1910s because people realized it was bad, it did because the government made it illegal. There is obviously a nexus between that awareness and the policy outcome, but there is a bridge of hard work done in between.

To use Graham’s example of cigarettes, anti-smoking advocates devoted their lives to fighting smoking for decades. They fought to make them harder to buy, to smoke in public places. They fought for taxes. And it was only those cumulative efforts of all those people over half a century that eventually drove cigarettes out of ubiquity.

Governments rise and fall on the backs of ideas. The idea that made the country is that of an American. That is what de Tocqueville saw in 1831, and what won Ronald Reagan 49 states in the 1984 Presidential Election. But there is no economic incentive for social media companies to promote unity, and every incentive for the malign forces trying to destroy it to spread.

Nobody is coming to save us from algorithmic media. We have to do it ourselves. Everyone else is just responding to incentives, and it is only the long arm of the state that will stop it from spiraling out of control.

If America is still the United States in another 250 years, that will be why.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Editor’s Note: Welcome Veronica Irwin back for a guest post all! Check out her regular work at Transformer here.

In recent election cycles, the crypto super PAC Fairshake has gained a certain reputation as an 800lb gorilla. This cycle, the crypto super PAC has raised more than $135 million from prominent crypto firms Coinbase and Ripple, venture capital investors Marc Andreessen and Ben Horowitz and the Solana Policy Institute. That is a lot of money, and in 2024 it received frequent media attention for its numerous wins.

That coverage continues to this day, as Crypto in America recently covered its wins in California. The group has spent more than $56 million so far, using that massive war chest to support and oppose candidates according to their crypto policy views. Per FEC data, the super PAC has supported or opposed 47 candidates across 40 races so far, and 38 of which went Fairshake’s way.

But those numbers may not tell the full story. This week, we asked, is this Super PAC gaming the system? What would that say about the influence of the crypto-lobby in Washington?

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To evaluate Fairshake’s impact, Brogan Law ran an analysis of FEC filings, polling, and elections data collated by The New York Times. Races where public polling overwhelmingly favored a candidate, or where candidates won by more than 10 points without a runoff in a non-swing district, were classified as races where Fairshake’s investment was likely not the deciding factor. Of the 40 decided races, only 16 were potentially swung by Fairshake’s involvement.

Per that analysis, more than two thirds of the time Fairshake is investing in races where the polling odds were already heavily in their favor. The super PAC isn’t singlehandedly sweeping races, it’s mostly investing in already leading candidates.

Consider the race for Georgia’s 10th district. The seat is solid red, so whoever won the Republican primary is likely to win the general. Yet Fairshake spent more than $700,000 in support of Houston Gaines, who got 66.9% of the primary vote, nearly 40 points ahead of second place candidate Ryan Millsap. In the race for the Kentucky Senate seat, Fairshake threw more than $7m behind Andy Barr, who was heavily favored in the polls and finished 30 points ahead of his competitor Daniel Cameron. Most of Fairshake’s races have similar dynamics.

Many of Fairshake’s investments, too, align with the contributions from other super PACs. Leading the Future, an AI super PAC which shares the heads of a16z as donors and Josh Vlasto, who speaks for Fairshake, as its co-lead. Twelve of the candidates which were supported or opposed by Fairshake were also supported or opposed by Leading the Future. Fairshake and Leading the Future’s support for Melissa Bean in Illinois were also boosted by additional contributions from electioneering groups linked to the Israel lobby. This raises a question of how much the race was impacted by their influence alone versus the combined influence of several powerful PACs.

This is not to say Fairshake is doing poorly. Rather, its strategy may be to appear like an 800lb gorilla, rather than always having to be one. This strategy might have the effect of influencing candidates into crypto-friendly policies, without necessarily having to spend a dollar in the race. Credit for this strategy is reportedly owed to Chris Lehane, a political operative who made his name when he coined the phrase “vast right-wing conspiracy” to describe Republican efforts to undermine the Clinton presidency, and, in tech, when he engineered Airbnb’s strategy against local efforts to bar short term rentals. Lehane is known for bulldog-style tactics where optics can inspire fear in politicians.

Here, the Chris Lehane effect is visible as a pressure campaign on politicians to adopt crypto friendly policies. Convincing them that Fairshake is winning an overwhelming share of elections it competes in may be key for that strategy to work.

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If that is Fairshake’s play, salience would be an important factor in making it work. In a political context, salience refers to how important an issue is for voters. Grocery and gas prices, for example, always have a high salience while something like credit card swipe fees or surge pricing for Taylor Swift tickets are lower salience. Issues that are lower salience are easier to conduct electioneering efforts on (and lobby on, for that matter) because they have little impact on vote outcomes.

Today, crypto is a low salience issue. Sure, there is a small group of people who care a lot about it, but most people don’t decide who to vote for based on crypto policies. This is particularly true during the current bear market.

This makes it an easy issue for politicians to adopt. There are few repercussions for politicians who take Fairshake money. The perception of electoral dominance, then, becomes the implicit threat at the other end of the stick. Oppose crypto, and there is risk. Fairshake may just be big and powerful enough to come and tilt the election against you.

For its own part, Fairshake sees its mission as casting a wide net. Spokesperson Geoff Vetter told Brogan Law “Our goal is to increase the number of members who understand and are willing to act on these issues in good faith. We do that by flipping seats and protecting champions. By definition, some races will be more competitive, while others less so. In the end, the difference we make will be creating the largest crypto-literate caucus in history which is ready to act on responsible regulation. As we’ve seen with more and more candidates getting smart on the technology, we’re confident we’re moving the needle.”

Fairshake isn’t the only crypto PAC in the game this election cycle, but it is still the largest. Its $57 million spent dwarfs the Digital Freedom Fund, funded by $21 million in bitcoin from Cameron and Tyler Winklevoss and Fellowship PAC, funded by Cantor Fitzgerald, which has spent a little more than $15m on various races.

While the last cycle delivered the GENIUS Act, and may yet deliver Market Structure, victories that Fairshake has as much right to claim as their own as anyone, the fruits of their influence this cycle remain to be seen.

The next Congress may well be a less pro-crypto one. The cards are already stacked against the industry, given the likelihood Democrats take back at least one chamber of Congress. Fairshake has been able to project outsize influence without demonstrably swinging contested seats, but whether it can win over a blue wave remains to be seen. In all likelihood, it will continue to be a meaningful counterbalance to the shifting tides against crypto, and play a role in elections so long as the “anti-crypto voter” fails to exist.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

So, SpaceX had an IPO this week and it was pretty big news. The company sold 555,555,555 shares at $135 each and thereby raised $75 billion in fresh capital. When the shares hit public markets they increased further to $160.95 per, valuing the company at $2.1 trillion and making Elon Musk the world’s first trillionaire.1

This comes as both big AI labs are also exploring public markets. Anthropic filed an S-1 a couple weeks back, and OpenAI did the same last Monday. Now you can file your S-1 and then not actually enter the public markets, but it’s just a matter of time, they’re coming, and will instantly be some of the most valuable companies in the world.

And that is very interesting for this newsletter in particular because the relative decline of public markets as a funding source has been a talking point here for a while. Back in 2024-25, the line was that large companies were eschewing public markets. Stripe, SpaceX, and OpenAI were all private, and seemingly saw no need to go public. Private markets were deep enough and tolerant of their sometimes avant garde approach to governance. This had the effect of freezing the public out of the greatest wealth generation events of the last decade.

We argued in the past that this animated for liberalized treatment of the accredited investor rule, that determines who is allowed to make private investments.

It was also one of the primary possible use cases for crypto. If you thought that the reason that companies were staying private was because the SEC’s public markets regime had grown overbearing, then crypto tokens could offer a regulatory arbitrage by acting as an unregulated substitute. That’s what I argued in CoinDesk in January of last year.

Since then, there has been a lot of movement in the putting equities on-chain game. We wrote about DTCC’s proposed token model last December, which was later approved by the SEC. And just last week the SEC proposed changes to the byzantine Reg NMS to make on-chain best execution possible.

So why the hell did SpaceX IPO through the traditional capital markets process, rather than a token? That is the question we’ll be trying to answer here today.

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1. It’s Illegal

In my internal model of crypto qua capital markets, participants are choosing to raise money through token sales because doing so does not subject them to onerous public company compliance.

And in theory, this would be great for Elon. He has very famously battled with both the SEC and Delaware Court of Chancery while managing Tesla, and generally it seems that rules-based regimes conflict with his preferred approach of committing to the bit and doing whatever the fuck he wants.

If he was able to raise $75 billion in funds through crypto markets, but leave SpaceX as a private company for purposes of securities law, he would be having his cake and eating it too. A major boon.

Except he can’t do that. And this is problem one of fantasizing about major on-chain offerings.

Even now, the SEC wouldn’t let him do that.

Back in the old days, before venture capitalists imagined retrofitting nuclear power plants to feed data centers, crypto projects raised some serious money in ICOs. Projects like Polkadot and Block.one raised tens of millions to billions of dollars.

But then the government cracked down. First, it told Facebook to get bent with its planned Libra project. Then, the SEC pursued a series of actions against existing ICO companies, forcing Telegram to return $1.2 billion to investors in 2020. Some of this post-ICO litigation, famously including Ripple, continued through the early days of the Trump administration.

But Trump is in power now. The times have changed, so major private companies can raise money this way now, right? Wrong!

It is simply unimaginable that a major company could raise anything close to this amount of money through an ICO. Realistically, it is unthinkable that a major private company could raise any amount of money through an ICO.

The SEC’s recent guidance “Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets” is informative. The SEC now draws a cleaner line between crypto assets that are themselves securities, or are sold as part of an investment contract, and crypto assets that are not securities because their value derives primarily from the operation or use of a functional network rather than from the managerial efforts of an issuer. But that distinction does not help SpaceX. A token sold to raise capital for SpaceX, marketed on the basis of SpaceX’s future business performance, and expected to appreciate because Elon Musk and the company keep building rockets, satellites, and whatever else, would sit on the wrong side of that line. It would not be a “digital commodity” or a “digital tool.” It would be a security offering with extra steps.

Of course, many businesses sell tokens under exemptions to the securities laws, like Reg D. But these are exactly the exemptions that companies like SpaceX can already raise money with through private markets. The retail exit capital that SpaceX employees crave is still only available on public markets, and while the American public can now trade in crypto freely, you can’t raise new money from them there.

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2. Tax

Ok, so you’re Elon. You’re about to raise $75 billion and you hate the SEC, so you decide, fuck it, we’re doing X Token. We’ll sell 69,420,000,000 of them for $10.80 a piece. It’s going to be totally epic. You hire Jason Schwartz to advise you on the tax consequences.

He has some concerns.

Equity markets are a little bit magic. When you sell a product, shooting objects into space and blue checkmarks for SpaceX, you pay corporate tax on the profits from doing so.2 When a corporation issues its own stock, though, it generally does not owe tax on the proceeds. That is because IRC Section 1032 says a corporation generally recognizes no gain or loss when it receives money or property in exchange for its own stock. Tokens do not automatically get that treatment. If SpaceX sold “X Tokens” instead of shares, the first tax question would be what SpaceX had sold: stock, property, prepaid services, network access, some contractual right, or something else. And unless the answer were stock, SpaceX would have introduced a massive corporate tax question into a transaction that traditional equity markets solve for free.

This is the basic problem that has prevented the Wyoming DUNA structures from gaining traction. Sure, you can set up a non-profit there and operate your protocol, and maybe that gives you colorable securities arguments to sell your project token, but you’re paying tax no question and no serious business will ever consider that while tax free options exist.

There has been a lot of talk of the Clarity Act, which, of course, is not yet law, changing the treatment of new token offerings in the United States, but it doesn’t change this basic tax problem.

So even if it was legal to do the SpaceX IPO on-chain, the tax consequences would have made it economically infeasible.

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3. What about offshore?

Of course, these are the exact reasons that approximately all new sales of tokens from venture backed companies are completed through offshore subsidiaries.

A foundation set up in the Cayman Islands, owning an operating subsidiary in the British Virgin Islands, will issue and sell the token into the market. And then, through the natural movements of the secondary market, as well as a little bit of payola for exchanges and market makers, the tokens find their way into the United States.

This structure is relatively efficient, because the Cayman Islands don’t charge a tax, and the memberless foundation structure provides a fig leaf argument that the new product is extraterritorial vis-a-vis the United States, providing securities laws cover.

This structure works, so why didn’t SpaceX do this?

I hope by now the answer is obvious.

No major company is going to set up an offshore affiliate, rely on shaky legal arguments, cut deals with cryptocurrency exchanges and market makers, and still absorb significant tax risk, just so that it can raise funds through cryptocurrency tokens and avoid public company reporting.

The risk-reward is simply too high. Yes, there is a path to make this sale. In practice, nearly impossible. For a sale of this size, every argument and ambiguity will be tested. Plans that work in the shadows may not survive the light. And no sane board of a major company would choose that risk for a sale of this magnitude. The SpaceX IPO was not a token sale because there is no path to do so reliably. And whatever the marginal cost of public administration, it is not worth risking a $75 billion dollar liquidity event.

What does it mean for crypto that this is still not even plausible after all these years?

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It’s a Set Up

Ok, so you might have been wondering why I’ve been earnestly proceeding through a ridiculous straw man argument when nobody ever proposed putting any part of the SpaceX IPO on-chain. In addition to all the arguments above, SpaceX employees own equity in the company, and many can probably now sell that equity through public markets and buy property in Carmel-by-the-Sea.

Venture capitalists, too, as well as the probably thousands or tens of thousands of others who have invested in SpaceX, own shares of the company, or rights to shares, and they want to sell them so they can fund their podcasting careers.

The entire system of American capital markets is based around the premise that companies will sell stock, and then that stock will one day become liquid. It was an aberration that this system failed to produce major tech IPOs for a period of time, but ICOs or other token fundraising was never going to be a replacement, because raising the money itself is only half the point.

I’ve been thinking about this a lot, as crypto descends further into a bear market and a steady stream of OGs continue to bleed out and pivot to AI. The failure this industry is facing now is one of narrative. It is very hard to tell a story about why it still has transformative potential to global economies.

A variety of stories have come and gone over the years. First, sovereign currency that would allow users to transact without government interference. It turns out the government has all the weapons so they get to interfere even if the money runs on private servers.

A composable programmable financial layer that will allow new financial products to develop. This may have been true, but it turns out that a lot of what you are buying in finance is your counterparty, and a system that obscures that produces adverse selection effects that have been repeatedly catastrophic.

New, less-regulated capital markets that blur the lines between public and private markets and allow Americans greater access to novel companies. This is the argument that I made in 2025. And, much as it has some success stories like Hyperliquid, mostly, nothing new this way comes.

That’s because launching public assets is hard. Securities regulations have built robust guardrails around public offerings for a reason, and the fundamental properties of equity in a business. With crypto, it’s different. Manage a launch poorly, your token tanks, and your business is dead. At least it is dead if it ever needs to raise new capital. Best case scenario it will need to recapitalize and merely you, the founder, and all the investors who previously trusted you, will be dead. It’s not a pretty thing.

But crypto is not dead. Token sales still make sense for native projects with strong public support. They are a riskier, less expensive, less regulated subset of capital markets. I would be very surprised if there are ten projects a year that successfully launch tokens delivering meaningful long-term value over the next decade, but it won’t be zero.

But more importantly, the hard work that advocates for the industry have done in Washington over the past many years has paid off. The rules in the United States are changing rapidly, and the lines between crypto products and financial products will continue to blur. Stablecoins are going to find widespread, global adoption.

All that fresh money on-chain is going to look for yield, because that is what money does. That, in turn, is going to drive products like vaults and perps that provide a seamless way to earn it. Financial products will be built on-chain because that’s where the money is. Where there is money, you can take a fee. And where a fee is available, builders will come. It’s that simple.

As regulatory rules increasingly permit on-chain equity products, there may eventually be markets to trade them permissionlessly through DEX’s. That will blur the lines between cryptocurrency tokens and equities further. And eventually, maybe, new token offerings will form a meaningful segment of fresh capital markets. But not yet, and not for sure.

In the end, cryptocurrency use cases should provide a less-regulated, higher risk segment of a broader financial landscape. That is its highest purpose. To unify international markets, cut away pointless procedural nonsense from the 20th century, and claim a durable segment of the economy.

These are financial products. Good ones. They support permissionless, high-velocity atomic payments that seem well suited to a future where AI agents have increasing authority to manage transactions directly. They hedge currency risk in poorly governed nation-states.3

They aren’t utopian sovereign building blocks for a libertarian future. They aren’t the start of a “web 3” future where Mark Zuckerberg directs Zumba classes through a digital avatar. They’re financial products for making money. They work because this is where the money is. If it wasn’t here, they probably wouldn’t.

And so no, the SpaceX IPO was never going to be on chain. And neither will Anthropic or OpenAI. But if you look past the fantasies of what the industry could do and focus on what it actually does, there is plenty of runway here for builders, venture capitalists, and lawyers to get them some. Bear market or no, if the opportunity is there, that’s just what they’ll do.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

We’ve been running this newsletter for close to two years now, and for most of that time, we’ve written about policy. Crypto policy. Prediction market policy. Federal trade policy. We’ve broken news and given commentary on D.C., state, and local government. That makes sense, because policy is a big part of what we do as a law firm, and the product questions that many of our clients come to us with are grounded in understanding the law and how it might change in coming years.

But this isn’t all we do at Brogan Law. As often as we write a comment letter, we represent clients in major transactions.

To that point, two weeks ago at Consensus, our client DFlow announced that it had been acquired by MoonPay in a deal valued at $100,000,000.1 Before that, we represented Propolis in its acquisition by DataDog, and Clanker in its acquisition by Farcaster. This practice is broadly known as mergers and acquisitions, M&A. And given the timing, I thought I’d write about it this week.

The last six months have seen an M&A boom in crypto and adjacent industries. As crypto asset markets struggled, projects became targets. Some because the time was right, some because they ran out of money and had no choice.

We’ve represented sellers, buyers, and investors, and hope to continue to do so in the future. We take the view that none of these parties are good or bad, they’re all just rational actors maximizing value in their own self-interest. In a deal, the self-interest of these parties can diverge, but ultimately, usually, it converges again in their mutual interest in completing the deal. We represent our clients’ interests, whoever they are, and so we aren’t sentimental or dogmatic about the strategies and tactics described here. All participants benefit from considering their counterparties’ view and empathizing with their needs. That being said, I wrote this article with founders in mind.

Investors and buyers are repeat players who know this game well. They might find this interesting, but they don’t need it. Founders, on the other hand, might only do this once, or a few times, in their lives. As a result, they are sometimes too credulous. The truth is, a good faith process includes tactics and strategy by all sides. This can sometimes feel sharp elbowed, but it is fair. I worry writing this that revealing the hidden game of M&A will affect future processes we run, but it is no secret.

In game theory, iterated games involve very different strategies than one-shot games. For practitioners, we interact with the same professionals many times over our careers, and so the range of sound strategies is subtly constrained. Founders can’t develop an understanding of the game from experience alone, so this article attempts to part the veil and reveal some of what we have learned.

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So you want to sell your company.

The other day I was talking to Stuti Pandey, partner at Triton Capital, and she introduced me to a saying that I had never heard before. “Companies are bought not sold,” she told me. What it means is that the best deals come from inbounds, not pitches. So for the founder, you may not know if it’s time to sell, but there will be signs.

This is a good moment to introduce one of the most important characters in the M&A game for most startups, the corp dev guy.2 “Corp dev” is short for corporate development, which is nonsense business jargon for an employee of large companies who goes out and finds deals to acquire other companies. Often, these people are former investment bankers. Some come from private equity or venture capital, but they arrive with one mission. Find deals, win over founders, and close.

In the modal acquisition of a venture-backed startup, the corp dev guy will be the closest and most involved point of contact for you, the founder, throughout the process. I find that they are nearly all relentlessly optimistic, and will tell you that things are incredible and they love you no matter what. Their words contain less signal than most founders expect, because their job is not to communicate true facts about the process to you, the Target. It is to win you over and close. That’s it.

There is another saying that I have always liked, that “it takes one buyer to sell your company, and two to get a fair price.” So when you are getting multiple inbounds from serious corp dev teams, that is a strong indication that there may be an opportunity in the market for you to sell your company.

There is another character that may become increasingly prominent in the space in coming years. The investment banker. In major mergers, investment banks are intimately involved in putting together the deals and financing them. This has not emerged as a major phenomenon in crypto dealmaking to date, but it is sure to eventually. I-bankers’ role is to generate interest and increase the return that a company will get selling itself. Founders we have worked with have been skeptical of their cost and value, but some of the deals must have meat left on the bone. Watch this space.

Some deals are brokered founder to founder, but at scale, we see most deals initiated by a corp dev guy and/or an investment banker. If you’re a founder, you’re hoping they’re coming to you, because that’s where the best price is.

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Team of Rivals

In the early-stage M&A world, the corp dev guy is the tip of the spear in a cast of characters that a founder will interact with in the M&A process. These will probably include the founder or an executive of the acquiring company, who probably won’t run point on the day to day of the deal but will come in at critical junctures to close or win issues. There are generally a few different flavors of lawyer running around, too. The in-house lawyer is familiar with the buyer’s strategy and can manage the process, but similarly has many roles and will come in and out of daily life in a deal. Then there is deal counsel, us and whichever firm we are paired against, who are generally the next most familiar face in the deal. On the buyer side, the lawyer sometimes plays the bizarro partner of the corp dev guy, playing either bad cop to good cop in negotiations over deal points.

If I describe this in a slightly rivalrous way, that is because it is. At the start of a deal, it is important that the founders level-set about what is happening here. Selling a company takes a long time. In virtually every deal, the corp dev guy says they want to close fast and tells the Target some variation of “ this will be the quickest process they’ve ever run.” But the reality is, and your expectation should be, that these things take months. As a founder, you will probably be highly emotionally invested the whole time. That is exciting at first, then slowly it becomes a grind, and eventually a torment. As weeks stretch into months, emotional resiliency is, in our view, one of the best predictors of deal performance. Setting expectations builds resilience.

In life, there is a general expectation that most people will be honest with you and treat you fairly. That is not the general expectation in dealmaking. I’m not here to tell you that your counterparty will lie to you in a deal. Only speaking for ourselves, we never do. But a deal is a contest, and unlike most things we do in life, the results really matter. People will do things in a deal that you wouldn’t expect them to do in their daily lives, and if that puts you on tilt, it will do you no good.

Acquisitions are often worth tens or hundreds of millions of dollars. And even though 100 million dollars won’t put you on any lists of the richest people in the world, it is still more money than approximately anyone will ever see in their lives. Plenty to litigate over. Plenty to go to war over, in the narrow corporate sense of the word. This is a lot of money and serious buyers are repeat players that develop operational capacity to squeeze out value from them. One of the most effective ways to do that is to use founders’ trust and emotions against them. That is just the reality and you should be prepared.

So don’t be surprised when you feel the cold steel in your back in week 8 of your M&A process. That’s how it goes. If you respond emotionally, then, in our experience, you will start to subconsciously hope for the process to end, which can make you manipulable. Know that your counterparty might take things away, retrade, reverse positions, at any time. Know that that is just how it goes. Nothing is done until the money is in your account. In our view, this perspective makes it easier to be unreactive when the time comes. Ultimately, this achieves better outcomes, and it also makes the process a whole lot less painful.

With all that said, if your takeaway is that all deals are adversarial all the time, you’d be wrong. Because while these are competitions and participants are trying to win, the most important part is closing the deal. This is the real beauty of M&A at its best. Everyone involved, the corp dev guy, the I-banker, the buyer’s CEO, the lawyers, and you — we all want the same thing. Sure, we’re dancing, but it’s towards a single goal. And this fact, much more than the competitive nature of that goal, is the most important thing about deals. We’re in this together.

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Here’s the order of my list that it’s in.

One of the biggest issues with not being a repeat player is that it is difficult to plan. In our view, the best way to avoid surprise is to know what is coming, so for the rest of the article, I’m going to go step-by-step through the process of selling an early-stage company.

M&A deals follow a predictable cadence. The parties can manipulate this cadence to delay the process and frustrate expectations. Since emotional endurance is one of the primary levers in negotiation, knowing that these steps are manipulable is key to setting expectations. Repeat players are resilient under pressure. Now you will be too.

Step 1: Inbound

Things are going well. You’ve built brand identity. You have users. You’ve inked a partnership with a major counterparty. The business is growing. This is the moment you get an inbound.

You’ll hear from your potential counterparty. Maybe it’s the counterparty you’ve already been doing business with. Maybe it’s a third party with dry powder. Whoever it is, they’ll probably tell you how great you are, how much they love you, and maybe give you headline numbers for your company. Maybe you’ll form the contours of a deal and shake on it. But at this stage, you likely do not have a deal and there’s a long way to go.

Right now, even before the LOI and Term Sheet that will follow, is the time to ask for more money. My general heuristic for buyers is to (nearly) always offer less than you think that the company is worth, and for sellers to always ask for money right away. Economics continue to be negotiated until the deal closes, in one form or another, and in our experience are less sticky than some other terms, but the right time to start is now.

Step 2: Letter of Intent/Term Sheet

After a founder and corp dev guy have played footsie for a while, the time comes to make a real offer. This is, variously, a “Letter of Intent” and/or a “Term Sheet.” I think of an LOI as being slightly less formal than a TS, sometimes lacking a no-shop and coming before TS negotiations. But in any deal you might have only one or the other, and either will typically contain (i) economic terms, (ii) holdback/adjustment terms, (iii) acceleration, (iv) go-forward employment terms for members of the Target moving to the acquiring company, (v) timelines, (vi) governing law (this will usually be Delaware), and (vii) a no-shop.

One of the biggest issues that should be negotiated at this stage is the timing and structure of compensation. As a founder, you would prefer to be paid the entire consideration of the deal at close, but buyers would, uh, prefer not to do this. Many deals are paid in shares, both because this avoids buyers having to acquire large amounts of cash, which may not be feasible, and because this can facilitate a tax-free reorganization under Section 368 of the Internal Revenue Code, which can range from valuable to critical in importance. Buyers often want some portion of the consideration to revest, meaning the founder may see a headline allocation that is only actually earned over time.

Buyers also sometimes structure deals to pay some amount of consideration as contingent employment compensation or retention bonuses. This is generally not part of the deal consideration itself, but rather negotiated alongside it. It has many advantages to buyers, but is taxed as ordinary income to recipients, which can make a very large difference in tax-adjusted compensation. Investors also hate this, because they feel it is money being channeled away from shareholders. Buyers, for their part, argue that employment compensation and retention bonuses are not substitutes for deal compensation.

At the TS stage, most of these terms will be expressly “non-binding,” which means that by entering the contract you aren’t required to eventually reach a deal that contains them. But don’t mistake lack of legal effect for lack of practical agreement. If something is agreed in a TS, it is very difficult to change it down the line. Doing so is considered re-trading and, though it happens literally all the time, is frowned upon. There is no limit to what can be in a TS, and as a general rule, if you really care about something, so much that it is deal breaking, it should be considered at this stage.

The few binding terms will be things like governing law and the no-shop, which says that the Target has to discontinue negotiations with any other potential buyer (or, often, investor). The purpose of a no-shop is to make the deal more likely to occur, and also reduce the bargaining leverage of the Target. Unfair, you may say? Maybe so. But this is 100% “market,” meaning it is standard practice in these deals. The fight is usually not whether there will be a no-shop, but how long it lasts, how broad it is, and what happens if the Buyer stops moving.

Step 3: Diligence

Diligence occurs throughout the deal, but it is most naturally placed here after the LOI/TS stage. Short for “due diligence,” this is the process where the Buyer identifies material facts about the Target before the parties sign the formal transaction agreement. These material facts could be things like financial details, regulatory risks, threatened litigation, or other bad facts that might make the deal riskier than initially anticipated. Sometimes this process identifies what assets are actually being acquired, and can inform deal structure which we’ll discuss a little later. And other times, especially where the deal consideration includes shares of Buyer’s stock, the Target will also perform “reverse” due diligence on the Buyer to uncover any bad facts that could affect the fair market value of receiving Buyer’s stock. While both parties might engage in diligence, and in large deals certainly will, in mid-market venture deals, the Buyer is likely conducting more diligence than the Target. Buyers are often reticent to share private information about their businesses, and they’re the ones writing 9-figure checks, so they generally have the market power not to.

All buyers will conduct some diligence, as you really, really do have to. But expect the amount of diligence to be greater from public companies. These businesses are subject to public reporting and prospectus liability, and while an undiscovered material fact might be a problem for a private buyer, it could be much more serious for a PubCo.

Did you have a founder leave without signing a separation agreement? That will come up here. Is your cap table in order? That is going to come up here. For crypto clients, this is typically also where your token and foundation structures will be scrutinized, which is one of the reasons it is so important to work with crypto-native counsel capable of articulating the regulatory arguments relied on for these setups.

Diligence is conducted through a series of questions, a secure “data room” in Google Drive, Dropbox, or some other tool, through which relevant documents can be shared, and likely one or many calls where the Buyer’s lawyers will ask the Target, and the Target’s lawyers, some uncomfortable and difficult questions.

The things to remember during diligence is (i) the Buyer will find out the truth eventually because they will own your business, (ii) it is better for them to learn it now, because if you hide it and they find out later, they might sue you, and (iii) everyone involved wants the deal to close. Diligence is a good faith effort to find the truth, but generally I don’t find it to be full of “gotchas.” The lawyers leading the process want to do their jobs, figure out what is material, and respond accordingly. Bad facts uncovered during diligence will often only end a deal if either the Buyer has already soured on it, or the problem is so big that there is no way around it. And if the problem is that big, it was always going to be an issue one way or another.

Step 4: Definitive Docs

Concurrent with the diligence process, the parties (with the help of their lawyers) will negotiate the “definitive agreement.” What form this agreement takes depends on the structure of the deal, of which there are many. The most common are:

(i) an asset purchase, which takes some valuable assets from the company but cleaves off the risky bits and leaves them behind. This is kind of a pain, and also tax disadvantaged for the Target, but some buyers prefer it;

(ii) a stock purchase. This involves the Buyer purchasing the shares of the Target, effectively buying the whole company, and

(iii) a merger, which involves the Buyer (usually via a “merger subsidiary” of the Buyer) utilizing a statutory Delaware mechanism to “merge” into a single entity.

These definitive agreements tend to be massive forms, with all aspects of the deal specified in great detail. This is where the lawyers’ role becomes preeminent and they tend to take over deals. I think founders should read all deal docs closely, but the truth is that if you are not a transactional lawyer yourself, even with contemporary AI models’ assistance, you are probably not equipped to meaningfully digest an entire merger agreement.

Founders should pay particular attention to the representations and covenants in these agreements, which are promises about the Target. When those are not true, deals generally include an indemnity, which will, under certain conditions, allow the Buyer to recoup losses caused by an untrue rep or breached covenant.

At this stage, so-called “ancillary” documents are also negotiated. These are things like joinders, SAFE surrender agreements, or support agreements. While they may contain many different elements, the important aspect is generally that they bind employees, investors, and other shareholders to the merger agreement, specify what will happen to them and what they will receive, and crucially contain broad releases to keep them from suing the Target or the Buyer. In theory, as a matter of Delaware law, most deals don’t actually require everyone to sign on to close, but in practice, buyers usually expect them to. In companies with a relatively small number of investors and shareholders, there is no reason to leave loose ends. If you want to sell your company, you need to convince your investors.

Step 5: Disclosure Schedule and Waterfall

In addition to all of the above, there are a few other core documents that the lawyers are developing in the process of negotiation. The disclosure schedule is a piece of the merger agreement that is split off into a separate document. It can contain a lot of things, but at its core it includes disclosures against representations made in the main document. If, for instance, a company represents that:

There are and have been no Proceedings pending or, to the Knowledge of the Company, threatened, against the Company or any of its Subsidiaries that would reasonably be expected to be material to the Company and its Subsidiaries, taken as a whole, or prevent, materially delay or materially impair the consummation of the Transactions.

It might also include “except as included in Section x.x of the Disclosure Schedule” and list litigations there. By including them, they are disclosed, and so the Buyer can’t later claim indemnity for them. Because of this dynamic, our thinking is generally to include anything that could plausibly be implicated. Better to over-disclose than under, from a risk perspective.

Then there is the allocation schedule, known colloquially as the “waterfall.” The definitives will contain some very complex formulas to determine who gets paid when after the deal closes, and all of that gets wrapped into a spreadsheet that spits out specific payouts. I’ve heard other M&A attorneys describe this as their “bible.” At the end stages of the deal, it tends to run the show. It is pretty hard, particularly on first pass, to meaningfully internalize the economics of a deal from a 100 page definitive agreement, but the waterfall makes it real.

Two key economic factors that can impact the waterfall are (i) the “holdback” and (ii) vesting. I mentioned an indemnity above, pretty much in every deal, that is there to shift risk. But it’s pretty annoying to have to sue someone and take some of the money you’ve given them back. That takes a long time, and what if they’ve spent the money? So instead, most of the time, the Buyer holds back some percentage of the deal consideration to satisfy the indemnity. The percentages vary and are always negotiated, and so does the length of time they hold it. Investors sometimes participate in the holdback, and sometimes do not.

Buyers also like to incentivize the Target’s key stakeholders. A company is a collection of assets, but some large part of its value is the people who work there and the knowledge in their brains. So when you buy a company, you really want to make sure you get that too. But people who have just received a nine-figure sum of money (i.e., go fishing money), and who have been leading their own company for some time, are notoriously disinclined to go into an office every day and report to a boss. So buyers often prefer to implement retention mechanisms that pay out over time, generally over the course of several years. If the stakeholder leaves the go-forward company before the applicable vesting dates, they forfeit the remaining unvested compensation. Unlike key employees, the Target’s investors’ deal consideration generally is not subject to any vesting terms.3

The way the holdback and vesting interact is determined by the definitive agreement, and can significantly impact the stakeholders’ payment and risk profile. Vesting determines what part of the deal compensation is paid out at close. And the holdback is often taken from payment due at close. This means that if there is a large enough holdback, founders might get nothing at close. Even though that holdback consideration is due eventually, this risk profile is materially worse for stakeholders, because vesting-dependent consideration may never be paid out if they are to leave the company, and the assets held back generally satisfy claims first. It is better for a target to spread the holdback across all consideration, which means that only a pro rata portion of the holdback is drawn from consideration due at close.

Step 6: Sign and Close

Generally, the steps above all occur between you, your lawyers, the other side, their lawyers, and god. But at the end that changes. Most companies, by the time they are acquired, have a number of investors, and, if you recall those ancillaries from above, they all have to sign. There also may be essential vendors or non-selling counterparties that need to sign on for the deal to be worthwhile to the Buyer. Sometimes, DOJ and CFIUS have to give their blessing.

This process can vary from a couple days of emails and some pats on the back to weeks or even months of hostile conversations with venture capitalists.

Sign and close refers to the two step process to finish a deal and make it permanent. In practice, these can be a single step where a deal has a simultaneous sign and close, but the two step allows for everyone to come together and be bound by law, while preserving a little bit of time to cross t’s, dot i’s, and complete any task that has to be completed before the shares move and the deal is irrevocably consummated.

Sometimes this can be a very long time indeed. In the ongoing Warner Brothers Discovery deal, the outside date is set more than 7 months after signing. But for deals involving venture-backed startups, a six-month interim period will probably ruin any founder’s life so completely that it is hard to imagine. We try to set this period to be as short as possible. You really don’t want to be hanging around like yellow snow in April. Once the deal is done, finish it as fast as you can.

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Endgame

Of course, after the deal is done, there is still time on the clock. Earn-outs can extend as long as four years. The same for retention bonuses. The truth is, it will almost certainly be years before you can fully breathe easy. Hopefully, you’ll be fabulously wealthy by then, but it is a long road.

We wrote this primer to help founders understand the dynamics, levers, and legal mechanics of early-stage M&A deals, but far more goes into it than this. These are months-long dramas playing out in Outlook inboxes and Zoom calls. You’ll experience highs and lows, anxiety and tedium.

For a little while, you come together with a counterparty and do something hard. If you take anything away from this, take this: the process is competitive. Founders tell me all the time that they have a good relationship with the buyer and expect the deal to be easy. It never is. Set your expectations accordingly, but don’t slip into cynicism or bad faith. Ultimately, we’re all doing this together.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

I Went on a Podcast

Before our regularly scheduled program, last week I went on the Bips & Sips podcast to talk about the legal and regulatory history of prediction markets in the United States. Some of what I discussed there is relevant to our topic today, so I highly recommend you check it out. Thanks to Khushi and Eshita for having me on!

The CFTC Strikes Back

The last time we covered prediction markets here was back in March. The timbre of that article was, as much as anything, spiritual exhaustion. We’ve just been following the fight between states and federally registered designated contract markets (DCMs) like Kalshi for so long, and the skirmishes have come to feel so inconsequential in the broader fight.

But a couple days after that article came out, some meaningful progress dropped. The CFTC issued an Advance Notice of Proposed Rulemaking (the “ANPRM”) simply entitled “Prediction Markets.”

Generally, the purpose of this kind of advance notice is to give the market an opportunity to weigh in on some fresh policy issue before a final rule is crafted. This one is framed within the broader context of an aforementioned war between the Commission and the states.

Last time, we covered the incentives the states have to attempt to chill federally regulated prediction markets. But the Commission is incentivized too. Even if it did not approve of a particular use case for prediction markets, allowing the states to regulate DCMs would be effectively conceding exclusive jurisdiction over the product. That is something no federal agency would be comfortable doing, under any administration.1 Perhaps for this reason, CFTC Chair Michael Selig has taken an affirmative defensive posture against the states. Since Chair Selig was confirmed in December, the Commission has filed amicus briefs and brought litigation that push back against state claims against DCMs.

But the Chair’s coup de grâce is the ANPRM itself, calibrated to refine and develop arguments against state authority. It suggests that the Commission is positioning itself to forcefully claim its jurisdictional elbow room and push the states out.

By developing a framework to place and regulate prediction markets within the broader corpus of “swaps” and the Commodity Exchange Act (“CEA”), the Commission is drawing wind from the states’ sails, narrowing the range of argument available, until, we think, the jurisdictional remit will no longer be a question that federal courts can plausibly construe against the CFTC.

The ANPRM matters because it lets the CFTC build the legal and policy record for federal control over prediction markets before the states can define the field through gambling, insurance, or consumer-protection theories. Of course, we had to comment.

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The ANPRM

The request posed a number of questions to commenters. These 40 topics span the CEA regime, covering subjects like CFTC Core Principles, the public interest, section 5c(c)(5)(C) of the CEA and “gaming,” and insider trading.

We’ve worked with our friends Matt Homer and Jon Blattmachr at The Venture Dept. on prediction market issues in the past. Back in 2024, they were early investors in prediction market projects, and we represented some of those companies. It made sense for us to put our heads together on policy, and so we co-wrote an article on CoinDesk, discussing the importance of the very first prediction market decision — Jia Cobb’s District of D.C. decision allowing Kalshi to offer election markets.2

We at Brogan Law respond to a lot of these requests for comment, and Matt and Jon are both former regulators, so we thought it would be fun for the ANPRM to put our heads together on some responses. We didn’t answer all of the questions. Instead we tried to focus on the issues that posed the highest leverage opportunity for insight, where we could contribute the most, or which were most interesting.

You can find our full letter here.

Here is what we argued.

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1. The Special Rule and the Public Interest

Ok, so as most of you already know, a lot of the controversy around prediction markets stems from something called the “special rule.” Back in the day, there were no event contracts, but then people started trading them in the early 2000s as a subset of swaps. This was great, but a little loose, apparently, because in 2010 as part of Dodd-Frank, Congress decided to add some color.

So when Congress was writing Dodd-Frank in the wake of the financial crisis, they included some language about event contracts that became CEA section 5c(c)(5)(C). And this language is a bit odd. In my reading of the legislative history, it is pretty clear that, in 2010, this language intended to narrow the scope of the event contract market. That’s what the senators seem to be talking about doing. Except it doesn’t do that.

The new language enumerates a list of events including:

(I) activity that is unlawful under any Federal or State law;

(II) terrorism;

(III) assassination;

(IV) war;

(V) gaming; or

(VI) other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.

And says that the CFTC “may determine that such agreements, contracts, or transactions are contrary to the public interest if the agreements” and that if it does so then they cannot be traded on DCMs.

And, uh, it turns out that that is actually pretty limiting on the CFTC and probably constrains its authority to prohibit trade in event contracts. Sure, basically anything could fit within bucket (VI), but you have to do notice and comment rulemaking to do that and rulemaking takes a long time and is annoying.

So what this actually means, in practice, is that the CFTC may only prohibit contracts that it deems contrary to the public interest if first those contracts are (i) unlawful under federal or state law, or (ii) constitute terrorism, assassination, war, or gaming.

This is pretty inconvenient if you want to control markets as a regulator, so some people maybe didn’t read it that closely in the past, and when the old CFTC was applying this statute during the Biden administration they took an expansive view of what could fit within these buckets. Unfortunately for them, around the same time that happened the Supreme Court decided in a case called Loper Bright Enterprises v. Raimondo that federal agencies had to follow the law. That meant that when the old CFTC went to court to defend itself it lost.

This is a pretty weird outcome, as I mentioned, because the legislative history really does make it seem like Congress wanted to give the CFTC more authority than it did, but the actual words that they write down to make the laws really does matter, and the words of 5c(c)(5)(C) are unequivocal. It’s a two-part test. That’s the special rule.3

So now, fast forward to the contemporary CFTC, which is not interested in broadly prohibiting prediction markets, a new question becomes really important. “How should step two of the special rule apply?” The Commission has a limited ability to prohibit certain contracts, and how is it going to do that?

We thought this was one of the most interesting open questions in the regulation of these markets, so it was the first that we answered.

Our view is that the Commission should adopt a clear, narrow definition of public interest to allow market participants to self-certify markets confidently. While such “public interest” is undefined within the Act, we looked to context clues to guide us to a suggested principle.

While it might be tempting to extrapolate that purchasing contracts on “bad things” is the rule, the criteria in the statute appears more subtle than that. Natural disasters, even plague, are not included as categories. On the other hand, focusing on what is included suggests that incentives may be important. Most of section 5c(c)(5)(C) categories like crimes, assassination, and terrorism involve bad acts perpetrated by persons. In our view, the reasonable principle to infer from this is that such acts should not be the subject of event contracts because the existence of the contract might induce those bad acts.

It doesn’t matter how many earthquake contracts trade, there will never be any increase in earthquake frequency. But if contracts trade on the assassination of public figures, any sane observer might worry that some more people might die. This is our first principle. If a contract might induce a bad act, that should be a strike against it.

Note that this does not necessarily apply to all of the enumerated categories. War, for example, is pretty difficult for any private citizen to cause. Maybe some government officials could cause a war, but there is statutory language in CEA section 4c(a)(3) intended to limit government insiders from trading, and it is plausible to imagine a meaningful prohibition. And on the other hand, the economic consequences of war, one of the core hedging purposes of derivatives, are massive.

We don’t argue that this should mean that war contracts are not against the public interest, that is for the Commission to decide, but it is a good example of how the principle we are elucidating is limited. Not everything that falls within one of the enumerated categories should automatically be prohibited. Instead, the Commission should carefully determine whether the markets are or are not within the public interest, based on the costs and benefits.

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2. Insider Information

Another major issue in the regulation of prediction markets has been the perceived prevalence of insider trading. Whether this is a real issue is a matter of debate, but it is certainly salient.

One thing that there is no question of is that some markets may be subject to manipulation. Just a few weeks ago, there was a popular and fun news item about bandits pointing a hairdryer at a temperature sensor at Charles De Gaulle Airport in Paris, France to manipulate a (non-CFTC regulated) market on Polymarket.

But of course, real market manipulation is rarely popular and fun, and this is our second category for which the public interest analysis from the special rule might apply.

Markets that are susceptible to a single human input, like the length of speeches, or the inputs of sensors, may be against the public interest for the same reason that assassination and crime markets are, because they induce individuals to do bad things. In this case, the bad thing may be market manipulation, and the Commission will only be able to reach this analysis where a market falls within an enumerated category anyway, but this is nonetheless a sound basis for principled exclusion of markets, or rulemaking under category (VI).

It may be the case that other regulation, or controls at the DCMs themselves of settlement criteria or other factors may remediate this issue, but future Commissions will have to weigh the effectiveness of these measures against the risks of manipulation and bad acts (and the benefit of contract availability) to conduct a fulsome public interest analysis.

The Commission posed a second question about insider information as well. “Is there some public interest utility if people with an asymmetric information advantage on a particular event contract are able to trade on prediction markets?”

This question has been the subject of much debate, with the theory sometimes preferring that insider information be included in markets because it increases the fidelity of the markets’ prices to the true probability that events will occur, and the public, in my estimation, always preferring that insider information is limited.

From our perspective, as long as everyone knows the rules of the market, it could be fair to include or not to include insider information. There is some advantage to including it, but it may also make uninformed users less likely to adopt a given market.

This, however, looks much more like a commercial decision than a necessary regulatory one. DCMs are a subset of so-called self-regulatory organizations (“SROs”), which means they can set their own rules for some things. We argue that, provided the rules are clear and followed to protect the public, the decision on how much insider information to allow should remain with the SROs, because they have the direct commercial incentive to get it right.

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3. Prediction Markets and Parametric Insurance

In addition to the questions we expected above, there was another interesting one that we took the opportunity to comment on. The Commission asked “How do event contracts compare to, or substitute for, insurance contracts?”

It’s pretty obvious, off the bat, that economically an event contract is the same thing as a parametric insurance contract. There will be more strings attached to an insurance contract, sure, but end of the day, something happens and the contract holder is either paid out or not. This is the simplest mechanism to shift risk between two parties.

Of course, these markets are funded differently. An insurance contract is sold directly by a sophisticated counterparty, an exchange-traded event contract is a market device, and that may result in better or worse prices to offset some risk.

But more importantly, in some places, it is illegal to offset risk through insurance contracts. In the United States, insurance is a largely state-regulated industry. And one thing that state regulators love is price ceilings. It is just a classic rootsy populist idea. Fuck big business. We’re not going to let these greedy insurance companies rob us anymore.

This plays in Sacramento, for example, where the California Department of Insurance set rate limits on property insurance under Prop 103, which resulted in large parts of Los Angeles becoming uninsurable in the leadup to the recent Palisades Fire.

While we don’t know if prediction markets can underwrite these events economically enough to act as an ancillary insurance product for homeowners, if it could, or if it could operate in any of dozens of other states where insurance products are limited by law, it might provide a significant public benefit.

Ultimately, the market prices everything. Governments have always tried to change this, but in the end price caps just lead to lines and shortages. The CEA preempts state laws, and so maybe it can offer a federal option for hard-working Americans whose insurance policies have been displaced by local government.

Bits and Bobs

We answered some other questions too. Talked about the definition of “swaps,” the flagship issue in Judge Gordon’s jurisprudence in Nevada.

We also talked about the definition of “gaming” and whether it should or should not include sports.

But probably all of the commentators did that. That is why we wanted to highlight the policy arguments above. It’s a great privilege to write comment letters for a job, or at least a part of one. I tend to think the highest leverage way to use this opportunity is to take the opportunity to question orthodoxy and make dialectical arguments that have some chance of meaningfully improving governance. For any given comment letter, the odds are good that no decision maker will ever read what you wrote, and better that they’ll never care. But at least with this approach, the odd time that they do read you, your writing could plausibly contribute something meaningful.

Prediction markets are controversial and exciting because they are new, but the real power of the modality is to cut the knot of state regulation that grips much of American risk industries. Federalism is great, but state governments are small and susceptible to capture. The CFTC could be too, of course, but if I’m taking odds on a federal regulator vs. your local county commissioner to make a tough policy call down the road, I know who I’m choosing.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Editor’s Note: Alan Gitelman is Brogan Law’s current intern. This semester, he is splitting his time between us and the Blockchain Association, and is doing great work. He is a 3L at Cardozo School of Law here in New York and currently still on the market for a full-time job after graduation. If you are looking for a deft and highly motivated crypto-native attorney, I recommend you reach out to him at agitelma@law.cardozo.yu.edu. It is difficult to find attorneys that are already familiar with the workings of crypto and it is rare to find first-years who can write. Alan can do both.

Imagine you run a small but legitimate firearms dealership. You’ve been in business for 20 years, pay your taxes, pass every background check, and have never had a compliance issue. One day, your bank calls and tells you your account is being closed. No explanation beyond “it no longer fits our risk profile.”

That scenario played out across the country at crypto startups and industries that were legal, but politically inconvenient. As it turns out, often, the invisible weight pushing those account closures was a bank examiner invoking “reputation risk.”

We’ve talked about debanking here before a few times. Mostly a program called Chokepoint 2.0, which was the crypto bogeyman of Biden-era federal policy. Emblematic of the way that certain zealots turned control of federal agencies into anti-crypto policy. That all reversed in 2025, and that progress is continuing now. This week, the OCC and FDIC issued a final rule prohibiting regulators from using reputation risk as a basis for supervisory action.

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Washington’s Perfidy

During the Biden administration, the debanking of crypto built slowly. First, as early as 2021, there was a campaign of informal pressure and supervisory letters that never showed up in public enforcement databases but made clear to any bank paying attention that serving crypto clients meant inviting examiner scrutiny.

By 2022, the FDIC had written to dozens of banks asking them to pause or refrain from crypto-related activity. The FDIC later acknowledged awareness of 96 institutions that had expressed interest in pursuing crypto activities, most of which pulled back.

FTX collapsed in late 2022 and sent shockwaves through the system. Then 2023 arrived. Silvergate Bank, which had built its entire model around serving digital asset clients since 2013, hemorrhaged deposits and wound down in March 2023. Its former CTO said regulators had imposed a cap on digital asset deposits that gutted the bank’s business model entirely. He called it being shot in the back. Within days, Signature Bank was seized by the New York State Department of Financial Services. A former Signature board member publicly said the closure was meant to send a message to the crypto industry.

In the aftermath of this, crypto firms simply couldn’t access banking services anymore. The industry called it Operation Chokepoint 2.0, a callback to the Obama-era campaign that used the same informal pressure tactics to cut off banking access for payday lenders and firearms dealers. And while its champions still deny that it was a single concerted campaign, the experience of those in the industry suggests otherwise.

Over the year, Coinbase, led by general counsel Paul Grewal, has used FOIA requests to attempt to get the real story out. What has surfaced is dozens of FDIC pause letters, written instructions to banks to halt crypto activity. Founders described getting account closure notices with no specific violation, no appeals process, and no path to remediation. Whether it was a coordinated campaign or banks doing what risk-averse institutions do when examiners signal discomfort, the result was the same. Compliant, well-capitalized crypto firms could not get a checking account.

And at the center, is the opaque “reputational risk” criteria that allowed diverse actors interpreting different information to all come to the same conclusion. Denial.

Now, though, that may never happen again.

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The Rule

The new rulemaking started back to 2025. The current process began in March 2025, when the OCC issued guidance instructing examiners to stop examining for reputation risk and began scrubbing references to it in the Comptroller’s Handbook. The formal rulemaking followed on October 30th, 2025, when both agencies published a joint NPRM in the Federal Register. The comment period closed December 29th, 2025. On April 7th, 2026, the OCC and FDIC jointly issued the final rule titled “Prohibition on the Use of Reputation Risk by Regulators,” having reviewed and responded to public comments received during that process. The rule makes binding amendments to 12 CFR Parts 1, 4, 30, 302, and 364 and is effective June 9th, 2026.1

The rule does three things of practical significance. First, it formally eliminates reputation risk as a standalone supervisory risk category. Second, it prohibits both agencies from using reputation risk, disguised or not, to criticize banks or take adverse actions against them. Third, it prohibits the agencies from pressuring banks to exit, modify, or refuse client relationships on the basis of a client’s political, social, cultural, or religious views, protected speech, or involvement in lawful activities perceived as reputationally sensitive.

Comptroller of the Currency Jonathan Gould said it plainly: “Regulators and banks have too often used it as a pretext for decisions that have nothing to do with safety and soundness, financial risk, or even BSA/AML compliance.”

Until now, reputation risk was never defined clearly, never measured consistently, and was never subject to anything resembling due process. It was a catch-all that let examiners signal discomfort without pointing to a specific rule. Banks played it safe, turning away crypto clients at onboarding, closing accounts with little explanation, and establishing internal policies that treated entire industries as off-limits rather than assessing individual client risk. The rule removes that dynamic and gives banks meaningful cover to serve industries they have been quietly avoiding for years.

The rule does leave some things unresolved.

The Comptroller’s Handbook will not be updated overnight, and banks and examiners may be operating under different assumptions during the transition. That gap matters for anyone trying to structure a compliant crypto banking relationship in the near term. The BSA obligations have not changed either. Serving digital asset clients well requires transaction monitoring calibrated for onchain activity, customer due diligence that accounts for counterparty exposure and wallet risk, and ongoing oversight of a client base operating in a regulatory environment that is still being written. The GENIUS Act raised the bar further for stablecoin issuers specifically. The regulatory pressure to avoid crypto may be gone, but the compliance work required to serve it responsibly is persistent.

Banks stepping into this space need updated risk assessments, onboarding procedures capable of evaluating a crypto exchange with the same rigor as any other institutional client, and monitoring infrastructure built for how this asset class actually behaves. Building it takes time, budget, and people who understand the space.

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The Future Beckons

Banking access and compliance clearance are two different things, and the rule does not change that. Crypto firms that have been locked out of banking relationships for years may read this rule as a green light to re-engage with banks and move on. The regulatory pressure to avoid them is gone, but the compliance obligations those firms carry have not changed.

All MSBs must still register with FinCEN. State money transmitter licenses still need to be obtained and maintained across every jurisdiction where the business operates. OFAC screening obligations apply regardless of whether a firm has a bank account. SAR filing requirements have not moved. KYC and customer due diligence standards are the same.

For stablecoin issuers specifically, the GENIUS Act raises the bar considerably. BSA program requirements, transaction monitoring, suspicious activity reporting, and sanctions compliance are now codified obligations at the federal level, and enforcement authority spans Treasury, the Federal Reserve, and the OCC. The compliance infrastructure required to meet those standards is substantial, and firms that have been operating in a lighter-touch environment will need to close the gap.

And even though the industry may not be subject to systemic discrimination anymore doesn’t mean it is without risk. Banks that begin serving crypto clients again will need to conduct their own due diligence before opening accounts. A crypto firm with a weak AML program, gaps in its sanctions screening, or unresolved regulatory history is not going to sail through that process just because reputation risk has been removed from the examiner’s toolkit. Banks still have their own risk appetite, their own compliance obligations, and their own boards to answer to.

Despite the regulatory hurdle being lifted, shareholders, customers, and counterparties still have to form their own judgments about which business they want to service. As a result, compliance teams will need to revisit internal risk frameworks, board-level risk appetite statements, and third-party risk programs built around the old expectations.

The rule takes effect 60 days after Federal Register publication. In the time between publication and the effective date, the Comptroller’s Handbook will not yet be fully updated to reflect the change. The OCC began removing reputation risk references from its handbooks and guidance documents in March 2025, so the process is already underway, but it will not be complete by June 9th, 2026. For banks and crypto firms trying to structure a relationship during that window, the rule itself is the governing authority and if an examiner raises reputation risk during that transition period, be mindful that the new regulation has the final say.

Read the Final Rule here.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

I’m going to be at the HLS Blockchain & Fintech Initiative Conference next week, April 17th. Would love to chat with anyone else who will be around Boston that day. Reach out at aaron@broganlaw.xyz to find a time to talk or book a time here directly.

Investment Advisers

It’s annoying to be an RIA. Really a big pain. You’re just humming along, managing $149,999,999 as an exempt reporting adviser (ERA), and all of a sudden a fresh $2 comes in and you have to file a Form ADV.1 The next thing you know, the SEC is all up in your business, telling you what kind of compliance program to have, what books and records to keep, and, important for today, how you can custody those assets.

In the ideal world, operating a cryptocurrency vault is sort of like the opposite of being an RIA. You set up a smart contract on-chain that holds some assets and facilitates deposits, redemptions, and curation, and then you take it to your lawyers who take the view that you don’t fall within any regulatory regime. The vault can contain virtually unbounded assets and, in the ideal world, nobody who touches it has to register anywhere.

That’s decentralization, baby.

Or so the argument goes, at least.

As institutional capital and cryptocurrency markets meet, there is an increased need for regulatory imprimatur at points of contact. See, for the past hundred years or so, issuing securities and managing assets has been subject to prescriptive government oversight. We often discuss these regimes here in many contexts, as the rules governing the securities laws are a genuine maze.

Within the world of vaults, the Investment Advisers Act of 1940, and the SEC rules related therein, have become particularly important of late. Basically, a vault is a fund designed to sit outside of regulatory regimes through automaticity. To simplify, if you think of your vault as a box, depositors put in assets and receive a receipt token in return. That receipt token represents a share of the assets in the vault, and can be exchanged for the deposited asset, plus some yield, according to the terms of the vault. A third party, sometimes called a curator, “manages risk” by deploying the assets in the vault into some agreed strategy.

If the box was an LLC in Delaware, and it deployed into securities, it would be a fund covered by the Investment Company Act of 1940. If it deployed into commodity derivatives it would be a commodity pool regulated by the Commodity Exchange Act. The shares in the box would be securities. The curator would, unless exempt, be required to register as a registered investment adviser (“RIA”).

When the box is a smart contract, maybe these regimes don’t apply? I don’t know, only a judge can say for sure. But a lot of players in the space, including Coinbase, have gotten comfortable with the arguments, and vaults are popping up everywhere.

In fact, they’ve gotten so popular that some money in the old LLC-based system might be interested in nosing around them. This interface is the challenge we’re discussing today.

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The Paper

Veda Tech Labs Inc. (“Veda”) is a developer of vault infrastructure. While I can’t speak for them or their products, my understanding is that this generally means that they put together the smart contracts that allow vaults to operate so that other third parties can deploy them.

In our experience, there are lots of firms that want access to this kind of product. Money wants to find yield and DeFi promises it, but if you are, say, managing the endowment of the Ford Foundation, you can’t possibly justify the risk of deploying directly into a DeFi strategy. Even if you did want that kind of smoke, you would have to hire someone with expertise to do it. Vaults provide the cover of a third party risk manager handling exposure.

But this institutional money in LLC world is generally managed by RIAs, and RIAs have rules. Specifically, 17 CFR § 275.206(4)-2(A) says that investment advisers are required to maintain client funds in segregated accounts with Qualified Custodians.2

This is actually a pretty big deal in the cryptocurrency economy. Qualified Custodians don’t grow on trees and it is far from certain that one will natively support novel cryptocurrency tokens. Most venture capital firms are RIAs, and buying access to new projects cryptocurrency tokens is a big part of what crypto VCs do. This is why, in most form token warrants that VCs ask startups to staple to the SAFEs they raise money with, the startup will covenant to something like the following:

Prior to any delivery of any Network Tokens, the Company shall exercise reasonable best efforts to, at the Holder’s option, (a) partner with a third-party custodian that is a “Qualified Custodian” under Securities and Exchange Commission rules so that such custodian will accept and support such Network Tokens with secure wallet and storage services promptly following such distribution; and/or (b) implement or impose programmatic transfer restrictions on such Tokens via technology that permits substantially similar restrictions and control of assets and that is not controlled by the Company or any Token Affiliate; provided, however, that the Holder shall always retain the right to self-custody of any Tokens acquired by the Holder hereunder.

This is fine, as far as it goes, but there is some take rate at any intermediated service, and it’s not very crypto after all to require a quasi-bank to hold tokens. And as vaults grow in importance, uncertainty about whether funds can deploy into them is a drag on the emerging medium. This is probably why Veda has a new proposal that it released a couple weeks ago on March 23, 2026.

The letter is titled “Recommendations Regarding Recognition of Vaults as Satisfying SEC Qualified Custody and CFTC Segregation Requirements for Digital Assets” and addressed to the SEC Division of Investment Management, the Crypto Task Force, the CFTC Division of Market Participants, and the Joint SEC-CFTC Harmonization Initiative.

Veda is arguing (along with their counsel Brian Forman and Jason Gottlieb at Morrison Cohen) that vaults should be qualified custodians. And it’s a pretty elegant point, I think.

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What the Vault Hath Wrought

Veda argues that the Qualified Custodian rule is intended to implement certain principles, primarily (i) misappropriation of client funds, (ii) commingling of assets, and (iii) exposure of client property to adviser insolvency. Each of these, in their view, could be addressed equally well through vaults. Their point is that, with crypto, it is possible to programmatically protect against misappropriation directly. “Unlike traditional securities and commodities, digital assets are controlled through cryptographic signing authority, recorded on distributed ledgers, and can be governed by deterministic smart contract logic.”

This may be true. Much of what a custodian does could be done with a smart contract. The security of this endeavor would depend on the security of the smart contract, but it is not necessarily the case that managing custody through a programmable vault is per se riskier than doing so through a custodial system. One can imagine a vault structured in such a way as to prioritize client safety.

Such a system might have advantages over a custodial interface, not least that it might be less expensive, burdensome, and faster, which could redound to benefits for the client in the long term.

Veda points out that a vault could keep assets bankruptcy remote as well as a custodian, which may be true, though, ultimately, a vault is not a bankruptcy remote vehicle. It is entirely plausible that a bankruptcy court could order its assets frozen, especially where they are commingled, and a major depositor is insolvent. But Veda’s point is good that “[f]rom a functional perspective, vault custody more closely resembles a separately managed account than a pooled balance-sheet vehicle: assets remain attributable to the client and redeemable directly through the vault contract rather than through an intermediary’s discretionary release process.” And clients should be sufficiently sophisticated to evaluate these risks without a prohibition.

The firm also makes several points about the potential benefits of these systems for custody. They advance the theory that “RIAs may encounter assets to which clients are contractually entitled but for which no qualified custodian is technologically capable or available“ which they call an “infrastructure bottleneck.” They list off a parade of other benefits “vault redemptions execute on-chain in near real-time, 24/7, without wire cutoffs, T+1 settlement cycles, or custodian operating-hour constraints; on-chain vault balances are continuously verifiable by any authorized party, providing real-time proof of holdings that periodic account statements cannot replicate; and reduced custody costs at scale.” And all of this is probably right. At the margin these might be advantageous relative to custodial management of funds.

Of course, there are disadvantages as well, like smart contract and private key risk, which Veda also addresses. But these both are beside the point, in my view. Different custodial modalities present different security challenges and offer different advantages. Our regulatory state should not attempt to perfectly calibrate best practices in a professional industry, that is what the market is for. But from a broader perspective, the idea that a vault could provide as secure custody meeting the primary policy goals of the Investment Adviser’s Act is a necessary predicate to the kind of intermediation between traditional finance and cryptocurrency that will actually advance the economy.

This is what makes this paper so clever, and so effective. It relates a new proposition in a relatively arcane corner of the securities laws, in a way that if accepted would have a big impact. It’s the kind of advocacy that we try to do here, with real vision, executed well.

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Le Sujet qui Fâche

Relative risks aside, though, absolute issues still exist in developing vaults designed to gain institutional (and regulatory) adoption. The elephant in the room, reading Veda’s paper, is that vaults do not always have a sterling track record.

Some of the regulatory arguments that we discussed above related to curators are, let’s say, speculative. Vaults’ use case as regulatory arbitrage machines may not endear them to all regulators (though the SEC may have signalled comfort with some of these arguments in private meetings). Veda addresses this in their Section VI arguing that “the existence of a strategy manager or curator exercising investment discretion over vault assets should not, in itself, disqualify a vault from this compliance pathway” and that “[t]he structural separation between custody infrastructure and investment strategy, as with traditional assets, is the feature that makes this compliance pathway analytically coherent and consistent with the rule’s existing framework.”

That may be the case, but real people don’t think like that, and if the SEC is convinced that vaults are used to illegally offer investment advice, it does seem less likely they would grant their blessing for their distinct but concurrent use as custodial tools. That said, if RIAs were permitted to use vaults for client funds, maybe more curators would be comfortable registering instead of relying on tricky arguments. Chicken and egg problem.

More importantly, theory aside, vaults do have an occasional tendency to blow up spectacularly in the real world. Just last week, the popular Drift Protocol’s primary vault on Solana was targeted by North Korean hackers and drained of a reported $270 million. This problem is not particular to vaults, but it is a point where the risk profile of DeFi might be ported into tradfi mediums that are accustomed to greater operational security.

The truth is, a qualified custodian like a bank has security advantages relative to smart contract controlled by a multisig wallet. These institutions have generations of operating practices and systems designed to prevent loss, and the most important of all is the practical reversibility of transactions made through heavily intermediated traditional finance rails. Wrench attacks are less effective when trades settle T+1. Vaults always sit one breach away from being drained, and regulators might justifiably be concerned about that.

But on the other hand, this is the nature of access to DeFi. A smart contract can be exploited regardless of how an RIA deploys client funds into it. The existence of an intermediate Qualified Custodian layer is no protection if funds are deployed into a protocol that is hacked.

Regulators should not prescriptively screen opportunities that sophisticated investors demonstrably want access to just because they are not accessible through traditional intermediaries. That is technological chauvinism, and while, yes, it does have the chilling effect that Veda identified, it is also simply a misapplication of regulatory authority.

To draw a normative conclusion about how regulation should address technologies like this, one must first be clear about the function regulation is meant to serve.

A popular academic model of regulation in the recent past is as a brake on industry, with the purpose of abstractly promoting consumer (or class) welfare. An economic model might suggest that regulators exist to enforce standards in an industry to internalize externalities and counterbalance information asymmetries. But in financial markets regulation is as much a partner to financial systems as anything else. It is good for securities markets that fraud is policed, and the same is likely true of RIAs and custodial rules. The government’s gloved hand prohibits marginal regulated actors from undermining the credibility of the industry as a whole, which makes third parties more comfortable, at the margin, having their assets managed.

Choosing between these models is a political question, but in our view, everyone is hurt when regulators overemphasize safety to the exclusion of innovation. Consumers should be protected, nobody wants to put the cocaine back in soda, but investors, particularly the accredited investors who would typically interact with RIAs, should not be treated like children.

DeFi is risky, this is well understood. But technical rules shouldn’t narrow access under the guise of procedure. The default should be that investors retain broad autonomy over their assets, with constraints imposed only where necessary to address identifiable risks like misappropriation, commingling, or intermediary insolvency. If the exceptions instead become the rule, we have lost sight of the system’s purpose.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

I Went on a Podcast

Before we start this week, a shameless pitch. A couple weeks ago, Jacob Robinson asked me to join his podcast, Law of Code. We had a fun, rollicking conversation spanning a number of policy topics in the cryptocurrency and prediction market industries. Check it out!

SEC Rulemaking

Since Trump took office in January 2025, the SEC has been breadcrumbing securities guidance to the cryptocurrency industry. From an industry perspective, most, if not all, of this guidance has been good.1 The Commission clarified that meme coins are not securities, that protocol staking is not an investment contract, and that neither are the tokens emitted by liquid staking. At the same time, no-action provided to Double Zero opened the door to decentralized physical infrastructure networks (DePIN).

All the while, the crypto task force was accepting comments from industry, and taking the show on the road to host roundtables and take meetings with what seemed like anyone who wanted to talk.

Laudable approach to governance. No notes.

What had been lacking, so far, was a pièce de résistance. Staff guidance and no action nibbled around the corners of the big question at the center of the regulation of cryptocurrency tokens. What is and is not a security, when, and how. We practitioners kind of expected these markets to liberalize but after a year, they hadn’t.

This question isn’t academic. Before Trump took office, there were dockets of hot litigation focused on nothing else. Judge Katherine Polk Failla of SDNY had just certified an appeal to the Second Circuit in SEC v. Coinbase on the question of whether secondary market transactions in crypto tokens can constitute investment contracts absent ongoing obligations between issuer and purchaser. These are live issues.

And the industry might have won, too. But when Trump came in he dropped all the pending litigation and so took it out of the courts’ hands. Without guidance we reached détente but not catharsis. The legal world stood unchanged but the practical consequences of issuing a token took a sharp 180. Yet the statute of limitations for most securities violations being five years and presidential terms only four, this was not a stable equilibrium.

This is not to criticize Chair Atkins & Co. For much of 2025, many practitioners2 expected Congress to pass some kind of market structure legislation that would irreparably alter the legal landscape of crypto token regulation, and it hasn’t happened yet. Maybe it will, maybe it won’t. But the uncertainty made it understandable that the SEC would not promulgate major regulatory changes. Why spend the political capital if Congress is about to do it for you?

But time passed, and if the SEC didn’t do something before the midterms, the political climate was poised to change, and so last week we were blessed with a joint release of the SEC and its sibling agency, the CFTC (note that we just refer to this as the SEC’s guidance throughout), titled “Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets.”

The guidance is doctrinally incremental but operationally meaningful, clarifying pathways the industry was already tentatively using without resolving the underlying legal uncertainty. Here are the takes.

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The New Guidance

The new release is the Commissions’ interpretation of the application of the securities laws. For administrative purposes, the release is an “interpretive rule,” which means it takes effect immediately but is still a “major rule” within the meaning of the Administrative Procedures Act, with an opportunity for the public to comment.

What it really is is a formal compilation of a number of different threads in the securities laws that have been percolating since the beginning of 2025. Some practitioners have described the guidance as extraordinarily important.

But while it is undeniably forward progress, we don’t necessarily agree that the guidance will meaningfully change crypto practices. This is for a few reasons. First, this guidance is interpretive. While we have written before about the possibility of rulemaking restructuring crypto markets, this doesn’t do that. It is very interesting, but it doesn’t change any substantive rights. And that matters a lot, because of issue number two of this guidance, which is that the SEC is not the one who gets to decide. Now, courts are probably going to look at this as persuasive, but the reality is that the Howey test exists outside of the SEC’s remit, and as long as there are regulators in the future who use it to pursue securities claims, this guidance will not impair their legal ability to do so. These issues remain live in federal courts, and it is there, not here, that they will be decided. Now this could indicate a shift in enforcement doctrine, which is quite powerful, but only so long as a sympathetic administration remains in power, which is far from certain as early as January 2029. Finally, third, much of what is contained in this interpretive release is consistent with prior guidance, and so has already been put into practice by much of the industry.

So what is the guidance?

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Taxonomy

The SEC starts by creating a taxonomy of crypto tokens, positing that this relates to their regulatory treatment. The categories are: “(i) digital commodities; (ii) digital collectibles; (iii) digital tools; (iv) stablecoins; and (v) digital securities.”

The purpose of this taxonomy is to distinguish between the treatment of the different categories. Broadly, digital commodities mean network tokens, tokens that are “intrinsically linked to and derive[ their] value from the programmatic operation of a crypto system that is ‘functional.’” The interpretation then defines a system as “functional” when the “system’s native crypto asset can be used on the system in accordance with the programmatic utility of the system” and adds the caveat that “[a] functional crypto system does not have a central party that oversees participation or distributes rewards to users.” In other words, the SEC is saying that practically decentralized systems are not securities because “a purchaser would not reasonably expect to profit based on the essential managerial efforts of others.” This is an interesting but limited exemption that will mostly apply to legacy network tokens at first, but which may be gameable in ways we’ll discuss a little later.

Digital collectibles are, broadly, NFTs. The SEC also wraps meme coins into this category, and applies similar analysis to that it provided in the past in its guidance there. According to SEC, “a digital collectible’s value is not based on the expectation of profits from any essential managerial efforts of its creator following creation but rather on supply and demand, which in many cases depends on the subject matter, popularity, or scarcity of the digital collectible, as is the case with physical collectibles.“

Digital tools are similar to digital commodities, except that instead of being a network’s native token, these tokens have some other predominant instrumental use. “Persons acquire digital tools for their functional utility and do not have any rights or interest in or with respect to a business enterprise or other entity, promisor, or obligor just as persons acquiring a museum membership do not expect to realize a profit from the essential managerial efforts of the museum’s operators.”

For stablecoins, the interpretive guidance defers to GENIUS, and digital securities are exactly what their name suggests. Any digital representation of an asset that is itself a security is, according to this taxonomy, still a security.

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Investment Contracts

Of course, the elephant in the room in saying that any cryptocurrency token is not a security is that, in addition to the statutory forms of security like stocks and bonds, there are also investment contracts, which are slightly amorphous.

One of the critical issues in the regulation of crypto tokens through the securities laws is how exactly the definition of an investment contract should apply. In the most common application, a sale of a token as an investment contract makes the token a security. This is sometimes called embodiment theory. Now that token, as a security, can only pass through the highly regulated rails of national exchanges, broker-dealers, etc.

Some smart attorneys noticed, however, that unlike a stock, for example, the sale of which is a securities transaction, but which itself is also a security, an investment contract refers only to the transaction itself. For instance, in a transaction to sell fractional shares in an orange grove, the oranges do not become securities. It is just the investment itself. In this conception, an initial fundraising transaction might be an investment contract, which could be performed through an exemption from the securities laws like Regulation D, but the token itself may not be.

The SEC, in this latest interpretive rulemaking, gives modest support to this view, saying that “the fact that a non-security crypto asset is subject to an investment contract does not transform the non-security crypto asset itself into a security. For this reason, a non-security crypto asset that has been subject to an investment contract does not remain subject to the associated investment contract in secondary market transactions where purchasers would not reasonably expect such representations or promises to remain connected to the non-security crypto asset.“

Yahtzee, right! But not so fast, because “[i]f, on the other hand, purchasers would reasonably expect such representations or promises to remain connected to the non-security crypto asset, the nonsecurity crypto asset would continue to be subject to the associated investment contract in secondary market transactions.”

In other words, secondary market transactions need not be security transactions after a token is sold as part of an investment contract, but they may be. And this is a major point of difficulty with the interpretive rule, because how do you tell the difference!

For the SEC, this depends on whether “the issuer has fulfilled its representations or promises to engage in essential managerial efforts” which in turn “depends on how the issuer defines or otherwise describes such efforts in marketing and promoting the investment contract.”

As Mike pointed out in his tweets last week, this standard, that a project can define for itself in its marketing what completion of managerial efforts is, is incredibly powerful. It creates an opportunity for projects to strategically end the investment contract portion of a token lifecycle early, and accordingly to allow it to trade liquidly.

However, I should caveat that while this is great and all, with no indication that any court anywhere will agree, it does seem difficult to apply reliably. Watch this space.

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Odds and Sods

In addition to these questions, there are a few other issues addressed in the interpretation. For one, staking, staking as a service, and liquid staking, which have been addressed at various times in guidance released over the last year. The SEC takes the view that any efforts made by promoters of these services are purely ministerial, which one could wonder if all courts would cosign, but which will certainly come as a vindication to firms that offer staking as a service pools.

Perhaps more interestingly, the interpretive rule, for the first time, explicitly states that wrapping and airdrops do not create per se investment contracts. Most practitioners had already treated these activities as non-securities, so this interpretation is not revolutionary, but it is a comfort nonetheless.

For airdrops, a point of clarity is particularly interesting. The way most airdrops function is people use your product, or do some farming activity, and in exchange at time T+1 you give them some token. This has always been a wink wink nudge nudge type of economy, where everyone subscribes to a fiction that the airdrop does not derive solely from pre-provided consideration, and the lawyers walk away happy. Well, SEC is cosigning this practice, stating “where such consideration was provided to the issuer prior to the announcement of the airdrop and the recipients are not required to provide any further consideration to the issuer after such announcement in order to obtain the airdropped non-security crypto asset, we would not view such consideration as being provided to the issuer in exchange for the airdropped nonsecurity crypto asset.” This creates a significant opportunity to structure airdropped TGE in a way that internalizes significant value without implicating the securities laws, and firms will likely take advantage.

One of the biggest challenge posed by these final sections of guidance is the distinction drawn in both between securities and non-security. If the underlying token is not a security, then the wrapping transaction, or airdrop provided not for consideration, is a non-securities transaction. However “a Redeemable Wrapped Token that is a receipt for a digital security or non-security crypto asset that is subject to an investment contract is a security” and airdropping a security would similarly implicate the securities laws. This is a particularly difficult standard when it comes to wrapping, because the function of the wrapper is unchanged, but the regulatory status of the resulting asset depends on actions of third parties, that a wrapping party may not be well positioned to evaluate. In practice, maybe this will be obvious, but if it comes down to questions of system maturity, as seems to be the case, it may be onerous for wrapping platforms, which may be automated, to make this kind of case-by-case evaluation.

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Looking Forward

Taken together, this new interpretive guidance may be the most significant piece of securities text in cryptocurrency since The DAO Report. By and large, it favors the industry, and provides reasonably clear paths forward for projects hoping to issue tokens. Here is how I see the path.

(i) Create a white paper identifying a clear, low, bar to establish managerial efforts are complete and a network is mature.

(ii) Sell tokens as securities using exemptions to investors (subject to lockups)

(iii) Airdrop other tokens to members of the public.

(iv) Retain some volume of token in treasury.

(v) Successfully achieve your own criteria for managerial efforts.

(vi) Secondary markets are now liquid in this token. You can fundraise by selling your reserves into the market, your investors can sell (subject to the lockups you implemented), and the airdrop recipients can sell.

(vii) Continue to develop your project along criteria apart from those identified in your white paper as requiring managerial efforts.

This is maybe a slightly craven take on the regulatory regime as laid out in the interpretive guidance, but it seems internally consistent and possible. The biggest question hanging over it is, what will the courts say, and what will future SECs say. If the answer to that is that they endorse this approach, then why does anyone need market structure?

Till next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Over the weekend, I read another hit piece about prediction markets. Charlie Warzel’s “A Technology for a Low-Trust Society” tries to make the case that prediction markets are bad, relaying familiar anecdotes of insider trading and markets that settle on undesirable events like war.

Warzel also reaches the conclusion that “they’re specious forecasting tools” while relying on an anecdote concerning the Polymarket “Will Jesus Christ return before 2027?” market and a derivative market that he alleges introduced an incentive to manipulation. From this, he reasons that “the markets don’t always reflect what people think will happen as much as they reflect what people think other people think will happen.”

Whatever the merits of these arguments, and I think it is beyond tired to argue them, the more interesting question to me is “why are high-profile journalists writing about these?” Why have a certain set of journalists, in unison, drawn the conclusion that prediction markets are bad and the masses should be warned.

Sure, they are growing in popularity, with both Polymarket and Kalshi reportedly eyeing $20 billion valuations on their next raise, and usage increasing. Nonetheless, they are still relatively small components of the global economy with well-established positive externalities and understood risks. What is the rub?

Near the end, Warzel pivots the article to a discussion of what he calls the “depravity economy” and a parade of horribles that he speculates will emanate from it.

As the depravity economy grows, it will break whatever trust we have left in one another: If prop bets spur athletes to play differently, this poses an existential threat to the integrity of live sports. If people believe that anonymous government insiders are profiting off of classified information, what reason is there to trust anything that the administration says?

When I see rhetoric like this, I think of something different. I think about incentives. A major feature of contemporary life is the richness and availability of highly dopaminergic stimuli. App developers long ago cracked the casino formula for making usage just rewarding enough, and just uncertain enough, that it will reliably bring users back for more.

All media is a zero-sum competition. There are a near-fixed number of people on earth, a fixed number of hours in the day, and each person can only focus on a single thing at a time. So each instant of TikTok must take time from something else. This is very challenging for written media, which is not inherently dopaminergic, and now must compete with these purpose built behemoths.

One strategy that works is fear. The human limbic system is the set of brain structures that comprise emotional responses. It can be reliably activated by stimuli that provoke fear, and once active it produces focus. This means that for a journalist, if you can find a bogeyman that people are afraid of, you can get attention, and in media that is your next meal.

Prediction markets, particularly when framed, as Warzel did, that they contribute to a society-wide “erosion of trust,” appear to be salient in this way for certain readers.

This struck me as interesting recently, because while most media around prediction markets has earnestly emphasized perceived problems like market manipulation, insider trading, or death markets, I don’t see any of these as a long-term threat to the industry. Instead, the real issues, which aren’t covered anywhere, are the opportunistic uses of the markets as convenient foils by journalists and politicians, and money. More on that next.

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Kalshi v. “Fairness”

I have to tell you the truth, I’m really tired of writing about the litigation surrounding prediction markets. It’s been years now, and thinking back to the first article I published (with Matt Homer) in CoinDesk in September, 2024, everything was fresh and interesting then. Kalshi was breaking through and opening up new markets. Then Crypto.com opened the sports frontier, and anything seemed possible.

But then the prediction markets won, and now the litigation is just a slow erosion of that victory. The truth is, you can use legal prediction markets approximately everywhere. They won, and their various opponents lost. But the States realized too late that prediction markets were a raw deal for them, and went to war.

Every day on X I see Daniel Wallach making a new post about some district court decision going one way or the other.

And while each of these subsidiary actions is interesting in a sort of transitive constituent way, in the broader sense of the future of prediction markets in the United States, they do not matter. There is a panel of nine judges in Washington D.C. that is going to eventually determine whether prediction markets based on sports and entertainment are legal, and preempt state enforcement, or are illegal and do not, and every single other decision between now and the day that the Supreme Court does eventually rule is just noise. Plain and simple.

It is the fact that the law is so clear1, in my view, that makes the ever escalating chatter over the markets in public forums so interesting. Charlie Warzel is only the most recent example. I have seen endless think pieces about how gambling or prediction markets may be bad for consumers, how they could be manipulable, or vectors for insider trading. Generally, I think these issues are overblown on the merits. These are markets like any other.2 But the same old opportunistic saw drives them.

Fairness is a base emotion. If you take two dogs and give one a sausage and the other nothing, it will bark at you. That is because fairness lives in the ancient recesses of our hind-brain, and this gives it a direct tap to the limbic system. When people hear that prediction markets are manipulable, or that they host insider trading, it sets off the fairness button in the back of their skulls, and that moves their eyeballs. And eyeballs are power.

Politicians and journalists focus on “fairness” in prediction markets because they have found that perceived unfairness provokes a strong response in their constituents, and that allows them to control you.3 Journalists want clicks. Politicians want donations and votes. And the good ones know that the best way to do this4 is to produce content that activates an emotional response in human brains. But this issue doesn’t matter. It is not the reason that politicians care about prediction markets, they would happily sell each constituent one-by-one down the river to Hades if they thought it would preserve their status. It is also not the issue that will ultimately determine whether these markets survive. It is just a farce, playing out alongside the real battle, to trick you into clicking links and supporting politicians who hate you.

Here is what actually matters. Money. Power. That is the key to understanding this fight.

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States Will Always Hate Prediction Markets

It is a little glib to say that fairness in prediction markets doesn’t matter. Of course it is bad for markets not to be fair. There is a common argument that the positive externality of fidelity to truth is increased by insider trading, and that may be true. It may even outweigh the negative effect of unfair markets to retail, but it doesn’t mean the unfairness isn’t bad, that is all it is.

This is why the securities laws prohibit insider trading, enforcement facilitates trust in capital markets, which, the theory goes, is essential to their function. This might be true, there is definitely evidence that there was a lot of nonsense in 1920s stock trading, but the conclusion does not necessarily follow for prediction markets.

More importantly, though, the reality of fairness has no explanatory power of what is actually happening in the prediction market space. It is not, and will never be, an important issue that drives anyone with power to make a decision about prediction markets. Those reasons are, (i) opportunism as described above, and more importantly (ii) money. Let me explain.

Historically, state gambling was illegal. But on May 14, 2018, the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association, 584 U.S. 453 (2018) legalized state sports gambling in the United States. It turned out that the law PASPA—the Professional and Amateur Sports Protection Act of 1992 that the federal government previously used to prohibit states from legalizing gambling actually violated the anti-commandeering doctrine of the Tenth Amendment. This created an important source of state-controlled revenue, and created a new locus of power in state regulators by locally empowering them to oversee substantial gambling markets.

Prediction markets’ “crime,” the reason that so many states have pursued and will continue to pursue action against them until they win or are stopped, has nothing to do with the merits of these markets. As I have written many times, on the merits prediction markets, however imperfect, are clearly better than traditional gambling markets.

Event Horizon

Guest Column: Prediction Markets May Be 'Gambling,' But Does The Definition Miss The Point?

Editor’s note: I am not the only “source of truth” in the prediction markets industry. In that light, I am going to include some commentary below with which I don’t agree 100%. But I think it’s important as we all learn more about prediction markets and what their future in the United States might be that we consider other viewpoints…

Read more

a year ago · 2 likes · Dustin Gouker and Aaron Brogan

But prediction markets are federally regulated under the CEA, and the CEA gives exclusive jurisdiction to regulate such derivatives to the federal CFTC. That means that if they come to predominate, states will not be able to control them, and more importantly, may not be able to tax them.

Tens or hundreds of millions of dollars of revenue from states is no joke. That is not something that anyone will ever let go. You cannot blame states for value maximizing.

But you can’t give them the moral high ground either. And that is my real point. Whatever journalists and politicians would have you believe, the prediction market fight is not a story of a knight on horseback coming in to rescue the public from themselves. It is a fight for a knife in the mud.

My best prediction is that entertainment and sports prediction markets have a 70% chance of surviving. That assumes that the forthcoming CFTC NPRM on prediction markets liberalizes the treatment of these markets, and that the question of preemption eventually accedes to the Supreme Court. Once it gets there, all that counts, through all the sound and fury, is counting to five.

Anything that tells you anything different has a motive.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

The History of the Master Account

The Federal Reserve is unique among federal agencies. While it is often treated as speaking with a single voice, it is actually a system of twelve banks spread across the country. They do come together for certain policy decisions, but they also maintain some autonomy. Back in 1980, though, some thinkers got together and decided that that separateness should be a little less pronounced, so Congress “passed the Monetary Control Act, giving all depository institutions access to Federal Reserve accounts.”

This was the genesis of the contemporary master account — so named because it would cover the whole system and not just an individual bank among many.

At first, the master account was intended to be broadly available. According to scholar Julie Hill, “[t]here is little doubt that Congress intended that all depository institutions would be able to use the Federal Reserve’s payment systems.” However, as banking changed in the 21st century, the typically august Federal Reserve started to become circumspect.

This meaningfully limited the availability of master account access. This issue became widely known earlier in this decade when a number of crypto-native institutions like Custodia Bank, Inc. and Payward Financial, Inc., d/b/a Kraken Bank tried and failed to gain master account access.

Perhaps in response to the controversy around master account access, the Federal Reserve Board issued Guidelines for Evaluating Account and Services Requests in 2022 (the “Guidelines”). These Guidelines set out criteria for evaluating banking institutions’ eligibility for master account access. While there were already legal criteria, which are relatively easy to meet, the Guidelines create a taxonomy, with Tier 1 banks being federally chartered banks with deposit insurance, Tier 2 banks being federally chartered banks without deposit insurance, and Tier 3 banks being state chartered banks.

Perhaps unsurprisingly, the Federal Reserve Board thinks banks in Tier 1 should get master account access, while Tier 3 banks are subject to heightened scrutiny, and Tier 2 somewhere in the middle.

And this is a problem in crypto.

See, banks in the Tier 1 have not historically participated directly in cryptocurrency economies. Indeed, just a few years ago it was difficult for many founders in the space to acquire bank accounts at all. Businesses were routinely screened through a number of criteria intended to limit access to banking services to these novel products.

But banking services they needed, and so a cottage industry emerged of state chartered banks, mostly chartered in liberal-minded Wyoming, that were willing to provide where others weren’t. These are exactly the banks that were cut off at the pass by the Guidelines.

Nowadays, cryptocurrency businesses are supposed to be allowed to bank, we certainly are. But there is a new paradigm that is equally troubled by the Guidelines limitations. On July 18, 2025, Donald Trump signed the GENIUS Act into law. That law created new guardrails around the issuance and use of stablecoins in the United States, and in so doing created new demand for the types of institutions, particularly depository institutions chartered by the federal government and overseen by the Office of the Comptroller of the Currency, that many observers expect to be favored under eventual GENIUS Act rulemaking.

As a partial result of this, OCC charters have skyrocketed. Just in the last year, entities like Crypto.com, Bridge, and Paxos have sought these federal trusts. And, as a result of a parallel trend liberalizing treatment of these applicants, many have now been granted. The result is a forest of new growth in the world of Tier 2 banking institutions.

That leaves this industry closely associated with the types of banks that, by design, have the most structural difficulty obtaining master accounts access, and makes it a sensitive subject for operators in the space.

According to Professor Peter Conti Brown of the University of Pennsylvania Wharton School of Business, “[t]he master account allows a financial institution to participate in the payment system. Without it, a financial institution can’t really function as a financial institution. It becomes instead a kind of storage locker.”

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Diet Fed

Some people got to thinking about this problem. Academics think of money not as a single discrete thing, but as a constellation of quantities. You’re probably familiar with historical examples of societies using livestock to barter, or the cigarettes that SBF and Diddy now trade in, these objects may not be money but they have moneyness. Indeed, everything that can be traded falls along a spectrum of moneyness, based on how much it behaves like money.

And right at the top? Dollars held in the Federal Reserve System. The reason is because these dollars are perceived as risk-free, they are the intrinsic architecture of the United States monetary system, which can always just make more of them, and since United States Dollars remain the preeminent global currency, the best form of USD is the best there is. Other instruments like cash, dollars in FDIC insured bank accounts, and T-Bills are pretty good, but Fed dollars are the best, baby.

That means there is a lot of demand for access to this money, and there has been for a long time. That creates two problems. When the government doesn’t give access to these monetary rails, it introduces risk and uncertainty into the economy. That’s sort of fundamentally bad. Problem A. Problem B is, if the Fed does give full access to its systems to any Ray Dalio-type on the street, then in a perceived crisis there may be a flight to safety and a lot of money might come into the Fed systems.

If the Fed doesn’t know how to evaluate the bank’s risk profiles that are coming on its balance sheets, then in theory this could lead to some pretty spicy counterparty risk.

So, at once, the Fed kind of wants more people to access its money-like qualities, and it also kind of doesn’t want to set off a bonanza and become a de facto Bank of the United States, inadvertently causing Andrew Jackson to roll over in his Tennessee grave.

How do you solve this problem? You don’t give everyone access to a master account, you give them less. These are skinny accounts.

On October 21, 2025, Fed Governor Christopher J. Waller delivered a speech indicating that he was proposing “payment accounts.” In his words, this would be:

“[A] skinny master account. The account would provide access to the Federal Reserve payment rails while controlling for various risks to the Federal Reserve and the payment system. To control the size of the accounts and associated impacts on the Fed’s balance sheet, the Reserve Banks would not pay interest on balances in a payment account, and balance caps may be imposed. These accounts would not have daylight overdraft privileges—if the balance hits zero, payments will be rejected. They would not be eligible for discount window borrowing or have access to all Federal Reserve payment services for which the Reserve Banks cannot control the risk of daylight overdrafts. I want to be clear that this is just a prototype idea to provide some clarity on how things could change. The upshot is that, in my view, the payments landscape, as well as the types of providers, has evolved dramatically in recent years, and, accordingly, a new payments account could better reflect this new reality.”

Subsequently, on December 23, 2025, the Federal Reserve Board issued a “Request for Information and Comment on Reserve Bank Payment Account Prototype” further detailing the proposed skinny accounts.

The proposed payment accounts would give legally eligible institutions access to a quick approval process and limited set of services, including payment rails Fedwire, FedNow and the National Settlement Service. It would not, however, include FedACH, access to the Discount Window for borrowing, interest on balances, and it will also place a limit on overnight institutional balances “at the lesser of $500 million or 10% of the payment account holder’s total assets.”

I can’t explain to you what that means in a newsletter’s length, so if you want to know more, you’ll have to read our comment letter. Suffice to say, though, this is a meaningful but limited subset of the Fed’s available services.

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Our Comment Letter

A few months ago, we worked with the Blockchain Association to provide commentary to the Consumer Financial Protection Bureau (CFPB) concerning the so-called “Open Banking Rule” that requires banks to provide fintech and DeFi firms access to certain user data at the users’ request.

For the Fed payment accounts proposal, they brought us back. You can find the comment letter here.

BA is the leading nonprofit trade association representing the blockchain and digital asset industry in the United States. Its members include a broad cross-section of the digital asset ecosystem, including technology companies, financial services firms, infrastructure providers, and other stakeholders that develop, deploy, and operate products and services that increasingly intersect with the U.S. payments system. BA and its members have substantial experience with payment operations, compliance programs, risk management, and the practical realities of integrating new technologies with legacy financial infrastructure.

BA has frequently weighed in in the past on issues of master account access. It filed an amicus brief in the U.S. District Court for the District of Wyoming in Custodia Bank, Inc. v. Federal Reserve Board of Governors and Federal Reserve Bank of Kansas City (D. Wyo. No. 1:22-cv-00125-SWS), arguing in favor of master account access for SPDIs like Custodia. BA filed a second brief on July 3, 2024 in the U.S. Court of Appeals for the Tenth Circuit in Custodia Bank, Inc. v. Federal Reserve Board of Governors, No. 24-8024 (10th Cir. Apr. 26, 2024). Most recently, on December 22, 2025, BA filed an amicus brief in support of Custodia’s petition to be heard en banc in the Tenth Circuit.

So you might think that we would come to the payment accounts proposal guns blazing. After all, the accounts offer a very limited subset of the activities that are actually included in a master account. FedACH, for example, is the dominant retail rail, used for $22.5 trillion in transactions in 2024, so banks using payment accounts to access Fed rails will either have to maintain the same relationships with partner banks that they do now or not offer meaningful retail services.

Indeed, many of the academics and stakeholders we spoke to in preparing the comment letter did take a somewhat dim view of the program. The primary complaint was that it would be commercially impractical. The primary interest of fintechs and other large financial institutions that do not currently have access to banking rails in Fed access would be to settle and clear transfers, however the structure of payment accounts could make that difficult.

In a master account, the account-holder has some degree of overdraft protection, so they do not necessarily have to maintain sufficient Fed balances at all times to cover any potential transaction. At the same time, whatever balance they do hold receives interest. Payment accounts are different though. Without overdraft protections, participants would need to maintain sufficient balances to execute transactions at all times, but they do not receive interest. That means that each dollar held at the Fed is losing money relative to some other instrument paying the market rate. When you have to do something that loses money in order to participate, you might expect that a program will be unpopular.

But as it turns out, this is not the case. Many respondents to the Fed’s request for comment took a balanced to positive view of the proposal. For instance, Coinbase applauded “the Board for proposing an account that could enhance innovation in financial services and permit broader connectivity between Federal Reserve payment services and providers of emerging payments.” Similarly, the Crypto Council for Innovation argued that “the Payment Account RFI offers a constructive and pragmatic step toward modernizing Federal Reserve payment services in a responsible and balanced manner.”

Our view is largely the same. While the proposed payment accounts are not perfect, they represent a productive step towards integrating novel financial institutions into federal payment rails. In our view, providing new access is important, and shouldn’t be greeted with disapprobation, regardless of meaningful commercial limitations to the program. Still, we did caveat that support by noting “the risk that the proposed Payment Account would perpetuate a two-tiered banking system in the United States, to the detriment of novel financial institutions that would be likely to participate in the proposed Payment Account.”

Ultimately, many commenters, including BA, came to a similar conclusion. These accounts are a good thing, but they should provide FedACH access, they should increase overnight balance limits, and they should pay interest. And if the Fed listens to those comments and tweaks the program, American payments will be in a meaningfully better place going forward. Check out the comment letter and let us know what you think.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Last week, we experienced a pretty dramatic crash in cryptocurrency asset prices. Bitcoin, which had traded as high as $126,277 on October 6, 2025, crashed to a 52-week low of $60,230 on Wednesday, as part of a long downward trend without a single obvious catalyst.

I’ve written about these crashes before, and they are a real cause for alarm. When things go back, it has ripple effects, and often you start to see bodies washing up a few weeks later. So we have that to look forward to!

But that isn’t what I’m interested in this week. Instead, I want to cover the seeming pall that has descended over the crypto communities in recent months, and try to assess what it means. We make our living in the crypto industry here at Brogan Law, so there should be little doubt that we are biased, but that shouldn’t discount the force of my point today.

Token prices are a sentiment market, but crypto as an industry is the rails, regulation, and builders. Those are improving even as tickers fall. Crypto is OK.

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Crypto Winter

Cryptocurrency is cyclical. Indeed, this is one of the defining features. If you go to X at arbitrary time=n, you’ll likely be able to find Martini Guy or some similar account talking about mega cycles, bulls, bears, etc.

For years, the vernacular of crypto winter, spring, and summer have suffused the dialogue around asset prices and helped normies understand what is happening in the markets. And everyone knows that these cycles are driven, at least in part, by sentiment.

It is almost a tautology to say that crypto asset markets are driven by sentiment, because for much of crypto’s history as an asset class, sentiment is all there was. Most crypto assets have no inherent value, they do not represent a claim against real world assets, there is no promise of future financial engineering to support their price, and all a purchase really represents is a bet that future purchasers will be willing to pay more for the asset.

And without fundamentals to evaluate, sentiment is contagious. See market go down, think something is driving it, sell. Easy. Indeed, one need not even assume that individual actors are behaving irrationally to arrive at this mechanism. If you, rational investor, expect the market to react to falling asset prices by selling, then you are incentivized to sell first.

This dynamic precipitates wild swings, which, oh yeah that is exactly what the crypto market has literally always done. Somehow, though, even though we all know this is how the crypto asset market works, every time we experience a downswing, en masse, the crypto community enters a depressive fugue state.

It’s all over, they say.

Well let me tell you. Soon, we’ll be so back. That is just how it works.

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Wrestling with Chaos

I guess as people, one of our core cognitive functions is to attempt to derive meaning. The evolutionary psyche account of this goes something like, thought has instrumental value to the extent it correctly predicts outcomes, facilitating planning and strategy. For this reason, thought is the process of observing events and extrapolating patterns. We can surmise that those patterns will continue and use them. And when you’re really good at it, like humans are, you can really start cooking with gas.

Where this system breaks down is when causality is obscure, and especially in complex systems where it may not exist. Renaissance Technologies earned many billions of dollars distilling the ineffable into winning predictions, so one might speculate that there is deeper causality that humans can readily conceive, but at some level of abstraction we are simply unable to wrap our feeble little rat brains around big multi-variable systems. That’s when superstition arrives at the door. And that, I contend, is what is happening now.

This morning I was reading an Odd Lots newsletter from last week. Joe Weisenthal was listing off reasons why this crypto winter is different. Notwithstanding that this kind of media inevitably forms in a downturn for clicks if nothing else, it seems that Mr. Weisenthal sincerely believes that this time is different, and is trying to fit a model to that conclusion.

Some of the reasons might be meritorious, “In past drawdowns, people could tell themselves things like “We’re so early!” Well, nobody buys that anymore. It’s not early. There are numerous crypto ETFs right now” and “Meanwhile AI is crowding out Bitcoin specifically. For a long time, one of the big ideas behind Bitcoin was that miners could exploit access to cheap or stranded electricity. But if you have access to the power grid, why are you mining Bitcoin (which has never been that great of a business) instead of building an AI data center?”

But this is a commentary on crypto asset prices specifically, not the industry as a whole. When Mr. Weisenthal branches into that domain, I think the analysis is notably less sagacious. “Crypto is losing mindshare” is, sure, a valid critique, but many of his points, like “We have an incredibly crypto-friendly administration” and “It’s completely mainstream now” obviously cut the other way.

And that is the key, because in a chaotic system we simple pattern matchers try to fit the outcome we perceive to the facts presented. But we end up describing what is happening without analytical force. What are the facts on the ground? The cryptocurrency industry is experiencing its greatest regulatory acceptance ever, and asset prices are locally down. For Joe Weisenthal, this is a bad thing, because if you draw a causal relationship between events and asset prices, it seems that events can hardly improve, and so asset prices won’t either.

But what if asset prices are down simply because of contagion, or for no reason at all. If you view crypto asset markets as fundamentally chaotic and volatile, then the many trends in favor of the industry don’t have to form a constituent piece of your theory of current asset prices. Good things can just be good things.

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Departures Aplenty

One phenomenon that has consistently appeared in crypto markets is that sentiment follows asset prices. Years ago I was talking to an editor at CoinDesk (long since departed) about their business. “Well it’s good you know, we just have the problem that when Bitcoin prices are down clicks fall off a cliff” they told me. And you can see that everywhere.

Particularly, in this cycle, as Bitcoin prices have fallen relatively consistently since their peak in October, there have followed a flood of departures from the industry.

Most recently, Multicoin co-founder and highly influential Solana leader Kyle Samani announced that he would leave to focus on other things. This is a genuinely shocking turn at a firm that has been at the forefront of policy and novel technologies in the industry.

This is amidst a raft of other departures including our own Veronica Irwin. And it is hard to separate these from the broader context of depressed asset prices leading to low sentiment. People have interior lives and come and go for reasons of their own, but when the vibes are bad more of those people may pull the trigger. And maybe those departures push sentiment down further, depressing asset prices more in a vicious cycle.

The greatest real risk that this poses is that the many digital asset treasury companies (DATs) which sprung up during the recent bull will pop and tank prices even further as they do. These businesses often rely on levered buying and may face margin calls oh about any moment now.

But here is my core theory of this industry, and the real point. Even if the DATs do explode and tank all of our bags, prices are not reality. Yes, the basket of twenty or so tokens that constitute most retail crypto investments may not experience 10x gains from their recent all-time highs, but the actual work of building an industry continues, and that is what will ultimately continue the secular growth of alternative financial products that drew us here.

Most of our clients do not even have a token, don’t plan on launching a token. The prices of tokens, then, do affect VCs upside and ability to quickly realize liquidity, but are not a good barometer of the health of new growth in the industry as a whole.

The truth is, the regulatory environment has improved so dramatically so recently that the fruits of this change have not yet ripened. The GENIUS Act, as well as whichever of market structure or SEC exemptive relief eventually pertains, will dramatically widen the aperture of what is legally possible in the United States on crypto rails. This will lead to dramatic long-term secular growth of our industry.

When Joe Weisenthal writes that “arguably Wall Street has never been more excited about crypto-adjacent ideas like stablecoins and tokenization. But it’s not redounding to the benefit of any of the existing tokens. The holders of, say, ETH or SOL haven’t benefitted from all of the interest in crypto rails” he says it as if it were a bad thing. It may be true that a narrow band of legacy tokens won’t capture the value of future growth in this industry, but that is because, you, the founders, will.

We are an industry of builders, not of bagholders. And now in a moment of understandable anxiety, it is important to remember that. We are winning, for a year and change, everything that could go our way has gone our way, and that means that we will be able to build more and more. But a ticker changes in an instant and that takes time, so it is a harder story to tell.

Until next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Maybe its not banks versus crypto after all.

If you read this newsletter you already know crypto market structure legislation has hit a few snags. Members of Congress are at odds, mostly on partisan grounds, on provisions about DeFi developer liability, ethics restrictions on government officials, anti-fraud restrictions on crypto ATMs, and a number of other issues.

But a provision in the most recent draft that would further restrict the yield and rewards programs issued by third parties on stablecoins has been the biggest frustration for many of the industry’s most politically active firms. Up until now, this was understood to be a public fight between bank lobbyists and their crypto counterparts, where the banks call for a prohibition on yield in the name of protecting their deposits, and crypto lobbyists call for allowing yield in the name of healthy competition.

This yield-banning provision really upset Coinbase’s chief executive Brian Armstrong, who took the nuclear option when he went on X two weeks ago to say he was pulling his support for the bill because of it, along with three other insurmountable flaws.

Coinbase, which gives some of its users 3.5% on Circle’s USDC, has long been the biggest advocate for permitting stablecoin yield.

But it seems that the world’s biggest stablecoin issuer reportedly disagrees, destabilizing what had appeared to be a united front from crypto on stablecoin yield. According to three sources familiar, Tether’s U.S. operation met with some members of the Senate Banking committee since Armstrong published his explosive X post to say that it supports the current draft of the bill, including the new prohibition on yield. Tether also specifically distanced itself from Coinbase, telling Senators it met with that it did not agree with Armstrong’s decision to take the dispute public.

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Tether is pursuing bank partnerships with its American stablecoin, USAT, according to two of the sources, though it has not said so publicly. That, combined with the fact that its international USDT stablecoin holds a dominant position with about 60% market share according to CoinMarketCap, reportedly holding one of the world’s largest non-sovereign controlled gold reserve, puts the company in a position of not needing yield or rewards programs to encourage adoption. The company’s position is very different than Circle, whose USDC token has 23% market share, and Coinbase, which earns all of the interest income from USDC held on the exchange and 50% of the income Circle earns from USDC not held on the platform, and thus has a vested interest in broader USDC adoption.

Yield and rewards programs also dip into profits. Stablecoin issuers make the bulk of their money off interest on their reserves, which they’re providing end users a piece of when they administer yield and rewards programs. If there isn’t a significant value add, these partnerships simply aren’t worth the money. Users can earn a yield on USDT through firms including Kraken, Ledn, and MEXC, but these payments are not produced as a cut of interest on reserves, but rather through differently-structured lending and liquidity agreements according to a Tether blog post. (Notably, Tether’s bank partner for USAT, Anchorage Digital, offers a stablecoin rewards program the yield provision would probably ruin, but there’s been no indication that USAT was going to be part of it).

Yield was previously debated in the process of passing GENIUS. The bill’s final text narrowly prohibits yield payments from issuers specifically, theoretically leaving third party firms paying “rewards” on stablecoins untouched. It is now widely assumed that third party rewards programs are therefore GENIUS Act-compliant, though rules from the OCC interpreting the GENIUS Act, including this yield piece, have not been finalized.

Bo Hines, then Executive Director of the White House’s Crypto Council, coordinated parties to expedite the GENIUS Act’s passage at the behest of the Trump Administration, though he notably did not weigh in on the yield issue. Hines is now the CEO of Tether’s U.S. arm.

The USAT token launched on Tuesday without any such rewards programs. The token was also listed on what seemed like nearly every exchange operating in the U.S. besides Coinbase, judging by the firm’s X posts. Most lobbyists and staffers are of the understanding that Coinbase lobbied against Tether during the GENIUS Act drafting, putting the firms in conflict long before this dust-up over yield (I was not able to verify this for certain, but the belief is widely-held).

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It is unclear whether it was Hines himself clarifying Tether’s position on yield — and feelings about Coinbase — to Senators. Two sources directly familiar told me in the course of reporting this story that the White House has been frustrated with Coinbase’s stubbornness, including dating back to Hines’ tenure working for the Trump administration. Several more sources have told me in the course of reporting other stories that the White House, represented by Hines at the time, was frustrated with Coinbase and over the summer. (Hines did not respond to my request for comment).

Regardless, it seems the White House has become even more frustrated since Hines departure, threatening to pull support for the bill altogether if Coinbase didn’t seek a compromise — something Crypto in America first reported, and which I was also able to substantiate, but which Armstrong himself denied. Hines’ replacement, Patrick Witt, also subtweeted Armstrong in an X post urging crypto firms to stay engaged, despite expressing his own frustrations with bank lobbying on the yield issue a few days before.

One source familiar said that Coinbase’s tactics with the White House are perceived as “arrogant.” “Nobody is going to tee up this bill for you and be like, ‘Oh, Coinbase, are you happy?’” they said — something which they contend Coinbase did not understand.

Until this month, Tether hadn’t been very active in market structure discussions, according to three sources familiar with key Senators’ schedules. Even now, the firm has not met with all of the key players — Tether did not meet with Senator Cynthia Lummis, the Chair of the Banking Committee’s Subcommittee on Digital Assets, for example, which probably has something to do with the Senator’s longstanding concerns about Tether on national security grounds. But by hiring Hines, Tether strengthened its connections within the Trump administration, a relationship that was already solid. Trump’s Commerce Secretary Howard Lutnick, is the former CEO of Tether’s primary custodian Cantor Fitzgerald.

That positions Tether to be a persuasive voice just as it hits crunch time for market structure. The Senate Agriculture Committee has plans to mark up the bill on January 29th, while the Senate Banking Committee is eyeing late February or early March. Discussions are bipartisan in both committees, though it seems likely that votes, at least in the Agriculture Committee, will break on party lines.

Legislation requires at least seven Democrats for passage in the Senate — and even more, if any Republicans choose not to vote in support. Many less-engaged Senators will take a queue from their counterparts in the committees, so the purely partisan passage through the committees after the coming markups does not look good for the bill. Moreover, partisan politics will be amplified as the November midterms approach, putting market structure legislation at risk of becoming either a political lightning rod or being deprioritized all together.

Any more mistakes and the crypto industry could lose its chance at a market structure bill altogether, the previously quoted source explained. “You get a window, and to get another window is not that easy.”

Coinbase declined to comment. A representative for Tether did not respond to requests for comment.

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Goodbye to Veronica

A parting word: This will be my last column in Brogan Law for a little while. I’m starting a new job on Monday, and will be focusing my energies there. Big thanks to Aaron for allowing me to write here the past several months — it’s truly been a highlight of the past year. Writing for you all has kept me motivated and engaged in the face of a crypto media environment that is, let’s face it, in pretty bad shape these days.

I hope to have the opportunity to write here occasionally down the road. In the meantime, you can keep up with my reporting on X.

Editor’s Note: Thank you so much for working with us here Veronica. We are devestated to see you go and excited to see what’s next. Come back and write for us any time!!

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

If you’ve been anywhere near X lately, you’re probably aware that it is Market Structure week. The lumbering bill is coming back after a holiday break and a few months of inactivity, and this cycle there are some new issues appended.

The substance of the bill we’ve covered before exhaustively in previous posts. It will create a framework for token issuance and certain transactions using tokens. These transactions, of course, are already effectively legal, since the Trump administration has thus far chosen not to pursue new cases against cryptocurrency firms (other than in cases of fraud) and dismissed most of the otherwise pending matters.

So really the current instantiation of the bill effects two substantive policy goals for the industry. First, it will create a legislative policy scheme that cannot be easily undone by future administrations for the offering and sale of cryptocurrency tokens. This assuages the fears of many that AOC 2028 might wipe out all the progress the industry has made since the Biden administration.

Second, it bakes in a meaningful decentralization requirement. This is important to a select subset of cryptocurrency operators and thinkers who are ideologically wedded to the importance of decentralization. This idea is historically important to cryptocurrency communities that developed out of cypherpunk traditions rooted in notions of privacy and censorship-resistance. For advocates, the arguments around decentralization in policy have almost religious significance because most contemporary projects are not interested in decentralization, and if it loses policy significance, its advocates correctly suspect that crypto as a whole will cease to resemble the systems they pioneered.

One may query whether that is a good or bad thing. And, reportedly, many have, with rumors swirling for months that certain participants in DeFi or in the Solana ecosystem may be furtively opposing the bill’s passage.

But this week, it may finally be happening. Out of nowhere, a sudden powerful push to move the bill forward has emerged in recent weeks, and now, this Thursday the Senate Banking Committee will mark up the bill.

The new bill’s text emerged at midnight ET last night, here, and, in an expected move, includes some controversial language.

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Prohibition on Yield

Either you die a yield-bearing stablecoin program or you live long enough for adversarial interests to ban you! Last year we wrote several times about a sustained push by the banking lobby to prohibit yield-bearing stablecoins.

This was a central and highly discussed issue in the drafting process of GENIUS even before it was passed. The law ultimately included Sec. 4(a)(11), which states:

No permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.

At first, it seems, the banking lobby was happy with this. Some say it was because they weren’t paying enough attention, or just because they misunderstood the language, but those close to crypto policy circles immediately recognized that this “prohibition on interest” did no such thing.

Stablecoins have long avoided bearing direct interest out of concern that it would make them a security under the Howey test. But as rates rose in the early 2020s, there was increasing pressure to pass some or all of it on to end users. Stablecoins are highly liquid, and people respond to incentives, so everyone expects flows from deposits of value that do not pay yield and into those that do.

To deal with this, exchanges like Coinbase with market power cut deals with issuers like Circle (which we discussed in depth in our teardown of Circle’s S-1 last year), whereby the token issuers, who hold collateral and earn yield, would pay some of that collateral to exchanges holding their tokens in omnibus wallets on behalf of customers. The exchanges then paid on some or all of that yield to the owners of those tokens through rewards programs.

It’s important to note that this is incredibly fair. The interest is not some windfall profit, in high rate environments it is a representation of the time value of money, and without it stablecoins cannot participate pari passu in the American financial system with assets like deposits that do pay yield, but I digress.

These programs became ubiquitous, and they are probably not covered by Sec. 4(a)(11) of GENIUS because the payment stablecoin issuer, the relevant regulated entity, is not paying yield “solely in connection with the holding, use or retention” thereof. They are paying yield as part of negotiated commercial agreements with institutional counterparties. The exchanges are paying these yields, but they are not covered by this section of GENIUS.

The upside? Yield lives.

Well, after the banking lobby got word of this, so-called “loophole”1, there was a come-to-Jesus moment. Apparently, there is great concern that stablecoins will outcompete deposit accounts if they pay yield. The risk would be that stablecoins are a better product and consumers choose to use them because they improve their lives. The banks couldn’t have this.

They raised some interesting points. If capital flowed from deposit accounts to stables, then state-licensed savings associations and other small banks may not be able to survive. And more concerningly, because stablecoins require 100% collateralization and so cannot support fractional reserve banking models, a flight from deposits to stables will not be a neutral transfer, it will materially reduce the M2 money supply by collapsing fractional reserve money creation. This would be bad, which is why I suggested that 100% collateralization is dumb back in May of last year.

After all that, in this bill they finally did it. Sec. 404 of the new draft law includes a new prohibition on yield, and this time it may actually work. The law would extend Sec. 4(a)(11) to also cover digital asset service providers, stating “A digital asset service provider may not pay any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding of a payment stablecoin.”

There are carve-outs for rewards, but not rewards for just holding stablecoins, and that, of course, is what deposit accounts are for.

This kind of language is bad, in my view, because it is unfair to consumers and will ultimately handicap the adoption of cryptocurrency modalities. But it is an interesting example of the mixed incentives of those negotiating the bill. Bloomberg has reported that Coinbase threatened to pull support for the bill over it, but the direct effect of a prohibition on yield would be them retaining all of the capital outflows currently distributed through rewards programs themselves.

That’s profit!

In the same vein, there have been rumblings that some big players in the stablecoin game may not mind so much if yield is prohibited. Whether players will put their foot down here or not remains to be seen. But it is not the only issue.

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The DeFi Mullet

There have long been rumors that DeFi will revolt on this law. And that may soon come to a head, as this draft bill contains language that affects them directly. Sec. 301 creates a new category “decentralized ledger finance trading protocol.” This means “a distributed ledger system through which multiple participants can execute a financial transaction in accordance with an automated rule or algorithm that is predetermined and non-discretionary, without reliance on a person other than the user to maintain custody or control of any digital assets subject to the financial transaction.” In other words, autonomous, non-custodial, smart contracts.

The definition is further refined by the definition of a “non-decentralized finance trading protocol,” which applies when a person or group of persons “has the authority, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, to control or materially alter the functionality, operation, or rules of consensus or agreement of the decentralized ledger finance trading protocol.” It also draws in smart contracts that do not operate “based solely on pre-established, transparent rules encoded directly within the source code of the distributed ledger system.” Or when a person or group of persons has control.

301 goes on to say that non-decentralized finance trading protocols should be subject to the securities laws and Bank Secrecy Act (BSA). Bizarrely, however, it does not include any express carve-out of decentralized finance. Indeed, the definition “decentralized ledger finance trading protocol” is made and then never used anywhere else in the draft law. An exemption is implied, but not yet made.

Then, Sec. 302 extends monitoring and compliance requirements to the “distributed ledger application layer,” which essentially means the hosted front-end of a DeFi protocol. It goes to specify criteria for these distributed ledger applications to comply with sanctions law through monitoring and risk-based measures. While these may impose a new burden, I am not sure that they will be unwelcome in the DeFi community, where most professional applications already observe similar measures but with less certainty than this law would provide.

The biggest takeaway from these sections, other than that they do not provide a complete carve-out of decentralized DeFi, is that they leave a significant amount of air for rulemaking. If this were to become law unamended, I think that the rulemaking around DeFi rules may be the single most consequential regulatory process in cryptocurrency’s history. The whole industry will be on trial, and the administration that gets to decide what applies is going to have massive influence on its outcome. While more analysis will come soon, these sections make me nervous.

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Ethics

What does ethics in crypto mean? Making whatever Donald Trump is doing illegal.

There was a push last week to include language to that effect in this bill. Of course, Donald Trump will have to sign the bill to make it law, so the “Make Trump Illegal” language will always be a non-starter and is pure political posturing. This draft does not include language to this effect.

Whether the bill will be able to progress, only time will tell, but for the first time ever, I am starting to think there may be sufficient political will to get this passed. The question now, as Keith Calstaldo described for us in November, is timing.

In a midterm election year, the legislative agenda is likely to be frozen early. The prohibition on yield is still lurking as a bogeyman, and it is not clear, even if it weren’t a controversy, whether there would be 60 floor votes to pass this law. This is before the long-rumored rebellion from DeFi emerges, should it do so.

That is why you have to keep reading the newsletter.

Till next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

I’ve been listening to the 1994 Tom Petty record “Time to Move On” a lot this week. Something about it grabbed me, and so I’ve been dissecting it in spare moments. Particularly, the difference in one line that I hear as, “when I was ahead, I had no way of knowing,” and the official lyric “what lies ahead, I have no way of knowing.” I’ve been thinking about the poignancy of that difference.

Autobiographical writing is interesting, because, God-willing, time will pass and one day we’ll be able to stack up the world as we saw it then with the real truth. It tests the fidelity of the writer’s perception, much like the prediction markets we’ve written so much about this year. There’s something honest about that.

When I was still in BigLaw, I was haunted by a different line from a different writer. Leonard Cohen wrote “Famous Blue Raincoat” as a lament to a lover’s lover. How autobiographical it is, who knows, but its detail makes it seem intimately real.

“There’s music on Clinton Street all through the evening.”

In the song, Cohen tells this third party that he is “living for nothing now” and hopes that he is “keeping some kind of record.” That stuck with me.

In any highly compensated corporate role, the employee enters a bargain. The firm pays you a lot of money, and in exchange you agree to be nobody. And this, sitting at a desk in an office tower, gnawed at me. What record was I leaving? All this work for nothing left to show.

Obviously, this existential kernel is the root of the age-old debate of whether anything matters when you’re gone. But it mattered to me, so I set out to do something that would leave a trace.

I tell you all that, because 2025 is over, and, as I did last year, I want to take this moment of inflection to explain what Brogan Law is about. Before you stop me, of course it’s self-indulgent. If you aren’t interested, feel free to skip this one. I promise we’ll return to policy next week.

Our Mission Statement

At the end of 2023, I was tired of trading life-purpose for salary. I wanted my time on this earth to leave some kind of record. So I quit and started Brogan Law. My bet was simple: cryptocurrency will experience secular growth for at least another decade. What happens in that decade will be driven, probably to a large degree, by public policy. And that public policy will be made by the lawyers at the industry’s vanguard.

Finance is important. So much of our attention is consumed by the human drama adjacent to finance that it is easy to forget that our capital markets facilitate, and are absolutely necessary to, the operation of the greatest economy the world has ever seen. If cryptocurrency is going to supplant contemporary finance, even a portion of it, it will be a defining industry of the 21st century. And we are here early, still able to shape it.

I started Brogan Law to be a part of that.

It’s important to understand that about us, because even though it doesn’t have a direct effect on our ability to, say, negotiate a term sheet, it is fundamental to who we are. It is an atomic condition of everything we do.

This law firm exists to participate in the defining economic policy battles of our time, and some principles flow from that.

1. We work with the best.

I was talking to a potential client earlier this year, and when I passed on representing them, they were shocked. “I’ve never seen a lawyer turn down work before.” We are busy, very busy, but never too busy for the right project. If you’re a founder building something transformational, we will be a part of it even if it means late nights and long weekends. But we do not take money from bullshitters.

The point of this firm is to be closely involved in the rebuilding of the global financial system, and we do that by partnering with brilliant and driven founders. Money makes this machine run, but we’re not doing it for the money. That means that for the clients we take, we invest our entire spirit in trying to help them succeed. The legal industry, particularly in crypto, has a certain reputation for being extractive, but we don’t do that, and never will.

2. Our work is the best.

If you accept the goal of being intimately involved in a major world event, it colors the way you approach the work you do. What the fuck is the point of leaving your job, building a firm out of nothing, and spending years seeking out the best clients in the industry just to do B+ work? That’s not how we operate.

From the moment we wake up in the morning until we are done at night, we endeavor to provide the highest-quality legal service that money can buy. That means we try to be as responsive, as quickly, as elite BigLaw firms. We try to produce work product that is as clean as elite BigLaw firms. And, of course, we maintain an understanding of the law that governs cryptocurrency and alternative financial products that is on the bleeding edge of contemporary regulatory arguments.

If we are really here to do something that matters, we have to be the best. And so that is what we demand from ourselves.

3. We work in policy.

Lawyers don’t just contribute to the advancement of new industries by ably supporting operating companies and investors in those industries, though. To have real influence, you have to meaningfully contribute and advance the ideas that shape policy. Most law firms don’t do this, because it often doesn’t contribute to the bottom line. Or they do it in a half-assed, vanilla policy-alert kind of way to keep their SEO up. It is integral to what we do here at Brogan Law.

From the start, we have produced this newsletter weekly to integrate information about cryptocurrency law and policy and advance the discussion. We try very hard to maintain the quality of analysis and theory in this work, and that’s why it was widely cited across media and comment letters in 2025, including, for example, in the DeFi Education Fund et al.’s recent rebuttal of Citadel Securities.

We don’t just write the newsletter, though. Over 2025, with our clients Etherfuse, Consensys, and the Blockchain Association, we developed three comment letters to directly participate in the federal regulatory process of the United States. We don’t just comment on policy, we shape it.

Time to Move On

After Tom Petty released “Time to Move On” in 1994, he got divorced. In retrospect, one can surmise that is what he was writing about back then.

“Under my feet, baby, grass is growing.”

In the following years, he had some successes, hosting a popular satellite radio show, but he never made a truly great album again after Wildflowers, and the struggle of divorce drove him to heroin addiction by the late 90s. He went to rehab and quit in 1999, but twenty years later, in 2017, he died of a fentanyl overdose in Santa Monica. So whether it was “what lay ahead” or the times “when he was ahead,” that he wrote about back in 1994, what proceeded turned dark.

Anytime we prognosticate, we take a risk of being wrong. A near-certainty, really.

But this law firm was built to do great things, and so every new year, we affirm that this is what we are here to do. When I say that we are built for war, I don’t mean that we are bellicose. I mean that this law firm, from inception, was designed to be the kind that partnered with great clients and rode with them into the trenches. It is incredibly difficult to do new things, to build great businesses, and, justly, many founders don’t think lawyers get that. But not us. We, like you, are here to carve our initials in the annals of history. And when that is what you’re here to do, you’ll just do more to get it.

Now let’s have an extraordinary 2026.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

A couple of weeks ago, the SEC issued an important no-action letter to the Depository Trust and Clearing Corporation (DTCC). The DTCC provides infrastructure to American securities markets by providing clearing, settlement and custody for all trades on national exchanges. And it has a subsidiary called the Depository Trust Company (DTC) that acts as a central depository of stock certificates.

We’ve covered the history of intermediation in securities markets here before (and as ever, Vy Le and Austin Campbell have a much more comprehensive treatment of it here), but the upside is that, once, stocks were certificated and brokers had to pass those certificates around, but that was annoying so now the DTC just holds all the certificates and keeps a ledger of who owns what.

There has been a lot of chatter about tokenization of securities this year. Some of the proposals, like the one Robinhood proposed in Cannes in June, create what is essentially a derivative of a security and trade that. The token doesn’t necessarily represent ownership of the underlying asset itself, but it does represent a right to receive it, so its value should economically track the underlying asset through basic arbitrage.

Regulators don’t like that, and as of now, these products have not become widely available through regulated intermediaries in the United States.

So recently, some other regulated intermediaries, like NASDAQ, have offered their own proposals for tokenized stock trading. They proposed back in September that trading and settlement would occur as normal, and then at the end of the process, DTC would mint a token and send it to the recipient.

Ah, DTC! That’s the same group as earlier. Oh yes, this no-action is the official instantiation of the NASDAQ plan. Back in September, we described the NASDAQ plan (in a charitable reading) as “a minimum viable product version of tokenized stocks through the regulated environment.” And lo! That is exactly how DTC describes it now in their no-action request:

“In early 2026, DTC plans to conduct one or more production-based but limited minimum viable products (“MVPs”) or pilots involving a few, select Participants, a live blockchain, and real data and assets with limited actual value. The MVPs or pilots would serve as a key step in testing the core functionality of the DTCC Tokenization Services before later launching the Preliminary Base Version.”

Great minds, am I right?

Let’s break down the no-action and what it might mean for the future of tokenized securities in the United States.

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The No-Action Letter

So here is how a securities trade works today. An end user tells their broker-dealer they want to purchase a security. Then their broker-dealer fills the order through a somewhat complicated and highly regulated process of identifying best execution. After that, the trade is recorded by the broker-dealer, its counterparty, and the trading venue. It is then sent to the National Securities Clearing Corporation (NSCC) to clear, is netted with other trades, and is transmitted to DTC who update the accounts of participants.

In the model proposed by DTCC, this process will be flipped. Participants (a defined term that is limited to the regulated intermediaries that are permitted to interact with the DTC), may register cryptocurrency wallets, which are then whitelisted to receive tokenized securities. If they elect to receive securities in tokenized form, then the DTC will mint a token representing securities entitlements and deposit the token in the appropriate registered wallet.

Up to this point, the process is very similar to the current regulated model of transacting in securities. However, after the tokenized security reaches the wallet, this shifts. At this point, a third party service LedgerScan tracks the wallet, and the Participant can transact 24/7 with any other registered wallet without any other intermediation at all. DTC will automatically update its ledgers to match the transactions.

Participants are also free to do other stuff with these new tokenized securities, including:

“to enter into securities financing transactions (e.g., repurchase agreements, reverse repurchase agreements, and securities lending transactions) involving their Tokenized Entitlements; pledge, title transfer, or otherwise encumber their Tokenized Entitlements for purposes of obtaining financing or collateralizing transactions; and sell or transfer on a free-of-payment or delivery-versus-payment basis their Tokenized Entitlements (though any delivery-versus-payment settlement would occur away from and without any involvement by DTC, rather than through a delivery-versus-payment instruction to DTC).”

This is quite interesting and likely very useful. While “Participants” within the system are all regulated entities, the no-action makes clear that this product can be passed through to retail end users. Participants can register as many wallets as they need, doing so “for the benefit of its customer and even provide that customer with the keys to the wallet.” These beneficial owners can then trade the securities at will with any other registered wallets, essentially offering true 24/7 quasi-permissionless direct securities trading, with just a few caveats.

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Is it Crypto?

Back in September when we looked at the NASDAQ proposal, I was initially somewhat critical:

“If this sounds like a parallel track to an identical process to current execution with no discernible advantage to users, and not very cypherpunk at all, that’s exactly right. By structuring the rule to establish the minimum possible use of blockchain technology, NASDAQ has proposed, basically nothing.”

On some level this is basically right. The process may look largely similar, but it is clear from this DTCC proposal that there will be significant advantages to transacting through tokenized securities rather than traditional intermediaries.

In particular, 24/7 trading with direct custody models will allow sophisticated participants to access markets during hours that traditionally have been illiquid or impossible to trade in. Exactly how much trading will occur off hours remains to be seen, but one imagines this will open up new profit possibilities, and a new ability for the market to react in real time to news. This, in turn, may change corporate off-hour behavior.

It also seems that composability that is characteristic of blockchain applications may generate compelling opportunities for new products.

Of course, the most obvious limitation of the paradigm is that only registered wallets may participate. Since these wallets will be the responsibility of Participants that are themselves regulated entities, expect acquiring one to be far from permissionless.

In addition to registration at the outset, there is also a supervisory function baked into the DTCC proposal, through which “DTC would have a “root wallet” on each blockchain with keys that it can use to convert, transfer, mint, or burn any of the Tokens, even without the private key for the Registered Wallet.” This is to respond to “Conditions Requiring Reversal” defined as “erroneous entries, lost tokens, or malfeasance,” but crypto-native readers will recognize it as non-self custody, which many libertarian-minded market participants view as anathema to genuine crypto use-cases.

But for most users, how significant are these limitations, really? While the number of registered wallets may be low at the outset, and it does impose limitations on transacting with counterparties who can’t or won’t pass KYC, the set of approved wallets should theoretically be as robust as the domestic securities market. That makes the theoretical TAM of this product quite broad. While it might take some time for this “Preliminary Base Version” trial period to reach real liquidity, in the long term one has to imagine that it might. The incentive to participate is too strong to avoid. After all, many traders may prefer to keep trading hours, but if your competitors trade 24/7, can you really afford not to?

The “not-your-keys-not-your-crypto” point, too, seems like a red herring. The truth is, it is likely that more people have lost access to assets by losing private keys or being scammed than through institutional oversight.1 If this model provides some small remedy for that, it may be a net positive without being true self-custody.

There is also legitimate uncertainty as to whether tokenized security entitlements will receive pari passu legal treatment relative to recognized recordkeeping approaches. Under current U.S. law, most investors do not own securities directly, but instead hold “security entitlements” governed by Article 8 of the Uniform Commercial Code, with finality, priority, and insolvency outcomes tied to the books and records of a securities intermediary. DTCC’s pilot proceeds on the practical assumption that a tokenized record of those entitlements can function equivalently to traditional book-entry interests, though Article 8 does not expressly contemplate blockchain-based ledgers as legally operative records.

At the end of the day, this is a limited pilot, but there are few things we like covering here more than no-actions, and this could end up being a transformative one. When Commissioner Peirce wrote that “it marks a significant incremental step in moving markets onchain. DTC plays a central role in our securities markets. I am looking forward to seeing how DTC’s participants benefit from this program and the extent to which DTC’s tokenization model can enhance the functioning of our securities markets,” she took the words straight out of my mouth.

Happy holidays. See you next week.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

I’ve seen the numbers, and many of you follow us here at the Brogan Law Newsletter because of prediction markets. Over the years, we’ve been blessed to peek under the hood of some really interesting products, and helped build some for our clients too.

In parallel, this sector has jumped to the fore of emerging finance in the United States. This year has seen a steady stream of headlines of new markets (primarily sports), prediction markets raising at ever-increasing valuations, and ongoing battles between state regulators and those markets. I could write about this stuff every week, but I dare not lest I lose my crypto readers!

This week, though, a number of domestic companies1 involved in the prediction market space came together and formed a trade group, the “Coalition for Prediction Markets,” and so it is the right time to discuss this industry once again.

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Trade Groups

Trade groups are incredibly important vehicles for industry advocacy in the United States. Antitrust law prohibits competitors from colluding in the United States, and is a powerful bulwark against monopolistic behavior like price fixing. But in Washington, a single regulatory action may have broadly overlapping consequences for a whole industry, and it would be dissipative for each entrant to respond to each one in essentially the same ways, and The First Amendment guarantees persons the right to petition the government for a redress of grievances.

So in 1961, in Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. and United Mine Workers v. Pennington, the Supreme Court carved an exception to the Sherman Act, ruling that “no violation of the Act can be predicated upon mere attempts to influence the passage or enforcement of laws.” These cases, and their progeny, form the Noerr-Pennington Doctrine, which is the bedrock of contemporary trade groups.

As a result, trade groups are able to engage in coordinated efforts to petition the government without incurring antitrust liability, even where those efforts reflect the shared economic interests of competing firms. This protection allows industry participants to associate for the purpose of lobbying legislatures, submitting comments in administrative rulemakings, advocating before executive agencies, and pursuing or supporting litigation or other adjudicatory proceedings.

This is an incredibly powerful vehicle for advocacy because (i) pooled resources give these groups greater ability to respond to a broad range of government activity and, more importantly, (ii) the unified voice of an entire industry has far more credibility with regulators than any single business, no matter how large, ever could on its own.

We’ve worked with a number of these trade groups. We recently wrote a comment letter with the Blockchain Association on the CFPB’s open banking rule, and The Digital Chamber’s CEO Cody Carbone graciously joined us for an interview back in May.

Until now, prediction markets have been loosely represented by the crypto trade groups. The primary gaming trade group, the American Gaming Association has opposed them forcefully, and the gaming firm Fanatics recently left that group after signing a deal with Crypto.com to offer PMs that likely resembled the Underdog deal we covered in September.

The truth is, the industry is so new that, most likely, nobody thought to launch this trade group until now. We started covering Kalshi when they won in D.D.C. last September.

Since then, it has taken an improbable sequence of events, further wins the D.C. Circuit, Donald Trump’s win in November 2024, Crypto.com’s sport market play, and, eventually, a more accepting regulatory environment that has allowed these businesses to grow so dramatically. But as much as 2024 and 2025 have been halcyon days for the business, 2026 will be the most important yet, and there is no doubt that a trade group is now essential.

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The Year Ahead

To this day, people look at me, bewildered, when I mention the CFTC. The single most common comment from friends in the two years of the Brogan Law Newsletter is “you use too many acronyms,” and, universally, the acronym they do not know is CFTC.

Of course, you, dear reader, know that the Commodity Futures Trading Commission is the nation’s second most prominent regulator of financial markets covering derivatives and the commodities that underlay those derivatives. But to be completely fair, the CFTC was much lesser known than its sibling the SEC until recently.

That all has changed, and the CFTC is positioned to be the most important regulator of both cryptocurrency and other alternative financial products, like prediction markets in the year ahead.

This happened because advocates for the cryptocurrency industry sought to bring the regulator into the fold, on the theory that cryptocurrency is not a security but a commodity.

At the same time, the aforementioned case KalshiEx LLC v. Commodity Futures Trading Commission opened up prediction markets to political events for the first time in 2024, and sports followed, dramatically increasing the utility of prediction markets to serve deep retail markets.

But then, everything slowed down. Commissioners like Summer Mersinger (now head of the BA2) left the regulator, and Caroline Pham took on the role of acting Chair. Acting Chair Pham took on many tough issues, including overseeing the first recognized perpetual futures markets, but has left prediction markets untouched.

At first, that was great for these markets. Hell, Shayne Coplan got a dawn raid under the Biden administration, so quiet, for some, must have come as a relief. But over time, the states started to face some of the consequences that I laid out in TheStreet last December. States benefit from traditional betting products, but they can’t tax federal derivative products. So if those derivatives outcompeted traditional gambling, that would be bad for them! This realization caused a stir.

Starting in March, first Nevada, and then a number of other states, issued harshly worded letters telling prediction markets to get out.

This was the battle of the year, and for a while it looked like the prediction markets were going to win, until a new, idiosyncratic line of reasoning emerged in Nevada. D.N.V. Judge Andrew Gordon first ruled that the Commodities Exchange Act (CEA) preempts state enforcement of gambling laws against licensed derivative exchanges, correctly in my view.

Then, somehow, he retraced, and decided that event contracts do not qualify as swaps under the CEA when they are premised on the outcome of an event and not on the occurrence or non-occurrence therein. This reasoning is inane, but he’s in charge for now, so it seems the tides turned in Nevada. I told Decrypt that these decisions will lose “six ways to Sunday on appeal” and I stand by that, but until the 9th Circuit has its say, we are here.

That is the first reason that a trade group is so important now. It can unify the industry to file compelling amicus briefs in these crucial appellate cases as they come up in 2026 and 2027. These are complicated issues, and the industry can’t be at cross purposes when it is deciding its position on the definitive analysis of them.

I think they will eventually end up at the Supreme Court, but something else has to happen first.

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The Chair

We’ve extensively covered the controversy around the CFTC Chair role here. Trump’s first pick was Brian Quintenz, who reportedly did not get along with the Winklevoss twins and eventually withdrew from consideration.

Subsequently, there was some discussion of who would replace Mr. Quintenz, with chatter even suggesting it could be SEC chair Paul Atkins in a dual role. Eventually, though, prominent SEC staff-member Mike Selig was chosen.

While Mr. Selig has not been confirmed yet, the expectation among those close to these issues is that he will be. And when he is, that will begin the clock on the most important moment for the industry.

My view is that the status quo as it exists today is an unstable equilibrium. Sports-based prediction markets (and, indeed, elections) exist in a legal limbo without any explicit regulatory imprimatur, and unclear legal status. While I think these markets should be legal, and they currently are, in most places, there remains significant risk. This is while investors are pouring billions of dollars into developing them, and opponents like the AGA, the Indian Gaming Commission, and the state of Nevada, are spending millions to attempt to make them go away.

One path forward is for the various litigations to proceed to the Supreme Court, but that is ponderous and uncertain. What we need now is rulemaking.

Once Mr. Selig takes his chair, the only goal of this industry in Washington should be to lobby the CFTC to promulgate rulemaking confirming the legal status of these markets under the CEA. The arguments are well-trodden, and the equities align. The federal regulator has every reason to bring this kind of risk asset under its roof. States have proven fickle regulators that have allowed sports books to prey on their customers, and this could quickly progress into real crisis without a steady federal hand to temper it. Prediction markets are the perfect juncture to do this.

Once a rule is promulgated, the Coalition for Prediction Markets will have to quickly and forcefully guide the agency through well crafted comment, and by bringing constituent members to discuss these issues in person. There is no substitute for facetime.

But then, once a rule is in place, there will still be a final hurdle. The various opponents of prediction markets will sue the CFTC alleging violations of the Administrative Procedures Act, and these cases will be the ones that finally determine what is and is not legal in American risk asset markets.

When the day comes to file the amicus brief that the Supreme Court will cite as the “industry” this new trade group will be there. Not a minute too late.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Major Questions

A wise man once told me that invoking the Major Question Doctrine crossed a bridge unnecessarily. So when I was reading Citadel Securities’ recent controversial SEC comment letter “Tokenized U.S. Equity Securities & DeFi Trading Protocols” and came to the line “using exemptive relief to create a new regulatory framework for tokenized U.S. equities would constitute a ‘fundamental revision’ to the statutory scheme without ‘clear congressional authorization’ to do so,” I checked the citation.

Behold, West Virginia v. EPA.

Because many of you are not lawyers, it’s helpful to step back here and explain. Law, at the ground level, is a code composed of relatively well-defined rules. If you park on the wrong side of the street in Manhattan on alternate-side parking day and the NYPD finds out about it, you’ll receive a $65 fine.

But as you ascend the mount to the rarified airs of appellate courts, and particularly the Supreme Court, this certainty vanishes.1 Here, law less resembles rules than principles and ideas sometimes received from precedent and sometimes created by jurists themselves.

The Major Question Doctrine is one such judicial creation. In 2022, in the aforementioned West Virginia v. EPA Chief Justice formalized the idea, stating that where “precedent counsels skepticism” that an agency’s authority exists in some domain, “the Government must… point to clear congressional authorization to regulate in that manner.”

In other words the doctrine expressly states what has always existed in the interstices between caselaw and statute: the jurist’s residual authority to make judgments and rule on that basis of their own interpretation of what law does and does not mean.

Which is great. Interesting doctrine. Says the quiet part out loud in a way that is admirable. But the court hasn’t promulgated detailed rules about when it should apply2, and really, the residual is all it is. Major Question is a doctrine for when the court doesn’t want a ruling to come out in a certain way, and, rather than engage directly in interpretation, throws water on an idea. That makes its application stochastic, and, generally, when you cite it, it is because your good arguments are already made.

Citadel Securities cites it, and that’s telling.

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All Bark, No Bite

The basic problem with Citadel’s arguments is vision. They mistake regulatory machinery for the values it was meant to promote. “If there is no registered intermediary, then nearly all of the rules governing the secondary trading of U.S. equities that are designed to protect investors would no longer apply.” For this reason, they argue, the SEC should adopt an interpretation that is inclusive of the kind of indirect intermediation that is commonly found in DeFi applications.

Blink and you might miss the sleight of hand, when they provide the crucial reasoning to tie this argument together. DeFi should be regulated as exchanges, ATSs and broker/dealers, because “[t]o conclude otherwise would suggest that the technology used matters more than the trading functionality supported, and would severely undermine the regulatory framework designed to protect investors and safeguard market integrity and resiliency.”

Did you catch that?

Citadel Securities does not argue that DeFi would severely undermine market integrity and resiliency, but rather a regulatory framework designed to promote them. And whether undermining that framework has a corresponding effect on the values themselves is directly dependent on how effective those frameworks are.

As we’ve argued in this publication many times, pushing and arbitraging existing regulatory regimes is sort of the point to this project of developing novel financial systems. One need not think that contemporary financial regulation is wholly broken to think that something new and different might provoke new and different regulatory structures that could be better.

I think back to Vy Le and Austin Campbell’s paper from this summer Crypto and the Evolution of the Capital Markets, which exhaustively covered the origins of current capital market clearinghouse structures. Going back to the late 1960s, trades settled on paper, and as their volume increased, management of those trades became impossible. So centralized clearing was invented and implemented to solve the problem. And that is ok! But the point is that this structure, along with many others, is arbitrary. There may be many ways that capital markets could be regulated, and it is only possible to identify the best approaches through iteration.

If we concede that the regulation of new products cannot disturb old methods of regulation, then we are at a loss to ever advance. And that may service Citadel Securities’ interests, but it does not necessarily serve the public’s. That is why we find arguments cabined in frameworks.

Citadel Securities’ argument here is what is called an “argument from authority.” That means they are not developing points from principle, but instead invoking some existing authority—in this case, the language of the securities laws. If our goal here is to advance the fidelity of capital markets regulation, we must engage with more than just the current capital markets regulation.

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Fighting in the Arena of Ideas

Obviously, I am not the first practitioner to criticize Citadel Securities’ letter. But it is still additive to point out these fallacies when they pop up in the industry’s opponents’ work. The reason we see the Major Question Doctrine and arguments from authority in Citadel Securities’ work is because, against the bare metal of ideas, their vision would not withstand scrutiny. It would be obvious, if they articulated the system they actually want, that they have no real theory of how capital markets should work, but are instead engaged in self-interested sophistry.

It is much harder to argue against the idea of novel formulations of capital markets than it is to argue that they are illegal, or would disrupt existing structures. This is ok. Most people, opponents and allies alike, don’t think from first principles. How tedious that would be!

At Andrew Ross Sorkin’s recent Dealbook Summit, Blackrock CEO Larry Fink admitted that his views on cryptocurrency are a “very glaring, public example of a big shift in my opinions.” Is that, do you think, because the underlying principles of cryptocurrency have changed, or the environment?

And yet, this pliability need not provoke cynicism. It is an opportunity to do the hard work of developing theory, because where our opponents argue from self-interest, our ideas are free to fill the void. Capital markets could function better with new and less active regulation.

From that theory, we can’t reach conclusions. That takes practice, experimentation, study. But if our argument is that the SEC should develop exemptive relief to develop a discretionary regime to test our ideas, and Citadel’s argument is “let’s do things the old way,” who do you think will win the town square?

When Chair Atkins introduced Project Crypto and said that the SEC would consider exemptive relief, he was referencing various provisions, Exchange Act § 36, Securities Act § 28, that authorize the Commission to “conditionally or unconditionally exempt any person, security, or transaction” from the Act’s requirements whenever doing so is “necessary or appropriate in the public interest” and “consistent with the protection of investors.” This is not a loophole or a workaround; it is an explicit recognition that inflexible regulation could undermine the very values, efficiency, fairness, competition, that federal securities law is meant to promote.

Congress included this exemptive authority for a reason. Financial regulation cannot remain fixed while the markets it governs evolve, and the history of the securities laws is a history of the Commission adapting inherited structures to new technological and institutional realities.

Matt Levine likes to say that cryptocurrency is “rediscovering traditional finance.” He means it to be lightly barbed, but while there may be inefficiencies and pitfalls to this process, first principles provide a rare opportunity to make systems better.

Where our opponents abdicate to authority, we insist on the harder work of judgment. Ultimately, this is why we will prevail.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

Brogan Law provides top-quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help our clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email info@broganlaw.xyz

Banks Left Them Out. Crypto Let Them In.

One of crypto’s oldest and best-known use cases is for cross border payments. Proponents talk of long wait times and high fees short-circuited with stablecoins. But this problem may not sound particularly urgent or dire to the uninitiated. That is, unless you regularly send money to other countries. Let me set the stage.

International remittances are among the slowest and most expensive transactions in traditional finance. A transfer from, say, the United States to Senegal can take up to five days to settle and cost as much as $50. That is an annoyance for most businesses, but that delay can be devastating when the money is meant for an emergency, or when the sender is low-income and every dollar matters.

After years of reporting on tech hype cycles and valuation-driven narratives, I found myself drawn to a technology aiming to solve a practical, deeply human problem. People sending money abroad were often marginalized by the financial system. Crypto offered a way back in. That realization has kept me covering these issues for six years.

So when Paradigm’s Vice President of Regulatory Affairs, Justin Slaughter, asked me to research how unbanked and underbanked people use crypto, I jumped at the chance. Globally, about 1.4 billion adults are unbanked, according to the World Bank. According to federal government data, roughly 16 million adults lacked a bank account in 2024, and another 13.8 million were underbanked — technically banked, but reliant on non-bank services like remittances or check cashing to meet their core financial needs.

Over six weeks, we analyzed existing research and conducted in-depth qualitative interviews with eleven people across these groups to better understand how crypto fits into their daily lives. Here’s what we found.

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Crypto Changes How People Think about Money.

Across the board, interviewees consistently emphasized that crypto changed how they conceptualized and managed their money. Whereas they had previously thought of money solely as a means to buy goods and services, crypto inspired them to think about money as an asset to grow.

The interviewees I spoke with were diverse. Most were based in the United States, though some were living abroad in countries in Europe and Africa. Of those living in the U.S., I spoke with immigrants who had documentation issues, immigrants on visas or who had gotten citizenship, and natural-born American citizens. Most of the people I spoke with were low-income or middle class, but two had amassed significant wealth. The interviewees’ ages ranged from early 20s to mid-50s. Some I found actively sharing tips on Reddit and X, while others hardly spent time on social media at all.

For those stretching every dollar, stablecoins and staking rewards offered the possibility of small but meaningful returns. For wealthier interviewees, automated lending protocols created flexibility, allowing them to borrow against holdings and smooth out financial shocks.

Taking direct responsibility for their assets, instead of trusting a bank or payment processor, created a noticeable psychological shift. As one interviewee, who we gave the pseudonym London, put it: “It’s all about my choice. [Crypto] gives me more control — I don’t need a bank to access funds. I just need my phone.”

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Online Crypto Payments Feel Safer.

Many interviewees also said they felt more secure transacting online with crypto than with traditional debit or credit cards. Part of this stemmed from the same mindset shift: crypto nudged them to learn how the technology worked instead of blindly typing card numbers into checkout windows. Crypto taught interviewees to rely on themselves, rather than financial intermediaries.

They appreciated that sending crypto required only a public wallet address, not full payment details. Multiple interviewees had experienced credit-card theft after online purchases, while others had cards frozen because automated fraud controls didn’t account for their immigration status or inconsistent access to identity documents. Crypto felt simpler, safer, and less dependent on institutions that had failed them.

The interviews were a good reminder of the profound impact of being able to send money directly between one account to another, peer-to-peer. Intermediation introduces risk.

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Efficiency isn’t just a buzzword.

Applications like Zelle or Venmo can make sending money seem like it’s fast and cheap these days, but those systems aren’t reliable if you can’t get a bank account. Interviewees bemoaned the fact that even using prepaid cards for these systems came with fees or troublesome hurdles, while the same issues with identity documents could make it difficult to register.

Crypto’s reputation for speed and low cost often gets dismissed as marketing language. But this study reminded me how important efficiency really is, especially for people shunned by traditional finance.

Crypto, by contrast, let them send and receive money within minutes. Gas fees were an annoyance, but still dramatically cheaper than payday loans, non-bank money orders, or cross-border remittance services. For interviewees supporting families abroad, the difference between a five-day wire and a two-minute stablecoin transfer was transformative. Many described crypto payments as simply “seamless.”

“You notice how swift payments can be made — it’s not the same with a bank,” one interviewee, who we gave the pseudonym Simon, told me. “With cryptocurrency I don’t have to go to the bank to do anything, I can do it from the comfort of my home. But then with traditional banks you have to make extra efforts, sometimes there’s delays, and it’s just a whole lot of stress.”

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More Work to Be Done

Crypto is often portrayed as a speculative casino full of hype and scams. And for some of the industry, that criticism may be valid. But our study shows that for an overlooked group of people, crypto payments are genuinely useful. They’re cheaper, faster, and easier to use than the tools available to them in traditional finance, and in many cases gave people access to digital payments they were completely unable to use before.

Talking to interviewees, many of whom taught themselves everything they knew about crypto, was a reminder of why I cover this space. I hope the findings remind others in crypto why their work matters.

More importantly, I hope the work reminds crypto entrepreneurs to build products that don’t only fuel the aggregation of wealth, but also accelerate inclusion. Making apps easier to use, more secure, or more efficient isn’t always sexy. But it’s these simple improvements that compound, and which make crypto such a transformative technology.

That said, this research is only a beginning. The study was qualitative and small in scope. Major gaps remain in our understanding of how and why unbanked and underbanked people use digital assets, especially outside stablecoins, and especially when it comes to more quantitative assessments. I plan to continue this work and hope others will join in closing those gaps.

For more context, please read my blog on the Paradigm website here, or view the full report here. You can also watch me discuss our research at the most recent Pretty Good Policy for Crypto briefing here.

Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/

Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.