Why Web3 Builders Should Get Legal Help Before Launching

Whether or not crypto builders want to admit it, Mark Zuckerberg's famous motto of "move fast and break things" has become a defining ethos in the industry. Some projects have come under the scrutiny of the U.S. Securities and Exchange Commission (SEC) for allegedly offering unregistered securities, with question marks lingering around many others.

At the recent 0xpo Crossroads conference in San Francisco, Lisa Rubin—a blockchain and fintech attorney with law firm Paul Hastings LLP—explained that such a mentality towards Web3 creation can come back to haunt any project that doesn't seek legal guidance before launching into the wild.

"A lot of early-stage projects are so excited to build that they worry about the legal part later, which is very understandable," Rubin told Decrypt at the event. "But the thing is, it's actually better at the building stage to be talking to some legal help."

American regulators, including the Treasury Department and SEC, have stepped up their investigations into crypto projects, as well as the exchanges and lending platforms that list their tokens. As Decrypt wrote in August, the SEC and Chair Gary Gensler have "shifted from rhetoric to enforcement," with an eye on current and past projects alike that the agency believes violated securities law.

By launching or marketing a project before obtaining the input of crypto-savvy lawyers that closely follow the evolving regulatory landscape, Web3 builders only amplify the potential risk they face down the line.

"You can't take that back," Rubin said of crypto marketing claims. It's better to make necessary tweaks during the building stage, in her view, as opposed to after the launch—when such legal issues could threaten the aims or functionality of the project.

In July, the SEC said it was opening an investigation into Coinbase, the largest crypto exchange operating in the United States, alleging that the company listed nine tokens that the agency considers unregistered securities. Coinbase has denied the agency’s claims.

In November, the SEC won its case against LBRY when a court determined that the company committed securities violations by launching and selling its native LBRY Credits (LBC) token.

Many in the space see the advance of federal regulators and a lack of clear regulation as signs that more and more U.S.-based crypto projects will relocate to crypto-friendlier countries. However, Rubin said that this will not necessarily protect Web3 developers from the long arm of American law enforcement.

"This is a misconception,” she explained, “because even if a company forms abroad, it's possible that they could be subject to U.S. laws if they are dealing with U.S. customers or doing business in the U.S."

In September, the SEC sent shockwaves through the crypto space when the agency claimed that it had the right to sue Ian Balina, a crypto influencer, for failing to register a cryptocurrency as a security in 2018.

Balina’s case is controversial in part because the agency alluded that the U.S. government has jurisdiction over all transactions on the Ethereum network. Rubin said that now is the time for builders to pay close attention to what is happening with Congress and the SEC.

There could be tricky times ahead for crypto builders, depending on regulators’ next moves, but it’s sure to provide plenty of opportunities for attorneys who specialize in the sector.

“It is very exciting,” Rubin said of crypto law. "The law is a bit of a gray area, and it moves fast."