by Kelley Drye and Warren’s Blockchain and Cryptocurrency
practice group as relevant during the week of July 27 –
August 2. We hope you find this useful. Access may require
subscription.
Regulatory Updates
Robinhood’s Crypto Division Fined $30M by New York
Financial Regulator
CoinDesk, August 2, 2022
The New York State Department of Financial Services (NYDFS) fined
the crypto trading unit of Robinhood (HOOD) $30 million for alleged
violations of anti-money-laundering and cybersecurity regulations,
the Wall Street Journal reported on Tuesday.
- The fine, the first crypto-related enforcement action taken by
the regulator, was handed because Robinhood Crypto LLC failed to
maintain and certify compliant anti-money-laundering and
cybersecurity programs, the report said. - The NYDFS also said it found significant failures through a
supervisory exam and through a subsequent enforcement investigation
of Robinhood. - Robinhood Crypto foresaw the fine and had said last year that
it expects to be fined by the New York regulator. A 2020
investigation “focused primarily on anti-money laundering and
cybersecurity-related issues” found the company to be in
violation of numerous regulatory requirements, the firm said last
year. - In 2021, the trading firm was fined $70 million by the
Financial Industry Regulatory Authority (FINRA), the largest fine
ever issued by FINRA, for failing to protect customers.
Read more here.
Crypto: Lawmakers Rip Industry, Demand SEC Action
During Recent Hearings
Yahoo Finance, August 1, 2022
Crypto winter and resulting bankruptcies are pushing lawmakers to
up the ante on regulators. During a hearing last week, Senator Pat
Toomey (R-PA) said the SEC is the missing cop on the crypto beat
while Sen Elizabeth Warren (D-MA) ripped on the crypto industry for
scamming mom-and-pop investors and pledged to introduce a bill soon
to regulate the crypto market and stamp out scams.
Warren criticized the crypto industry, lambasting up to 20% returns
crypto lenders like now defunct Celsius Network offered, while
highlighting the influx of institutional investors into crypto from
venture capital firms to hedge funds.
“Crypto has made it faster and cheaper than ever before to rip
off consumers,” Warren griped during a Senate Banking
Committee hearing Thursday. “Across the crypto market, the big
investors are funding, hyping, and then vampire-sucking money out
of crypto projects that scam mom-and-pop investors.”
Amid these failures and losses, as the Senate Banking
Committee’s ranking member, Toomey is questioning where the SEC
has been. “What was the SEC doing while these companies and
others were offering lending products that looked an awful lot like
securities?” Toomey asked during a Senate Banking Committee
hearing on crypto scams. “And what is the SEC doing now to
help ensure the crypto community gets the regulatory clarity it has
repeatedly asked for?”
Read more here.
Binance.US Delists Cryptocurrency Cited by SEC as a
Security
WSJ, August 1, 2022
Binance.US, the U.S.-based arm of crypto exchange Binance delisted
a small cryptocurrency in the wake of the Securities and Exchange
Commission’s investigation into insider trading at rival
Coinbase Global Inc COIN -0.41%?.
Binance on Monday said it was delisting the AMP token as of Aug.
15. The cryptocurrency trades for less than a penny with a market
value of less than $400 million, according to CoinMarketCap.
Despite its small size, AMP looms large because it was one of nine
cryptocurrencies cited by the SEC as unregistered securities as
part of its investigation of insider trading at Coinbase.
The entire crypto industry has grown up without clear definitions
of the assets within it and regulations for trading. The SEC has
informally said that the two largest tokens, bitcoin and ether,
aren’t securities. However, both the current SEC chairman, Gary
Gensler, and his predecessor, Jay Clayton, said that most
cryptocurrencies meet the legal definition of a security,
potentially putting crypto exchanges in the position of selling
unregistered securities.
Read more here.
Why Crypto Flinches When SEC Calls Coins
Securities
Bloomberg Tax, August 1, 2022
Cryptocurrency traders have been put on notice that the US
Securities and Exchange Commission considers a range of widely
traded digital assets to be securities, a position that could
impose regulatory requirements that many boosters say could be
crippling. But figuring out what does or doesn’t make a coin a
security is a complicated question.
An asset can be under SEC purview when it involves investors
kicking in money with the intention of profiting from the efforts
of the organization’s leadership. In December 2020, the agency
sued Ripple Labs Inc. , for allegedly raising money by selling the
XRP digital token, which at the time was the third biggest, without
registering it as a security. The SEC claimed that the company was
funding its growth by issuing XRP to investors betting that its
value would rise. The case is now a massive legal battle with
Ripple having hired a former SEC chair, Mary Jo White, as an
attorney.
There have been efforts on Capitol Hill to give the Commodity
Futures Trading Commission, the US derivatives watchdog, more power
to regulate crypto assets directly. Currently it primarily oversees
crypto futures and has the ability to take enforcement action if
there’s fraud or manipulation in the underlying market. Crypto
backers argue that the CFTC, which has brought dozens of crypto
enforcement actions, is better positioned than the SEC to regulate
the asset class. Opponents of that approach say that the SEC’s
securities-focused rules offer more protections for mom-and-pop
investors.
What coins are or aren’t considered a
security?
The short answer is that beyond the very biggest cryptocurrency
there’s a lot of ambiguity. US regulators including the SEC
agree that Bitcoin, which is by far the largest digital asset,
isn’t a security. The second-biggest token, Ether, was deemed
not to be a security during the Trump administration by a senior
SEC official who signaled that while Ether may have started out
qualifying as a security — the Ethereum Foundation used it to
raise money — it had grown into something sufficiently
decentralized that it probably no longer was one. The CFTC followed
suit in deeming it a commodity, and the CME lists futures on it as
well as Bitcoin.
Read more here.
Philosophically, It Doesn’t Matter Whether Cryptos
Are Securities; Practically, It Does
CoinDesk (Opinion), July 31, 2022
On July 26, it emerged that Coinbase was being probed by the SEC
for allegedly listing securities. This news came on the heels of an
insider-trading case brought against a Coinbase employee and two
others on July 21 by the SEC and U.S. Justice Department. Making
matters (somehow) worse, Cathie Wood’s Ark Invest off-loaded
1.4 million Coinbase shares on July 27.
Yes, the SEC is tasked with enforcing laws against market
manipulation to protect investors. And yes, that is a valiant
purpose. But contending that market manipulation only matters in
the context of securities is exactly wrong. Bitcoin (legally deemed
a commodity in the U.S.) market manipulation should be stomped out
as well. If the SEC decided tomorrow that bitcoin was a security,
it would change nothing about bitcoin fundamentally. It would also
change nothing about bitcoin market manipulation being bad. It
would just change who thinks they can regulate it at this
particular moment.
The SEC cites the Howey Test when determining whether something is
a security. While the agency has said in the past that bitcoin is
not a security, and while I am not a lawyer, one could make the
argument that the test sure makes bitcoin look a lot like a
security because investing in bitcoin:
- requires money (fiat money, but still money) unless you’re
a miner (and even that requires money to pay the power bills) or
one of the die-hard merchants who receive it in exchange for goods
and services, - which is invested in a common enterprise (the Bitcoin
network), - with a reasonable expectation for profit (maybe unreasonable,
but if bitcoin demonetized gold, the price of bitcoin would go
up), - derived from the efforts of others (I hold bitcoin and I
haven’t once touched the code).
And that doesn’t matter one bit philosophically. It only
matters practically because investors, institutional and
individual, need to play by the SEC’s rules.
Read more here.
SEC Chairman Publishes Video Outlining Plan to Regulate
Crypto Trading Platforms
Bitcoin.com, July 29, 2022
U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler
published a video Thursday explaining how the securities watchdog
plans to regulate crypto exchanges and provide investor
protection.
Gensler explained in the video the similarities and differences
between crypto trading platforms and traditional exchanges like the
New York Stock Exchange (NYSE). “When you trade on a stock
market, you have certain protections,” he began, adding that
investors are “protected against fraud, manipulation, running,
and the like.”
Noting that crypto platforms serve “millions, sometimes tens
of millions” of retail customers who are directly buying and
selling crypto assets without going through a broker, the SEC
chairman detailed: “With so many retail customers trading on
crypto platforms, we should make sure that those platforms offer
similar protections” to traditional security platforms.
Gensler then brought up another risk factor inherent to crypto
exchanges. “Unlike traditional securities exchanges, crypto
trading platforms also may act as market makers,” he
described.
Read more here.
FDIC Urges Banks to Police Misleading Crypto Claims on
Deposit Insurance
Nasdaq, July 29, 2022
A U.S. banking regulator is urging banks dealing with
cryptocurrency companies that they need to make sure customers know
which of their funds will be insured by the government in case of
collapse, and which have no safety net.
The Federal Deposit Insurance Corporation (FDIC) said Friday it is
concerned consumers may be confused about how safe their money may
be when placed in crypto assets, particularly in cases where firms
offer a mix of uninsured crypto products alongside insured bank
deposit products.
In a new advisory, the FDIC said banks need to make sure any crypto
firms they partner with do not overstate the reach of deposit
insurance. The push comes as broad turmoil in the crypto market has
led to the collapse of some high-profile firms, including one
regulators publicly chastised yesterday for overstating deposit
insurance coverage. “Inaccurate representations about deposit
insurance by non-banks, including crypto companies, may confuse the
non-bank’s customers and cause those customers to mistakenly
believe they are protected against any type of loss,” the FDIC
advisory stated.
Read more here.
Binance and FTX, Big Crypto Exchanges, Get
Bigger
WSJ, July 29, 2022
Two crypto exchanges—Binance and FTX—are extending
their reach amid the continuing market rout.
Binance’s spot-trading market share rose to 49.7% in June from
45% in January, according to data from research firm CryptoCompare.
FTX, which has been aggressive in both marketing and acquisitions,
boosted its market share to 8.95% in June from 6% in January. It is
now the second-largest spot market.
The crypto selloff that began in November has gutted the crypto
market and crushed trading activity, the main revenue driver for
most exchanges. Spot-trading volume for the nine largest
cryptocurrencies was down 35% from the November highs, research
firm TradeBlock reported.
The longer this downturn lasts, the more it favors dominant players
such as Binance, Coinbase Global Inc COIN 1.14%?. and FTX, said
Charles Hayter, CryptoCompare’s chief executive and
co-founder.
Read more here.
U.S. Senator Seeks Safeguards Disclosures from Apple,
Google Amid Rise in Fake Crypto Apps
Cryptoslate, July 28, 2022
U.S. Senator Sherrod Brown (D-Ohio) sent letters to Tim Cook, CEO
of Apple, and Sundar Pichai, CEO of Google and Alphabet on July 28,
asking for information about what the companies are doing to
protect users from fraudulent cryptocurrency apps.
The move comes after the Federal Bureau of Investigation (FBI)
issued a warning on July 18 against fraudulent crypto apps, which
have caused losses of about $42.7 billion.
Cybercriminals have used logos, names, and other information of
crypto companies to create fake mobile apps to scam investors,
Brown wrote in the letter. Therefore, it is important that crypto
firms take precautions to prevent fraud, including warning
investors regarding the rise in scams, Brown added. But it is also
important that app stores have proper safeguards to prevent fake
apps, Brown wrote.
Read more here.
Tax-free Crypto Payments? Sinema and Toomey Propose
Senate Bill Covering Transactions Under $50
MarketWatch, July 28, 2022
A new bill proposed by a bipartisan pair of U.S. senators would
make cryptocurrency transactions valued at less than $50
tax-exempt.
The Virtual Currency Tax Fairness Act of 2022,
proposed by Pennsylvania Republican Pat Toomey and Arizona Democrat
Kyrsten Sinema, has a stated goal to “simplify the use of
digital assets for everyday purchases,” according to the press release associated with the bill.
According to the United States Senate Committee on Banking,
Housing, and Urban Affairs, when a crypto transaction occurs, it
can be a taxable event if the digital asset appreciated in value
due to capital-gains-tax rules. The bill would create a tax
exemption for all transactions under the amount of $50, as well as
any gains less than $50 on personal transactions.
The new bill aims to “amend the Internal Revenue Code of 1986
to exclude from gross income de minimis gains from certain sales or
exchanges of virtual currency, and for other purposes,” the
text of the bill reads.
Read more here.
US Tech Bill Creates White House Blockchain Adviser
Role
CoinDesk, July 28, 2022
A U.S. bill to boost computer chip manufacturing that’s heading
to President Joe Biden’s desk will also establish a crypto
advisory role inside his administration.
The bipartisan legislation, which cleared both chambers of Congress
after a House vote on Thursday, will establish a new adviser on
blockchain and cryptocurrency issues who will work in the Office of
Science and Technology Policy.
“I am proud to foster the policy needed to ensure innovation
continues to take shape in our government,” said Rep. Darren
Soto (D-Fla.), a crypto supporter who is co-chair of the
Congressional Blockchain Caucus, in a statement.
The bill, known as the Chips and Science Act, won a number of
Republican supporters on an otherwise Democrat-heavy effort that
will be counted as a significant political win for the party and
President Biden.
The White House’s science office was directed in the
president’s executive order on crypto to analyze the effects
digital assets are having on climate change and return later this
year with a report. The office requested public input on that
report in March.
Read more here.
FSOC Expects to Issue Digital Assets Report in Early
Fall 2022
Bloomberg Tax, July 28, 2022
The US Financial Stability Oversight Council says it expects to
release in early fall a report on ensuring responsible development
of digital assets, according to a Treasury Department readout of
the council’s meeting.
 The Hedge Fund Working Group made progress in developing a
risk-monitoring framework to inform the Council’s assessment of
current and emerging risks to financial stability related to hedge
fund activities.
 Read more here.
News Articles
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U.S. Crypto Firm Nomad Hit by $190 Million
Theft
Nasdaq, August 2, 2022
U.S. crypto firm Nomad has been hit by a $190 million theft,
blockchain researchers said on Tuesday, the latest such heist to
hit the digital asset sector this year.
Nomad said in a tweet that it was “aware of the incident”
and was currently investigating, without giving further details or
the value of the theft.
Crypto analytics firm PeckShield told Reuters $190 million worth of
users’ cryptocurrencies were stolen, including ether and the
stablecoin USDC. Other blockchain researchers put the figure at
over $150 million.
Read more here.
Attorney General James Urges New Yorkers Deceived by
Crypto Platforms to Report Concerns to OAG
Office of the New York State Attorney General, August 1,
2022
New York Attorney General Letitia James today issued an investor
alert urging any New Yorker deceived or affected by the
cryptocurrency crash to contact her office. Many high-profile
cryptocurrency businesses have frozen customer withdrawals,
announced mass layoffs, or filed for bankruptcy, while investors
have been left in financial ruin.
As part of the Office of the Attorney General’s (OAG) ongoing
investigative work, OAG is interested in hearing from New York
investors who have been locked out of their accounts, who are
unable to access their investments, or who have been deceived about
their cryptocurrency investments. New Yorkers who have been
affected by this conduct are strongly encouraged to report these
issues to OAG. Attorney General James also encourages workers in
the cryptocurrency industry who may have witnessed misconduct or
fraud to file a whistleblower complaint with her office, which can
be done anonymously.
Read more here.
SEC Slaps Founders, Promoters of Alleged Ponzi Scheme
Forsage With Fraud Charges
CoinDesk, August 2022
The U.S. Securities and Exchange Commission charged 11 people tied
to the alleged $300 million crypto Ponzi scheme Forsage with fraud
on Monday.
Forsage was launched in January 2020 by four founding members:
Vladimir Okhotnikov of the Republic of Georgia, Jane Doe aka Lola
Ferrari of Indonesia and Mikhail Sergeev and Sergey Maslakov of
Russia. It quickly grew to be one of the most popular decentralized
apps (dapps) on the Ethereum blockchain, and at its peak, it
consumed roughly a quarter of the blockchain’s bandwidth and
caused gas fees to spike, data from Dune Analytics showed.
Millions of users from around the world were recruited by a network
of promoters, including a group that called themselves the
“Crypto Crusaders,” to send money via smart contracts on
the Ethereum, Tron and Binance blockchains in exchange for a payout
when they recruited another investor, the SEC said – a
business model the agency described as “a textbook pyramid and
Ponzi scheme.”
Read more here.
Pearson Says NFTs Could Reap Profit in Secondhand Book
Sales (1)
Bloomberg Tax, August 1, 2022
The chief executive officer of Pearson Plc, one of the world’s
largest textbook publishers, said he hopes technology like
non-fungible tokens and the blockchain could help the company take
a cut from secondhand sales of its materials as more books go
online.
The print editions of Pearson’s titles — such as
“Fundamentals of Nursing,” which sells new for
£57.99 ($70.88) — can be resold several times to other
students without making the London-based education group any money.
As more textbooks move to digital, CEO Andy Bird wants to change
that.
“The move to digital helps diminish the secondary market, and
technology like blockchain and NFTs allows us to participate in
every sale of that particular item as it goes through its
life,” by tracking the material’s unique identifier on the
ledger from “owner A to owner B to owner C,” said Bird, a
former Disney executive.
Read more here.
Crypto Prices Crashed, but True Believers Are Holding
On
WSJ, July 30, 2022
With the crypto market crashing, there is a growing divide between
investors who are looking to make money and those who believe in
its mission. Some true believers, like Mr. Larsen, tout crypto as a
way to replace, or at least push back against, big banks and the
traditional fiat-money system. Others are more enthusiastic about
blockchain, a kind of digital ledger underpinning cryptocurrencies,
that could be used to change how records are tracked and stored in
areas as varied as medicine and real estate.
Some of the traders knuckling down on crypto are fairly well off,
which means they have money to lose—and a higher tolerance
for risk. Many, including Mr. Larsen, didn’t have their
investments tied up in lending platforms like Celsius Network LLC
and Voyager Digital Ltd., both of which have frozen withdrawals and
filed for bankruptcy protection. Customers there haven’t been
able to access their money for weeks.
Some investors buy cryptocurrencies as if they are stocks, holding
them in a crypto exchange and hoping prices rise so they can make a
profit. Others deposit their crypto into yield-earning accounts
with firms that then invest those digital assets or lend them out
to others for a fee. Bitcoin, the biggest cryptocurrency, is riding
the wave of July’s market rally. It is up about 28% in July,
but is still down about 65% from its November record high.
Read more here.
Voyager Digital’s Clash With US Regulators Followed
by Broader FDIC Warning
CoinDesk, July 29, 2022
The day after demanding Voyager Digital erase its claims that customers’ funds would
get government protections, the U.S. Federal Deposit Insurance
Corporation has issued a broader warning to bankers that they need to keep
their crypto partners in line.
The agency, which maintains an insurance fund to pay back
depositors if their banks fail, doesn’t extend that protection
to failing cryptocurrency firms that use those banks, according to
an FDIC letter to banks posted Friday. “FDIC insurance does
not protect a nonbank’s customers against the default,
insolvency, or bankruptcy of any nonbank entity, including crypto
custodians, exchanges, brokers, wallet providers or other entities
that appear to mimic banks but are not,” the agency
instructed.
The FDIC guidance added that if a bank’s crypto partner
“makes misrepresentations about the nature and scope of
deposit insurance,” there could be legal risks for that
regulated lender. The FDIC and Federal Reserve sent a letter to
Voyager CEO Stephen Ehrlich this week that accused the crypto
lender of misleading customers about the protections on their
assets by implying that they’d be covered by deposit insurance
in the event of Voyager’s collapse.
Read more here.
Nearly 75% of Retailers Plan to Accept Cryptocurrency
Payments Within the Next 2 Years
CNBC, July 29, 2022
From Starbucks to Lamborghinis, consumers are using
cryptocurrency to pay for a variety of goods — and retailers
are taking notice.
Nearly 75% of retailers plan to accept either cryptocurrency or
stablecoin payments within the next two years, according to a June
survey conducted by Deloitte titled “Merchants getting ready for
crypto.”
Deloitte polled a sample of 2,000 senior executives from the retail
industry who represent a range of subsectors including cosmetics,
electronics, fashion, transportation, food and beverage.
While digital currencies like Bitcoin are typically only as
valuable as users believe them to be, a stablecoin is a type of
cryptocurrency that derives its value from an underlying asset.
Stablecoins are often pegged to currencies such as the U.S. dollar
or a commodity such as gold.
Although paying with cryptocurrency is fairly novel now, 83% of
retailers expect consumer interest in digital currencies to
increase over the next year and a little over half of them have
invested over $1 million into enabling digital payments, according
to the survey.
For consumers, that means you could soon buy clothes, drinks,
beauty products and more with crypto.
Read more here.
Brands Try Turning NFTs From Kitschy Collectibles Into
Something Utilitarian for Consumers
WSJ, July 29, 2022
Marketers are moving past offering nonfungible tokens as branded
collectibles and instead trying to make their NFTs practically
useful for consumers. NFT projects that give people a sense of
community, access to a physical experience or rewards are now the
most promising for brands, industry executives said.
“It should be about the value it gives you in completing your
everyday life,” said AJ Dalal, managing director for data and
Web3 at digital consulting firm Publicis Sapient.
While plenty of consumers are still speculating on NFT collectibles
for financial gain, the NFT industry is being forced to evolve,
said Geoff Renaud, chief marketing officer and co-founder of
Invisible North, a marketing agency that helped create the on-site
experience for an NFT project this year at the Coachella Valley
Music and Arts Festival.
Tokens offered consumers a sense of community and ownership even
before brands began trying to add tangible benefits, said Mr.
Renaud of Invisible North. That is the opportunity that brands can
build on, he suggested. “Not everything needs to be this
massive risk [and] investment for your average consumer,” Mr.
Renaud said. “You can actually reward people and come up with
incentives for them to engage.”
Read more here.
SEC Scrutiny of Coinbase-Listed Tokens Rattles Crypto
Traders
Bloomberg News, July 28, 2022
The US Securities and Exchange Commission’s scrutiny of digital
currencies that are listed on Coinbase Global Inc. is igniting
concerns that a major crackdown for the rest of the industry is
imminent.
The SEC has been investigating whether Coinbase shirked regulations
by offering trading in certain tokens. Anxieties were already
running high after the regulator took the unusual step of
identifying several crypto assets that it considered to be
securities as part of an insider trading case.
The SEC lawsuit against a former Coinbase manager and two others,
coupled with the probe into the platform’s listings, signal
that after more than a year of warnings by Chair Gary Gensler the
regulator’s stance appears to be hardening. Meanwhile, the
agency’s assertion last week that nine tokens fall under its
jurisdiction is drawing pushback inside the Commodity Futures
Trading Commission, the US derivatives watchdog that also oversees
crypto.
“This is a shot across the bow of the industry, not just
across one boat within that armada,” said James Cox, a
professor specializing in securities law at Duke University School
of Law.
Read more here.
Three Arrows Liquidators May Try to Force Founders to
Cooperate
Bloomberg Tax, July 28, 2022
Liquidators overseeing the wind-down of Three Arrows Capital may
soon try to force founders Kyle Davies and Su Zhu to help clean up
the mess left behind by the crypto hedge fund’s collapse.
Zhu and Davies have so far provided “rather selective and
piecemeal disclosures” about the fund’s assets, attorney
Adam Goldberg said on behalf of the liquidators in a bankruptcy
hearing Thursday. Without further cooperation, lawyers will try to
compel the founders to turn over more information with assistance
from US Bankruptcy Judge Martin Glenn, he said.
The liquidators — appointed by a judge in the British Virgin
Islands — have so far gained control of more than $40 million of
the fund’s assets. But that’s a drop in the bucket compared
to what Three Arrows owes creditors — more than $2.8 billion of
claims are already on file, and the figure is expected to rise
significantly.
The liquidators expect to ask Glenn for help compelling Zhu and
Davies to hand over information in the coming days, Goldberg
said.
The case is Three Arrows Capital Ltd and Russell Crumpler, 22-10920
, U.S. Bankruptcy Court for the Southern District of New York
(Manhattan).
Read more here.
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