20 December 2023 • 16 minute read

Blockchain and Digital Assets News and Trends - December 2023

Editors:Margo Tank James Williams Elizabeth (Liz) Caires Eric Hall

This is our twelfth and final monthly bulletin for 2023, aiming to help companies identify important legal developments governing the use and acceptance of blockchain technology, smart contracts, and digital assets.

While the use cases for blockchain technology are vast, this bulletin focuses on uses of blockchain and smart contracts in the financial services sector. With respect to digital assets, we have organized our approach to this topic by discussing it in terms of traditional asset type or function (although the types and functions may overlap) – that is, digital assets as:

Securities
Virtual currencies
Commodities
Deposits, accounts, intangibles
Negotiable instruments
Electronic chattel paper
Digitized assets

In addition to reporting on the law and regulation governing blockchain, smart contracts, and digital assets, this bulletin will discuss the legal developments supporting the infrastructure and ecosystems that enable the use and acceptance of these new technologies.

INSIGHTS

CFTC proposes guidance on listing for trading of voluntary carbon credit derivatives – including those based on tokenized VCCs

By Deanna Reitman, Liz Caires, and Amanda Swenson

On December 4, 2023, the Commodity Futures Trading Commission (CFTC) announced proposed guidance for the listing of voluntary carbon credit derivative contracts on regulated exchanges or execution facilities, as well as requested public comment on the release.

Although derivative contracts on environmental commodities have been trading on CFTC-regulated exchanges for decades, and derivative contracts on mandatory emissions program instruments have been trading since 2005, the increasing prevalence of voluntary carbon credits (VCCs) has pushed the CFTC to work towards developing standards for the trading of financial instruments based on these VCCs.

In releasing its proposed guidance, the CFTC aims to promote integrity, transparency, liquidity, and price discovery in the markets for derivatives of such VCCs. It additionally aims to bolster the integrity of VCCs underlying the derivative contracts subject to CFTC jurisdiction.

As Chairman Rostin Behnam noted in his public statement on the proposed guidance, the issuance is “the most significant step of a financial regulatory to promote fundamental standards for high integrity VCCs.” Read more.

December brings flurry of Treasury activity against virtual currency services

By Eric Hall, David Stier, David Peyman, and Christian Ford

In the final days of November, the US Department of the Treasury decisively reasserted its intention to enforce the provisions of the Bank Secrecy Act, anti-money laundering (AML) requirements, and economic sanctions targeting the virtual currency sector and associated decentralized finance (Defi) and blockchain actors. We can expect to see more sanctions designations by Treasury, settlement agreements with sanctions violators, and Department of Justice-led prosecutions. Read more.

Exploring the ethical implications of digital assets, blockchain technology, and smart contracts in legal practice
A spotlight on client confidentiality, competence, and duties of care

By Deanna Reitman, Margo Tank, Liz Caires , Billy LaFortune , Brandon DeLano , and Amanda Swenson

The emergence of digital assets based on advanced technologies such as blockchains and smart contracts presents new ethical implications for the legal industry. The transformative nature of digital assets as driving technological advancement challenges established norms and raises significant questions for lawyers working with these technologies.

Lawyers are encouraged to educate themselves on the innovations related to digital assets and understand how these technologies may affect their professional practice. This alert discusses the emerging market of digital assets, and how the technologies utilized to create and manage these assets, affect lawyers’ ethical obligations and the evolving regulatory frameworks applicable to these assets. Read more.

STATUTORY AND AGENCY DEVELOPMENTS

FEDERAL DEVELOPMENTS

Commodities

Commissioner Johnson emphasizes compliance to Blockchain Association. On November 30, CFTC Commissioner Kristin Johnson joined other high-ranking federal officials at the Blockchain Association Policy Summit. In her remarks, Commissioner Johnson touted the CFTC’s long pattern of prosecuting fraudsters and scammers in the cryptocurrency space. These prosecutions, she said, were distinct from actions the agency had taken against large, decentralized finance (DeFi) platforms. In those cases, the allegations did not involve fraud or similar conduct, but were rather failures of compliance and registration. Commissioner Johnson told her audience that both types of enforcement are core to CFTC’s enforcement agenda. In particular, she emphasized the importance of strong corporate governance at large firms in the cryptocurrency space to prevent the high-profile collapses that characterized 2022 and 2023.
Commissioner Goldsmith Romero warns of affiliate risk in virtual currency service providers. On November 16, CFTC Commissioner Christy Goldsmith Romero delivered remarks at the Consumer Federation of America’s Financial Services Conference. Her remarks centered around “financial stability is foundational for consumer protection” – a theme that she illustrated through a discussion of conflicts of interest and affiliate risk in the cryptocurrency industry. She warned of an increasing trend of virtual asset service providers “vertically integrating” to act as an exchange, broker, and clearinghouse all in one. This trend, in her view, threatens instability through conflicts of interest that often remained undiscovered until it is too late. As a solution, she called for a “same risk, same regulatory outcome” approach that would apply “tried and tested market structures” to digital asset markets.

Department of Justice

DAG Miller stresses importance of corporate compliance to national security. On November 28, Principal Associate Deputy Attorney General Marshall Miller delivered remarks at the New York City Bar Association’s International White Collar Crime Symposium. His remarks addressed the “intersection of corporate crime and national security” and specifically highlighted cyber and crypto-related enforcement actions including operations that disrupted mixers which enable criminals to launder more than $4 billion in illicit finance. He also touted the Department’s efforts to promote “good corporate compliance” through the Voluntary Self-Disclosure (VSD) policy. According to Miller, DOJ is now working closely with virtual asset companies to achieve prompt reporting of cyber incidents, enabling DOJ to seize crypto assets more quickly.
Former crypto prosecutor addresses move to national security. On December 1, Deputy Assistant Attorney General Eun Young Choi delivered the keynote address at the 5th Nation Forum on the Foreign Agents Registration Act. Her remarks centered around her recent move from the National Cryptocurrency Enforcement Team (NCET) to the National Security Division. She noted the similarities in the offices: Among other things, both offices seek transparency and aim to mitigate the risks of obfuscation. NCET’s target is not lawful use of cryptocurrency, she told the audience, but the “problem of hidden actors” who use cryptocurrency to “sidestep anti-money laundering and know-your-customer requirements of financial institutions.”

Department of Treasury

Secretary Yellen acknowledges “small” role of crypto in fentanyl trade. On December 6, Treasury Secretary Janet Yellen spoke about the Biden Administration’s efforts to cooperate with Mexico to counter the trafficking of illicit drugs, including fentanyl, into the US. Her remarks addressed the fentanyl epidemic in the US and lengths that drug trafficking organization go to launder their proceeds. According to Secretary Yellen, traffickers generate billions of dollars every year but still hold only “small amounts” in “digital assets.”
EU-US financial regulatory forum issues closing remarks. On December 8, members of the US Department of Treasury and other federal agencies, including the SEC and CFPB, attended the EU-US Financial Regulatory Forum in Washington, DC. Following the forum, the participants issued a joint statement that, among other things, described multilateral work to address “operation resilience in digital finance” including Europe’s regulatory and technical development under the Digital Operation Resilience Act (DORA) and US regulators enforcement efforts. Representatives from the European Commission also shared an update on the EU’s digital euro proposal, which has moved to the “preparation phase.”

IRS

IRS CI emphasizes cryptocurrency investigations in annual report. On December 4, the IRS Criminal Investigations division issued its FY23 Annual Report. According to the press release announcing the report, IRS used data analytics to support over 1,300 questionable refund and return preparer investigations. IRS reported an increase in the use of virtual currencies in the mainstream economy with a commensurate rise in investigations of “unreported income resulting from failure to report capital gains from the sale of cryptocurrency, income earned from mining cryptocurrency, or income received in the form of cryptocurrency, such as wages, rental income, and gambling winnings.” The report also emphasized IRS efforts to join forces with other federal agencies to tackle darknet and illicit finance activities.

STATE DEVELOPMENTS

California DFPI invites comments on Digital Financial Assets Law. On November 20, the California Department of Financial Protection and Innovation (DFPI) announced it is seeking comment on a proposed rule implementing the Digital Financial Assets Law (DFAL), which was signed into law on October 13, 2023. DFAL would require licensure for certain virtual asset service providers, much like BitLicenses in New York. DFPI seeks comments on requirements for licensure, the application process, and stablecoin approval. Interested parties have until January 12, 2023 to submit comments here.
New York DFS adopts new regulatory guidance regarding listing of virtual currencies. On November 15, the New York State Department of Financial Services (DFS) announced the issuance of guidance adopting enhanced requirements for coin-listing and delisting policies of DFS-regulated virtual currency entities. This new guidance updates the prior framework issued by the DFS in 2020.

ENFORCEMENT ACTIONS AND LITIGATION

FEDERAL

Virtual currency

DOJ charges pair of Ponzi scammers in California and Australia. On December 12, the Department of Justice announced charges of two men – one from Australia, the other from California – for their alleged operation of a cryptocurrency Ponzi scheme through which victims lost more than $25 million. The men induced victims with promises of a trading program that purportedly used artificial intelligence to trade victims’ investment in the cryptocurrency market to generate enormous returns. According to the indictment, the scheme went by many names, including Circle Society, Bitcoin Wealth Management, Omicron Trust, Mind Capital, and Cloud9Capital. In reality, the men used the funds for lavish personal expenses and obscured their proceeds through virtual currency mixers and “blockchain hopping.”
Bitzlato founder charged with running illicit finance conduit pleads guilty. On December 6, the US Attorney’s Office for the Eastern District of New York obtained a guilty plea from Anatoly Legkodymov, the Russian founder of cryptocurrency exchange Bitzlato. According to the announcement, Bitzlato served as a primary conduit for dark-market buyers and sellers and provided a safe harbor for cyber criminals. As part of the plea agreement, Legkodymov agreed to shutter Bitzlato and forfeit nearly $23 million in seized assets. Prosecutors accused Bitzlato of operating a “no questions asked” clearinghouse for criminals out of its Hong Kong headquarters. The company’s largest customer was allegedly Hydra Market, an online market for narcotics, stolen financial information, fraudulent identification information, and money laundering services. Hydra Market users routed more than $700 million of virtual currency through Bitzlato despite many alleged warnings that the exchange was harboring proceeds of illicit activities.
Identity thief fraudster sentenced to 63 months in SDNY. On November 29, the US Attorney’s Office for the Southern District of New York announced that Esteban Cabrera Da Corte had been sentenced to 63 months in prison in connection with his scheme to steal $63 million in virtual currency using stolen identities and other personal identifying information. According to the indictment, in 2020, Cabrera defrauded banks and a cryptocurrency exchange by falsely claiming their purchases of more than $4 million of virtual currency had failed. In addition to his prison sentence, Cabrera was ordered to pay restitution of more than $3.5 million.

STATE

Securities

NYAG announces settlement with KuCoin. On December 12, New York Attorney General Letitia James announced a $22 million settlement with centralized virtual currency exchange KuCoin. The New York AG had accused KuCoin of failing to register as a securities and commodities broker-dealer. According to the announcement, an investigator with the Office of the AG in New York was able to create an account on KuCoin and purchase “popular tokens like ETH, LUNA, and UST” – two of which have fallen out of “popular” use after the collapse of Terra Labs more than a year and half ago. The AG alleged that these tokens were securities and commodities, but KuCoin had failed to register as a securities and commodity broker in New York. Under the consent order, KuCoin is prohibited from operating in New York and will be required to $5.3 million to the state and refund customers $16.7 million.
California DPFI joins coalition of states in enforcement action against GSPartners. On November 16, the DFPI announced it had issued an order against GSB Gold Standard Bank Ltd., Swiss Valorem Bank Ltd., and GSB Gold Standard Corporation AG (collectively, GSPartners) for violating California securities laws. According to the order, GSPartners sold unqualified securities in the form of crypto assets using misleading representations to investors. The order alleges that GSPartners used a multilevel marketing scheme to sell “MetaCertificates” which the firm claimed were investments in real-world industries and the foreign exchange market.

SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS

Société Générale announces MICA-compliant stable coin. On December 5, France’s third-largest bank Société Générale announced plans to issue its own stablecoin for use by the general public. The euro-backed coin would be one of the first coins to comply with the EU’s Regulation on Markets in Crypto-Assets (MICA). The token will be called EUR CoinVertible and will be available on Luxembourg-based exchange Bitstamp.
IOSCO publishes final recommendations for digital asset regulation. On November 16, the International Organization of Securities Commissions (IOSCO), which set the global standard for securities market regulators, published finalized policy recommendations for crypto and digital asset markets. According to the announcement, the recommendations cover six key areas: (1) Conflicts of interest arising from vertical integration of activities and functions; (2) Market manipulation, insider trading, and fraud; (3) Custody and client asset protection; (4) Cross-border risks and regulatory cooperation; (5) Operational and technological risk; and (6) Retail distribution.
OECD nations issue joint statement on crypto-asset reporting framework. On November 10, a joint statement by OECD nations embraced the Crypto-Asset Reporting Framework (CARF) which it said would “ensure tax compliance and clamp down on tax evasion” by virtual asset users. The statement expressed each country’s commitment to “swiftly transposing CARK into domestic law and activating exchange agreements” by 2027.

News from DLA Piper

The Financial Times recognizes DLA Piper as one of the Most Innovative Law Firms in North America.
The Legal 500 ranks DLA Piper Tier 1 in FinTech: Crypto. DLA Piper was also ranked in Tier 2 for FinTech, and Margo Tank was ranked as a "Leading Individual."
Chambers FinTech Legal ranks DLA Piper in all four categories including Band 2 for Blockchain and Digital Assets, with Margo Tank individually recognized in Band 3 in the Blockchain and Digital Assets and Payments & Lending areas.
DLA Piper’s Commodities, Digital Assets, and Carbon Compliance and Enforcement team draws on decades of collective experience in the commodities and securities industry to help companies navigate new and complex commodities enforcement matters, including those related to agriculture, metals, energy, digital assets, and carbon/sustainable commodities, among others.

RECENT AND UPCOMING EVENTS

American Bar Association Futures & Derivatives Law Committee. On January 26, Deanna Reitman will present at the winter meeting of the ABA’s Futures & Derivatives Law Committee. Her panel will discuss ethical considerations in digital assets and AI.

DLA Piper attorneys presented at the following:

AI ChatRoom, a DLA Piper video series hosted by Danny Tobey covering various topics in AI.
Small Splash, Large Ripple. Our latest webinar held on November 16 covers the ripple effects stemming from the banking failures earlier this year, including emerging risks and predictions of what is to come in 2024. Speakers Rich Hans, Isabelle Ord, Margo Tank, Whitney Cloud, and Nicolas Véron (Senior Fellow, Peterson Institute for International Economics) shared their insight surrounding the business, regulatory, and litigation activities that their clients are facing in this discussion relevant to all financial services companies.
Global Digital Forum – Adapting to a digital future for real world assets and content, September 28, 2023, with Margo Tank, panelist on "The regulatory outlook for real world assets," and James Williams, panelist on “The opportunities and challenges created by a new US framework.”

PUBLICATIONS

Cryptocurrency and Digital Asset Regulation, published by the American Bar Association and co-edited by Deborah Meshulam and Michael Fluhr, includes chapters by Meshulam, Fluhr, and Margo Tank