1 May 2024 • 19 minute read

Blockchain and Digital Assets News and Trends - April 2024

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

Contributors:Dan Jewell Sam Gokarn-MillingtonSuhail Mayor

This monthly bulletin is designed 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

IRS seemingly ignores calls to narrow definition of broker in draft digital asset broker reporting form

By: Tom Geraghty and Kali McGuire

The IRS released has released a draft of Form 1099-DA (Digital Asset Proceeds From Broker Transactions) and draft instructions for the form. Form 1099-DA, when finalized, will be used for “brokers” to report certain digital asset transactions beginning in tax year 2025. Although draft Form 1099-DA was released (on April 19, 2024) without any commentary, the draft form suggests that Treasury and the IRS have not been swayed by public calls to narrow the definition of broker as provided for in recently proposed regulations. Read more.

STATUTORY AND AGENCY DEVELOPMENTS

FEDERAL DEVELOPMENTS

SEC

SEC enforcement director defends legitimacy of SEC’s approach to crypto. On April 3, Gurbir Grewal, Director of the SEC’s Division of Enforcement, delivered remarks at the Practising Law Institute’s annual SEC Speaks conference. The bulk of his comments aimed to defend the legitimacy of the Enforcement Division’s approach to cryptocurrency. Contrary to the widely held view among industry participants, Grewal said “the SEC has clearly and consistently applied Howey and its progeny to protect investors in the crypto space.” His remarks appeared to concede, however, that the agency has elected to regulate the digital assets through enforcement rather than clear rulemaking. He referred to “dozens of orders, complaints, and briefs” as the “public documents” that industry participants should use to guide their conduct. Grewal then paraphrased several arguments that defendants in various SEC enforcement action have made. He reduced these arguments to a “decade’s worth of verbal gymnastics” and appeared to question the very existence of the Supreme Court’s “major questions doctrine.” These remarks came on the heels of a Utah federal court’s imposition of sanctions against the SEC for “gross abuse” of power in the agency’s enforcement action against digital asset company DEBT Box, as reported in last month’s issue.

Lawmakers criticize SEC for permitting Prometheus to custody ETH. On March 26, more than 40 members of Congress from the House Financial Services Committee and the House Committee on Agriculture penned a letter to SEC Chairman Gary Gensler demanding an explanation for the agency’s decision to permit a subsidiary of Prometheum, Inc. to custody Ether. According to the letter, the subsidiary is registered with FINRA as a Special Purpose Broker-Dealer (SPBD), a classification that does not authorize it to custody non-securities. SEC’s decision would thus seem to indicate that Prometheus determined that Ether is a security and that SEC agrees with that determination. According to lawmakers, this determination conflicts with positions taken by the SEC and CFTC in the past and would imperil innovation across the blockchain industry.

Treasury

Treasury Deputy Secretary renews calls for enhanced oversight over cryptocurrency. On April 9, in testimony before the Senate Committee on Banking, House, and Urban Affairs, Deputy Treasury Secretary Wally Adeyamo raised alarms about the use of cryptocurrencies to finance terrorist organizations, transnational criminals, and rogue states. Though he acknowledged that “these actors today only use virtual assets for a fraction of their illicit activity” and “terrorists prefer to use traditional financial products and services,” he cited recent examples such as the Islamic Revolutionary Guard Corps’ sending cryptocurrencies to support terrorist organizations in Gaza and Russian use of stablecoins to circumvent US sanctions. Adeyamo then advocated for “an oversight and enforcement regime” that would employ a “secondary sanctions tool” to target foreign digital asset providers and also expanding the Treasury’s authority to explicitly cover “key players and core activities of the digital asset ecosystem.” He specifically highlighted the need for tools and authority to regulate “dollar-based digital asset” In Treasury’s view, these reforms would protect both national security and the nation’s economy.

Senators introduce bill establishing regulatory framework for stablecoins. On April 17, US Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) announced the Lummis-Gillibrand Payment Stablecoin Act. The bipartisan bill attempts to create a clear regulatory framework for payment stablecoins. Key aspects of the bill include (1) protection for consumers by requiring stablecoin issuers to maintain one-to-one reserves and prohibiting unbacked, algorithmic stablecoins; (2) prevention of illicit or unauthorized use of stablecoins by issuers and users; and (3) creation of federal and state regulatory regimes for stablecoin issuers that preserve the dual banking system. According to Senator Gillibrand, a stablecoin regulatory framework is critical to maintain the US dollar’s dominance, protect consumers, and address money laundering and illicit finance.

NFTs

USPTO and Copyright offices publish report to Congress on NFTs. On March 12, the United States Patent and Trademark Office (USPTO) and the US Copyright Office delivered a 112-page report to Congress titled Non-Fungible Tokens and Intellectual Property. The report offers an introduction to NFT technology and explores the relationship between NFTs and copyrights, trademarks, and patents. In general, the report finds that copyright, trademark, and patent issues applied to NFTs are familiar problems in the age of digital and online content. For copyrights, the report expressed skepticism that NFTs offer meaningful value for copyright record-keeping. But the report did find that NFTs offer a real opportunity for digital artists to be paid for their works, even downstream sales, but qualified that such opportunities depend on enforcement from NFT marketplaces. Examining trademarks, the report expressed a need for more guidance on obtaining and enforcing trademark protection and indicated that NFTs with immutable artwork or other permanent metadata may present specific issue for trademark enforcement. Finally, the report found that patents may benefit from being stored, transferred, and licensed on-chain, but that further guidance may be required.

ENFORCEMENT ACTIONS AND LITIGATION

FEDERAL

Money transmission

Virtual currency exchanger sentenced for operating an unlicensed money transmitting business that handled drug proceeds. On April 2, the US Attorney’s Office for the Southern District of Florida and the IRS’s Criminal Investigation division announced that Miami resident Raul Rodriguez had been sentenced to 57 months in connection with his business of charging fees to swap cash into bitcoin and other digital currencies through his online exchange platform. Rodriguez was found guilty of operating an unlicensed and unregistered money transmitting business in violation of United States Department of the Treasury rules requiring virtual currency exchangers to register with the Secretary of the Treasury. His clients included a convicted drug trafficker and a professional money launderer. Rodriguez exchanged more than $5 million in digital currencies from 2016 to 2022 and, in addition to his sentence, will be ordered to pay the same amount in a forfeiture money judgment.

Securities

SEC charges Geosyn crypto mining company with unregistered and fraudulent securities offering. On April 24, the SEC announced charges against Geosyn Mining, LLC, a Texas-based crypto asset mining and hosting company, and its co-founders, Caleb Ward and Jeremy McNutt, for engaging in an unregistered and fraudulent securities offering. The complaint alleges that the defendants raised $5.6 million from investors by promising to purchase and operate crypto mining machines and distribute the proceeds to more than 60 investors. Though the defendants did run mining equipment, they allegedly lied about their favorable contracts with electricity providers and never provided specific services they claimed to offer in marketing materials. Ward and McNutt are individually accused of appropriating more than a million dollars for their personal use.

SEC issues Wells Notice to Uniswap. In a tweet on April 10, Uniswap CEO Hayden Adams announced that the popular Ethereum-based decentralized exchange had received a “Wells Notice” from the SEC. Wells Notices are preliminary warnings the SEC issues when it is considering bringing an enforcement action. According to a press release from the company, Uniswap’s Wells Notice focuses on allegations that Uniswap operated as an unregistered broker-dealer and exchange. It is not clear whether Uniswap’s UNI token is also being investigated as an unregistered security. The Notice, while preliminary, may have a significant impact on DeFi. Among other implications, the SEC’s conclusion that DeFi protocols are “exchanges” threatens Reg S as a viable registration exemption for foreign token issuers. Issuers relying on Reg S would need to include DeFi activity in their calculation of Substantial US Market Interest, making it harder to meet the requirements for exemption for registration under Reg S.

SEC secures jury verdict against Terraform Labs and founder Do Kwon. On April 5, the SEC announced that a jury in the US District Court for the Southern District of New York had found Terraform Labs and its founder Do Kwon liable for defrauding investors in crypto asset securities. Specifically, the defendants deceived investors about the stability of their algorithmic stablecoin Terra USD and also misled investors about a payment app they developed that purportedly used Terraform’s blockchain. The verdict is in addition the court’s earlier finding that these defendants were liable for offering securities in violation of the Securities Act’s registration requirements. For more on the case, see our January 11 Insight article on the court’s summary judgment ruling.

Virtual currency

DOJ secures conviction in first crypto market manipulation case. On April 18, the US Attorney’s Office for the Southern District of New York announced that a jury had convicted Avraham Eisenberg for defrauding cryptocurrency exchange Mango Markets and its investors. The scheme involved open-market trades and is the first conviction of its kind involving a cryptocurrency exchange. As previously reported in our January 2023 edition, Eisenberg found a way to artificially manipulate the price of certain perpetual futures contracts, netting himself $110 million in cryptocurrency. Sentencing is scheduled for July 2024. Eisenberg faces a maximum of 10 years on his conviction for commodities fraud, an additional 10 years on his conviction for commodities manipulation, and up to 20 years for his conviction for wire fraud.

DEX hacker sentenced to three years in prison for $12 million theft. On April 12, the US Attorney’s Office for the Southern District of New York announced that Shakeeb Ahmed had been sentence to three years in prison for perpetrating attacks on two decentralized cryptocurrency exchanges (DEXes). The hacks occurred in 2022 when Ahmed generated fake pricing data to extract more than $12 million from the DEXes. Ahmed then laundered the virtual currency by swapping it from the Solana blockchain to Ethereum and later Monero, an anonymized cryptocurrency that is notoriously difficult to track. In addition to his prison sentence, Ahmed was ordered to forfeit $12.3 million and pay restitution of more than $5 million. For more on the prosecution, see our January 2024 edition.

DOJ indicts cloud computing hijacker who mined nearly $1 million in the cloud. On April15, the US Attorney’s Office for the Eastern District of New York announced an indictment against Charles O. Parks III for allegedly defrauding two prominent cloud computing companies out of $3.5 million worth of compute resources so that he could mine cryptocurrency worth nearly $1 million. The allegations, which the indictment calls “cryptojacking,” include wire fraud, money laundering, and engaging in unlawful monetary transactions. To perpetrate the scheme, Parks allegedly created several fake accounts and corporate identities to obtain compute resources that he never paid for. Parks then laundered the money through various blockchains and, among other things, an NFT marketplace.

Sanctions

Treasury sanctions Russian virtual asset service providers. On March 25, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions against 13 entities and 2 individuals who were developing virtual asset services that enable users to evade US sanctions. The designated entities include, among others, B-Crypto, which had partnered with an OFAC-sanctioned Russian bank to facilitate cross-border virtual currency transactions; Masterchain, which had tokenized financial assets on behalf of OFAC-designated Russian banks; Laitkhaus, which had transferred and exchanged digital assets with sanctioned Russian banks; Atomaiz, which had tokenized precious metals and diamonds for Russian companies; Veb3 Tekhnologii, which provided blockchain solutions to Russian companies including sanctioned Russian banks; and Bitpapa which offered a virtual currency exchange to Russian nationals and conducted millions of dollars of transaction with OFAC-designated entities Hydra Market and Garantex. The OFAC designations mean all assets of the entities in the control of any US persons must now be blocked and reported to OFAC. In addition, any foreign financial institutions that transact with the entities run the risk of being sanctioned themselves. US citizens are prohibited from transacting with these entities too.

Treasury sanctions Hizballah virtual asset service provider. On March 26, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions against several entities involved in facilitating financial transactions for the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF), the Houthis, and Hizballah. Among them was Lebanon-based money exchanger Tawfiq Muhammad Sa’id al-Law (al-Law) which provided Hizballah with digital wallets to receive funds from IRGC-QF commodity sales and conduct cryptocurrency transfers on behalf of a sanction Syrian company. Al-Law also conducted cryptocurrency transfers for sanctioned Hizballah officials. The OFAC designations mean US persons are prohibits from transacting with the entities, and all assets of the entities in the control of any US persons must now be blocked and reported to OFAC. In addition, any foreign financial institutions that transact with the entities run the risk of being sanctioned themselves.

Anti-money laundering

DOJ arrests founders of cryptocurrency mixing service Samourai wallet. On April 24, the US Attorney’s Office for the Southern District of New York announced charges against Keonne Rodriguez and William Lonergan Hill, the US-citizen co-founders of the cryptocurrency mixing service Samourai Wallet. According to the indictment, the FBI and IRS’s Criminal Investigation division allegedly discovered that Samourai had transmitted $2 billion worth of transactions over nearly 10 years, of which the government alleged more than $100 million were laundered criminal proceeds. The indictment alleges that Rodriguez and Hill marketed Samourai as a privacy service but knew that it was a haven for criminal proceeds from darkweb markets such as Hydra Market and various fraudulent schemes. The indictment included a number of especially brazen tweets and direct messages that appeared to welcome sanctioned Russian users to the platform and express pride that Samourai was able to support darkweb markets. Each founder is charged with one count of conspiracy to commit money laundering and one count of conspiracy to operate an unlicensed money transmitting business.

STATE

Securities

Oregon settles charges against Plutus for Abra crypto products. On March 27, the Oregon Division of Financial Regulation (DFR) announced it had settled charges against Plutus Financial Holdings and its affiliated companies for violating state securities regulations with its Abra Boost and Abra Earn products. The state had alleged that the products were “interest-bearing cryptocurrency depository products.” Through them, Plutus permitted accredited investors to deposit digital assets that were in turn lent to institutional borrowers. The settlement requires Plutus to notify Abra users that the platform is shutting down and pay an administrative penalty if it fails to return all assets to consumers before the end of the month. To read more about Abra and the SEC’s related lawsuit, see our July 2020 edition.

Virtual currency

Brooklyn DA disrupts national “pig butchering” scam. On April 4, the Brooklyn District Attorney’s Virtual Currency Unit announced it had disrupted a so-called pig butchering operation that defrauded people from across the United States of more than a million dollars. Pig butchering refers to the practice of engaging unsuspecting victims online with promises of romance or riches, gaining their trust and then steering them toward fake cryptocurrency investments. In Brooklyn, the scams appeared to specifically target Chinese and Russian communities. To disrupt the scams, the DA’s office seized more than 20 active domains hosting fake cryptocurrency investments.

SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS

English High Court grants fraud victim right to recover crypto proceeds in anonymous wallets. A recent decision by the High Court of England and Wales affirmed the Court’s willingness to treat crypto currency as property while relaxing requirements that victims identify the perpetrator. In Tippawan Boonyaem v Persons Unknown Category (A) & Ors [2023] EWCH 3180 (Comm), the English court granted summary judgment on a victim’s proprietary claims to the traceable proceeds of scheme in which she was defrauded of more than $425,000 USDT. The Court permitted the claimant to identify the fraudster by their wallet address, demonstrating a degree of flexibility where cryptocurrency is involves. Read more here.

Singapore monetary authority amends rules to require user protections and stability standards on digital payment tokens. On April 2, the Monetary Authority of Singapore (MAS) announced amendments to the Payment Services Act to expand its regulatory scope over certain payment services and impose user protection requirements on digital payment token (DPT) service providers. The amendments enable MAS to impose anti-money laundering and countering terrorist financing requirements on DPT providers. The amendments also expand MAS’s authority to regulate (i) provision of custodial services for DPTs; (ii) facilitation of DPT transmissions between accounts and the exchange of DPTs; and (iii) facilitation of DPT exchanges and cross-border money transfers internationally, even where DPTs are not accepted or received in Singapore. These amendments in October 2024 after which non-compliant entities will be required to cease their activities.

Bank for International Settlement announces project to experiment with tokenized commercial bank deposits. On April 3, the Bank for International Settlement (BIS), an international financial organization that coordinates between central banks around the globe, announced Project Agorá, which it describes as a public-private initiative between several central banks to test how tokenized bank deposits could enhance the efficiency of the international monetary system. The project is part of the unified ledger concept the BIS has proposed to overcome structural inefficiencies in cross-border settlement. Participants include the central banks of France, Japan, Korea, Mexico, Switzerland, England, and New York.

Bank of International Settlements publishes report on stablecoin stability. In April, the Bank for International Settlement (BIS), an international financial organization that coordinates between central banks around the globe, published a report assessing regulatory responses to issuers of fiat-backed stablecoins. The report discusses various risks of fiat-backed stablecoins, including their ability to maintain parity to fiat currencies and their use in illicit activity risks. In the report, BIS’s Financial Stability Institute compares regulatory frameworks in 11 jurisdictions across seven “geographically diverse” regions to identify emerging trends and commonalities. According to the report “[s]tandard-setting bodies and international organiations, including the International Monetary Fund (IMF), the Financial Stability Board (FSB) and the Financial Action Task Force (FATF), are working to achieve a consistent policy response.”

World Economic Forum report calls for central banks to embrace wholesale CBDCs. On April 16, the World Economic Forum published a report on wholesale central bank digital currencies (wCBDCs) which the Forum claims could “improve the efficiency, security and inclusivity of the financial system.” WCBCS are tokens backed by central banks that are made available only to financial institutions. Their primary function is to streamline financial transactions between banks such as interbank settlements, buying and selling government bonds, or other large-value transactions. The report calls for “deep public-private collaboration” to develop wCBDC capabilities among banks and world governments.

DLA Piper news

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 & 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

DLA Piper attorneys presented at the following:

On April 5, David Stier, Vice Chair of the ABA’s Banking Law Committee – Bank Secrecy Act and Anti-Money Laundering subcommittee, spoke on a panel titled “Cryptocurrency & Illicit Finance: Risk Mitigation Strategies” at the ABA’s Business Law Section Spring 2024 meeting in Orlando, Florida.
On April 10, Eric Forni spoke on panel titled “Hot Topics in SEC and DOJ Enforcement” in Miami, Florida. The panel covered enforcement developments and SEC policy on crypto assets.