27 June 2024 • 16 minute read

Blockchain and Digital Assets News and Trends - June 2024

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

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.

STATUTORY AND AGENCY DEVELOPMENTS

FEDERAL DEVELOPMENTS

SEC

SEC closes office handling botched Debt Box case. On June 4, the SEC announced it would shutter its Salt Lake Regional Office later this year which was one of the agency’s 11 regional offices around the country. The press release announcing the closure referenced “significant attrition” recently as a factor in the decision which likely referred to the resignations of three SEC personnel in April and May following their involvement in the Debt Box case. In August 2023, the Salt Lake City Office brought an enforcement action against the crypto platform Debt Box, obtaining a temporary asset freeze and restraining order. After discovering that the SEC’s filings contained material misrepresentations, the court sanctioned the agency for bad faith conduct and ordered it to pay Debt Box’s attorneys’ fees of more than $1.8 million. We previously covered Debt Box in our August 2023, March 2024, and April 2024 editions.

Head of Crypto Asset and Cyber Unit resigns. On June 17, the head of the SEC’s Crypto Asset and Cyber Unit announced on LinkedIn that he had stepped down from the agency after nearly nine years of service. The announcement comes at a critical moment in the SEC’s broader crusade against non-compliant crypto asset platforms.

SEC Commissioner Peirce commends digital securities sandbox consultation paper. On May 29, SEC Commissioner Hester Peirce published a statement on a joint proposal by the Bank of England and the UK’s Financial Conduct Authority to create a digital securities sandbox – an environment for firms to test new technologies or products in the financial market under relaxed or modified regulations. Peirce’s statement suggests that the US and the UK should create a cross-border sandbox that would allow firms to operate in both countries under the same rules. She argues that this would benefit both regulators and the public by fostering innovation, learning, and competition in the financial sector. Peirce also proposes a micro-innovation sandbox for the US, which would permit firms to choose their own regulatory conditions for certain activities, such as using blockchain technology to issue, trade, and settle securities. The statement explains how this micro-innovation sandbox would work and invites public feedback on its design. Commissioner Peirce asserted that this sandbox would help firms overcome regulatory barriers and provide useful data for the US regulator. She further expressed that such a sandbox would complement the cross-border sandbox by allowing firms to follow the UK rules in the US if they wish.

FDIC

FDIC publishes 2024 risk review identifying crypto-asset risk as one of five categories of banking risk seen in 2023. On May 22, the Federal Deposit Insurance Corporation (FDIC) published its 2024 Risk Review, which provides an overview of banking risks in 2023 in five broad categories including crypto-asset risks. The Review’s crypto-asset risks section discusses the FDIC’s approach to understanding and evaluating crypto-asset-related markets and activities. It highlights the FDIC’s updated regulation on the use of the official FDIC logo and the definition of non-deposit products to include crypto-assets, which aims to prevent consumer confusion and deception about the insurance status of crypto-assets. The Review also mentions the FDIC’s enforcement actions against persons or entities that make false or misleading claims about deposit insurance or misuse the FDIC’s name or logo. Moreover, it refers to the interagency statements issued by the FDIC, Federal Reserve, and Office of the Comptroller of Currency that remind banking organizations of their obligations and expectations when engaging in crypto-asset-related activities, such as ensuring safety and soundness, legal compliance, and consumer protection. Finally, the Review describes the FDIC’s supervisory processes and monitoring activities to assess the level and nature of crypto-asset-related activities by supervised institutions and provide case-specific feedback.

CFTC

CFTC enforcement director identifies three trends in CFTC crypto enforcement. On May 23, in remarks delivered to the City Bar White Collar Institute, CFTC Enforcement Director Ian McGinley commented on trends in the CFTC’s recent crypto-related enforcement actions. Beyond fraud and manipulation, which McGinley identified as the primary theme in recent cases, he called out three growing priorities: (1) anti-evasion: preventing firms from using tactics to avoid US. regulations; (2) third-party intermediary liability: holding firms accountable for connecting US customers with unregistered platforms, like last month’s case against Falcon Labs; and (3) KYC/AML compliance: ensuring registered firms comply with customer identification and anti-money laundering rules, as in the actions against Ooki DAO and other DeFi platforms.

STATE DEVELOPMENTS

Money transmission

Pennsylvania reverses guidance, requires transmitters of virtual currency to get licensed. On April 20, the Pennsylvania Department of Banking and Securities announced it had revised its definition of “money” to include virtual currencies for the first time. The shift would reverse prior guidance that transmitters of virtual currencies do not have to get licenses. Under the new definition, these services would be considered money transmitters which are required to be licensed under Pennsylvania law. The new definition is set to take effect October 15, 2024.

Virtual currency

NYDFS issues new guidance regarding virtual currency customer service requirements. On May 30, the New York State Department of Financial Services (NYDFS) issued guidance advising virtual currency entities (VCEs) to maintain and implement effective policies and procedures to promptly address customer service requests and complaints. The guidance requires VCEs to collect relevant data so that the DFS can assess whether they are resolving customer service requests and complaints in a timely and fair manner.

ENFORCEMENT ACTIONS AND LITIGATION

FEDERAL

Money laundering

Promoter in crypto Ponzi scheme targeting Spanish-speaking communities pleads guilty. On June 5, the US Attorney’s Office for the Southern District of New York announced that Juan Tacuri, a “senior promoter” in the crypto Ponzi scheme known as Forcount had pleaded guilty to conspiracy to commit wire fraud. The global Forcount scheme targeted Spanish-speaking communities with a purported cryptocurrency mining and trading operation that promised victims they would double their investment in six months from the scheme’s trading and mining operations. In reality, there were no trading or mining operations, and investor funds were used to enrich promoters like Tacuri who traveled the world showing off his luxurious lifestyle. Victims were shown their supposed profits on a Forcount website, but they were never actually able to withdraw any funds. When victims complained, Forcount promoters started selling a propriety cryptocurrency called Mindexcoin which ended up being worthless. Tacuri pleaded guilty to wire fraud and agreed to forfeit $4 million in victims’ funds and real estate he had purchased with money from the scheme.

NFTs

UK nationals charged in “Evolved Apes” NFT scam. On June 6, the US Attorney’s Office for the Southern District of New York announced the unsealing of an indictment against three 23-year-old men from the United Kingdom who were alleged involved in a scheme to defraud purchasers of the “Evolved Apes” NFT collection. According to the indictment, the men allegedly lied about the development of a video game tie-in with the NFTs in order to pump the price of the collection while surreptitiously transferring the proceeds from sales of the NFTs to their own wallets. The men finally executed a “rug pull,” abruptly abandoning the project and laundering their proceeds through multiple wallets. Each defendant is charged with one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering, each carrying a 20-year maximum sentence.

Securities

Terraform and founder Do Kwon ordered to pay $4.6 billion. On June 13, the SEC announced that Terraform Labs and its founder Do Kwon had agreed to pay $4.5 billion follow a jury trial in April in which a unanimous jury found them liable for fraud arising from spectacular collapse of the “algorithmic stablecoin” UST which depegged from the value of a US dollar in May 2022 and erased nearly $40 billion in market value in a matter of days. Terraform has agreed to pay more than $3.5 billion in disgorgement, $466 million in prejudgment interest, and a $420 million civil penalty, while Kwon will be personally liable for more than $110 million in disgorgement and more than $14 million in prejudgment interest and an $80 million civil penalty. The settlement concludes a lawsuit initiated in February 16, 2023 which we covered in our January 2024 and April 2024 editions.

Colorado man pleads guilty in fake MEV bot scam. On June 21, the US Attorney’s Office for the Eastern District of Virginia announced that Colorado resident Robert Wesley Robb had pleaded guilty to a scheme involving online advertisements for his Maximal Extractable Value (MEV) cryptocurrency trading bot, referring to a system of automatically exploiting a vulnerability in the way blockchains sequence transactions to realize profits. Robb apparently never set up an MEV bot, however, instead using investor funds to pay for lavish vacations, cars, and luxury goods. In total, the scheme caused losses totaling more than $2.2 million.

SEC discloses closure of its investigation into Consensys products. On June 20, the Ethereum-based software company Consensys, maker of the popular Metamask cryptocurrency wallet, announced it had closed its investigation of the company’s dealings in ether. Consensys reported the SEC’s letter responded to a June 7 letter Consensys sent the SEC’s Enforcement Division asking it to confirm that recent ETH ETP approvals, which implied that the agency viewed ether as a commodity, could be taken to mean that the enforcement division would close its investigation into the company’s use of the popular cryptocurrency. Consensys had previously sued SEC for declaratory relief to preempt a threatened enforcement action against the firm’s services, such as MetaMask Snaps and staking, on the theory that these features represented unregistered securities transactions. The SEC’s letter implied these applications may still run afoul of securities laws.

Virtual currency

Utah men indicted in unlicensed money transmission and crypto fraud case. On June 17, the US Attorney’s Office for the District of Utah announced charges against Brian Gary Sewell and Keen Lee Ellsworth, both of Utah for their alleged roles in an unlicensed money transmitting business that converted bulk cash into cryptocurrency. According to the press release, the two men used their respective entities to transmit more then $2.5 million via wire transfer and then convert the funds into cryptocurrency. The money allegedly came from investors hoping to profit from Sewell’s purported experience running a successful cryptocurrency fund.

Illicit finance

OFAC sanctions Russian national involved in crypto-based money laundering scheme. On June 12, the US Department of the Treasury’s Office of Foreign Asset Control (OFAC) announced sanctions against several Russian entities involved in financing Russia’s wartime economy. Among the sanctioned individuals was Andrey Dmitriyevich Sudakov, an employee of Russian state-owned gold producer Public Joint Stock Company Polyus (Polyus). According to OFAC, Sudakov orchestrated a multi-layered laundering scheme through which Russian-origin gold was sold to fiat and cryptocurrencies through numerous UAE and Hong Kong-based front companies.

STATE

Securities

Kentucky enters consent order with Plutus crypto platform. On June 12, the Kentucky Department of Financial Institutions was the latest state regulatory agency to enter a consent order with a group of companies known as Abra. The consent decree 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 April 2024 and July 2020 editions.

Texas halts fraudulent cloud crypto mining operation scheme. On May 28, the Texas State Securities Board announced it had issued an Emergency Cease and Desist Order to halt a fraudulent multi-level market scheme that purportedly offered investments in cloud mining cryptocurrency. The order exposed the use of fake images and videos and hired actors to promote the scheme on social media platforms. The Order also revealed that the scheme did not operate from Arkansas as claimed, but from India, and used a payment service that was restricted in the United States.

Texas orders digital gold vault scheme to cease and desist. On April 22, the Texas State Securities Board issued an Emergency Cease and Desist Order pursuant to the Texas Securities Act The Order names eight individuals and entities, among them Billionico Academy, Primus Liquidity Holding Ltd, and several others, for engaging in deceptive practices and for their involvement in offering unregistered securities through investments in a digital gold vault without proper registration. The Order alleges the investments were offered through a multilevel marketing scheme, which promised passive income and commissions for recruiting new investors. It demands that the respondents immediately stop selling any securities in Texas, cease acting as securities dealers or agents without registration, and stop any fraudulent activities related to securities offerings.

INDUSTRY DEVELOPMENTS

Cumberland secured New York BitLicense. On June 17, cryptocurrency trading firm Cumberland announced it had obtained a New York BitLicense, becoming the latest of only 33 firms authorized to operate a virtual currency business in New York and offer services to New Yorkers. Cumberland claimed to be one of the few “principal trading firms” to have secured such a license.

SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS

UK’s Financial Conduct Authority takes down £1 billion cryptoasset exchange. On June 20, the UK’s Financial Conduct Authority (FCA) announced it had raided the offices and arrested two individuals running an unnamed cryptocurrency exchange that allegedly handles more than £1 billion in virtual currency trades. According to the press release, the exchange had failed to register with the FCA and failed to comply with UK money laundering regulations.

IMF endorses Central Bank Digital Currencies for promoting financial inclusion in Middle East. On June 19, the International Monetary Fund announced the results of a survey of 19 central banks in the Middle East and Central Asia. The survey found that nearly two-thirds of the surveyed countries were exploring development of central bank digital currencies (CBDCs) and concluded that CBDCs, though not essential, can advance financial inclusion and lower the cost of financial services. More developed nations that participated in the survey also expressed optimism for using CBDCs to make domestic and cross-border payments more efficient. Among the surveyed countries, Saudi Arabia has already joined an experiment with the Bank of International Settlements to use CBDCs in international trade.

Italian government expands authority to surveille crypto markets. According to public reporting, on June 20, the government of Italy announced plans to develop new authorities to oversee digital asset markets as part of its effort to comply with the EU’s Markets in Crypto-Assets (MiCA) regulatory framework that we previously covered in our June 2023 edition. According to the draft policy, Italy will impose fine for insider trading and market manipulation schemes with fines maxing out at €5 million.

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. The panel covered enforcement developments and SEC policy on crypto assets.

PUBLICATIONS

David Stier, Emily Honsa Hicks, and Eric Hall co-authored the chapter on Anti-Money Laundering (AML), Know Your Customer (KYC), and the Bank Secrecy Act, and provided general editorial assistance on other chapters in the newly published book Banking [on] Blockchain: A Legal and Regulatory Primer, published by the American Bar Association. The book, a comprehensive guide to the legal and regulatory landscape surrounding the use of blockchain technology, decentralization, and digital assets within the financial services while offering guidance on how financial institutions may navigate the complex regulatory environment.
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.