Blockchain and Digital Assets News and Trends

This is our tenth monthly bulletin for 2022, aiming to help companies identify important and significant 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 will be primarily on the use of blockchain and or 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

OECD releases finalized global tax reporting framework for crypto-assets

By: Tom Geraghty and Kali McGuire

The Organization for Economic Cooperation and Development (OECD) has published the final Crypto-Asset Reporting Framework (CARF) for the automatic exchange of information between countries on crypto-assets.

The final CARF, released on October 10, 2022, generally narrows the definition of covered assets, provides a final de minimis threshold for retail payment reporting, and provides some guidance on valuation. Read more.

White House releases framework for responsible development of digital assets

The White House recently announced release of a "First-Ever Comprehensive Framework For Responsible Development of Digital Assets." This framework referenced a series of nine reports issued in response to President Biden's Executive Order on Ensuring the Responsible Development of Digital Assets.

According to the announcement, these reports collectively "articulate a clear framework for responsible digital asset development and pave the way for further action at home and abroad." The announcement includes legislative proposals and commitments for future reports, as well as describes additional actions to be taken by the Biden Administration, including:

• encouraging regulators " to aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space" and "redouble … efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices" and
• considering agency recommendations to "create a federal framework to regulate nonbank payment providers" and evaluate "whether to call upon Congress to amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers—including digital asset exchanges and nonfungible token (NFT) platforms."

These Insight articles examine three key aspects of the Executive Order:

• In overseeing digital assets, the CFTC should use its existing authority, White House fact sheet says
• Commerce Department lays out US path to global leadership on digital assets
• Responding to Biden Executive Order, OSTP report addresses climate and energy implications of digital assets and blockchain technology

For direct access to the eight reports which have released to date, please click the links below. We are working on analyses of the additional reports and will release the analyses as they become available.

• Crypto-Assets: Implications for Consumers, Investors, and Businesses issued by the Department of the Treasury (see our analysis above)
• Responsible Advancement of U.S. Competitiveness in Digital Assets issued by the Department of Commerce (see our analysis above)
• Climate and Energy Implications of Crypto-Assets in the United States issued by the White House Office of Science and Technology (see our analysis above)
• How To Strengthen International Law Enforcement Cooperation For Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets issued by the Department of Justice
• The Future of Money and Payments issued by the Department of the Treasury
• Action Plan to Address Illicit Financing Risks of Digital Assets issued by the Department of the Treasury
• The Role of Law Enforcement in Detecting, Investigating, And Prosecuting Criminal Activity Related to Digital Assets issued by the Department of Justice
• Report on Digital Asset Financial Stability Risks and Regulation issued by the Financial Stability Oversight Council

SEC investigating NFTs and Yuga Labs

By Mark Radcliffe

Bloomberg News has reported that the Securities and Exchange Commission is investigating whether some non-fungible tokens (NFTs) and, possibly, ApeCoin offered by Yuga Labs, LLC, are securities.

Yuga Labs has a complex set of products, including the profile picture projects such as Bored Ape Yacht Club, Mutant Ape Yacht Club, Meebits and CryptoPunks; the digital currency “ApeCoin;” and land in its new metaverse, Otherside. It is not clear which Yuga Labs projects are under investigation. The SEC has not commented on the press report and has not publicly filed any charges. Read more.

FEDERAL DEVELOPMENTS

Digital assets

Treasury seeks public input on risks posed by digital assets. On September 19, the US Department of the Treasury announced it filed a Request for Comment to seek feedback from the American people on the illicit finance and national security risks posed by digital assets, including anti-money laundering (AML) and counter-terrorist financing (CFT) regulation and supervision, global implementation of AML/CFT standards, private sector engagement and AML/CFT solutions, and central bank digital currencies. The filing is pursuant to President Joe Biden’s Executive Order on Ensuring the Responsible Development of Digital Assets. The Request for Comment is open for comment through November 3.

Virtual currency

Senators seek details from Meta on efforts to combat cryptocurrency scams. On September 9, Senator Bob Menendez (D-NJ), joined by Senators Sherrod Brown (D-OH), Elizabeth Warren (D-MA), Dianne Feinstein (D-CA), Bernie Sanders (I-VT) and Cory Booker (D-NJ), announced they sent a letter to Meta FKA FaceBook requesting information about the company's efforts to combat cryptocurrency scams and to hold bad actors accountable for cryptocurrency fraud on its platform. The senators discussed data from the Federal Trade Commission (FTC) reflecting the prevalence of cryptocurrency scams on social media, with 67 percent of victims reporting scams originated on a Meta platform. The letter seeks responses to several questions, including seeking a description of Meta's policies, procedures and practices for identifying and removing crypto scammers from its platforms.

Securities

Senator Toomey criticizes SEC for lack of regulatory clarity on digital assets. At the US Senate Banking Committee hearing with SEC Chair Gary Gensler on September 15, Committee Ranking Member Pat Toomey (R-PA) noted that "crypto intermediaries often serve different customer needs, have different business models, and pose different risks than traditional securities intermediaries…. And they merit a clearly stated and tailored regulatory framework" He asserted, "Given the novel nature of these tokens, Congress ought to step in to provide clarity. In particular, we need to revisit the definition of 'security' as part of a larger effort to tailor a regulatory framework that is calibrated to the unique risks and activities of the crypto market."

SEC Chair continues to assert that crypto markets subject to SEC regulation. On October 3, SEC Chair Gensler spoke at the Financial Stability Oversight Council open meeting regarding the Council's Report on Digital Asset Financial Stability Risks and Regulation. Chair Gensler reasserted his belief that "the vast majority [of tokens] are securities" and that "offers and sales of these crypto security tokens are covered by the securities laws." He went on to note that "it follows that many crypto intermediaries are transaction in securities and have to register with the Securities and Exchange Commission in some capacity." Chair Gensler added that he looks "forward to working with Congress to achieve our public policy goals, consistent with maintaining the regulation of crypt security tokens and related intermediaries at the SEC."

STATE DEVELOPMENTS

Virtual currency

California governor vetoes bill intended to enact a new state cryptocurrency licensing regime. On September 23, 2022, California Governor Gavin Newsom vetoed Assembly Bill 2269, the Digital Financial Assets Law. The governor explained that his veto was due to his desire to first consider feedback related to his April Executive Order to “create a transparent regulatory and business environment for Web 3 companies” as well as concerns over compatibility with potential federal legislation. The law, as enrolled, would have established a license for digital financial asset activity and contained substantial reserve requirements and limitations for entities holding the proposed California license. Some of the limitations (including the limitation on approved sources of stablecoins) were intended to phase out over time.

Missouri money laundering statute modernized to include cryptocurrency. Effective August 28, 2022, Missouri’s statute criminalizing money laundering (Mo. Rev. Stat. 574.105) has been amended to define cryptocurrency and include cryptocurrency within the definition of “monetary instruments,” in addition to a number of other amendments that incorporate crypto currency within the purview of the statute.

Louisiana adopts regulations for virtual currency businesses. On October 20, the Louisiana Office of Financial Institutions enacted regulations under the Virtual Currency Businesses Act which became effective on August 1, 2020. These regulations establish requirements for licensure, registration and regulation of persons engaging in virtual currency business activity in the state, and also define unfair or deceptive and unsafe or unsound acts or practices subject to oversight by the OFI. Current businesses operating in the state must apply for licensure within 90 days of enactment.

ENFORCEMENT ACTIONS AND LITIGATION

FEDERAL

Anti-money laundering

Coin Center sues Treasury Department over Tornado Cash sanctions. On October 12, Coin Center, a nonprofit focused on cryptocurrency policy issues, announced that it filed a lawsuit against the Treasury Department seeking to “delist Tornado Cash privacy tools from sanctions, and to enjoin Treasury from enforcing against ordinary Americans exercising their self-evident and basic rights to privacy.” The lawsuit was filed in the US District Court for the Northern District of Florida. For more information on Tornado Cash sanctions, see our September issue.

FinCEN and OFAC assess penalties against Bittrex for violations of the BSA and sanctions programs. On October 11, the Financial Crimes Enforcement Network (FinCEN) announced entry of a consent order including a civil monetary penalty of more than $29 million against Bittrex, a US cryptocurrency exchange, for violations of the Bank Secrecy Act and FinCEN’s implementing regulations. The action is part of a global settlement with the US Office of Foreign Assets Control (OFAC). FinCEN’s investigation reportedly found that Bittrex failed to maintain an effective anti-money laundering program and failed to implement effective transaction monitoring on its platform, relying on as few as two employees with minimal training and experience to manually review all transactions for suspicious activity. FinCEN asserted that Bittrex conducted over 116,000 transactions valued at over $260 million with entities and individuals in jurisdictions subject to OFAC sanctions.

The same day, OFAC announced a Settlement Agreement with Bittrex requiring payment of a civil monetary penalty of more than $24 million. In the FinCEN announcement, FinCEN indicated it "will credit Bittrex's payment of $24,280,829.20 to settle its potential liability with OFAC."

For more information, see our article OFAC settles enforcement action against issuer of rewards cards and virtual currency exchange for failing to identify transactions involving sanctioned jurisdictions

Securities

SEC files charges in crypto pump-and-dump scheme. On September 30, the SEC announced the filing of a complaint against Arbitrade Ltd., a Bermuda company, and Cryptobontix Inc., a Canadian company, and their principals, Troy R. J. Hogg, James L. Goldberg, and Stephen L. Braverman, and a purported international gold trader, Max W. Barber, for perpetrating a pump-and-dump scheme involving a crypto-asset called "Dignity" or "DIG." The complaint alleges that the companies issued announcements falsely claiming that Arbitrade had acquired and received title to $10 billion in gold bullion, that the company intended to back each DIG token issued and sold to investors with $1.00 worth of this gold, and that independent accounting firms had performed an "audit" of the gold and verified its existence. The SEC complaint charges the defendants with violating the antifraud and securities registration provisions of the federal securities laws. The complaint seeks permanent injunctive relief and disgorgement plus prejudgment interest, and civil penalties against all of the defendants, and officer-and-director bars against the individual defendants.

SEC charges promoter and companies with $4 million fraud. On September 15, the SEC announced the filing of a complaint against Gabriel Edelman and his affiliated entities, Creative Advancement LLC and Edelman Blockchain Advisors LLC, for fraudulently raising and misappropriating funds from investors. The complaint alleges that the defendants fraudulently offered and sold securities using false and misleading statements to four investors, raising a total of approximately $4.3 million. Specifically, the defendants told investors their funds would be invested in digital assets, however, most of the funds were used for personal expenses. The SEC charges the defendants with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

SEC settles with Sparkster for $35 million. On September 19, the SEC announced issuance of a cease-and-desist order against Sparkster Ltd. and its CEO, Sajjad Daya, for the unregistered offer and sale of crypto asset securities. The SEC also charged crypto influencer Ian Balina for failing to disclose compensation he received from Sparkster for promoting the tokens. The order finds that the defendants offered and sold SPRK tokens to raise money to further develop Sparkster's platform, and the SPRK tokens were securities that were not registered with the SEC and not exempt from registration. Sparkster and Daya agreed to settle and collectively pay more than $35 million into a fund for harmed investors.

Commodities

CFTC charges digital asset derivatives platform with unlawful futures transactions. On October 3, the Commodity Futures Trading Commission (CFTC) announced the filing of a complaint against Adam Todd and four companies he controlled - Digitex LLC, Digitex Limited, Digitex Software Limited, and Blockster Holdings Limited Corporation. The complaint alleges that Todd and his companies operated a digital asset exchange under the trade name “Digitex Futures.” Todd and Digitex Futures are charged with illegally offering digital asset futures, failing to register as a futures commission merchant and comply with the BSA, and attempting to manipulate the price of DGTX, the Digitex Futures native token, through the use of bots.

CFTC imposes $250K penalty on bZeroX, LLC and Ooki DAO for off-exchange digital asset trading and other charges. On September 22, the CFTC announced it issued an order simultaneously filing and settling charges against bZeroX, LLC and its founders Tom Bean and Kyle Kistner for illegally offering leveraged and margined retail commodity transactions in digital assets; engaging in activities only registered futures commission merchants (FCM) can perform; and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs. The order requires the defendants to pay a $250,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act.

The CFTC also announced the filing of a civil enforcement action charging Ooki DAO, a decentralized autonomous organization (DAO), with violations of the same laws. The CFTC complaint alleges that the Ooki DAO became the successor to bZeroX when the founders transferred control of the bZx protocol to the DAO. The CFTC alleges that this transfer was touted by the founders as making operation of the bZx protocol "enforcement-proof." The complaint seeks restitution, disgorgement, civil monetary penalties, trading and registration bans, and injunctions.

The CFTC reportedly served the Ooki DAO by posting the complaint to an online discussion forum for DAO members and simultaneously submitting the complaint through a help chatbot on the DAO’s website. The CFTC filed a motion for alternative service to get court approval for these alternative means to effect service of process.

Taxation

IRS obtains court order authorizing John Doe summons to M.Y. Safra Bank. On September 22, the US Department of Justice (DOJ) announced that a federal court in New York entered an order authorizing the IRS to serve a Joe Doe summons on M.Y. Safra Bank seeking information on US taxpayers who are customers of sFOX, a cryptocurrency prime broker, who used banking servicing that M.Y. Safra Bank offered to sFOX customers engaging in cryptocurrency transactions. A California court had in August entered an order authorizing the IRS to serve a Joe Doe summons on sFOX for its customers' transaction information. For more information on prior Joe Doe summonses, see our September 2022 issue and our May 2021 issue.

Virtual currency

DOJ charges man and businesses with wire fraud and money laundering. On September 22, the Department of Justice (DOJ) announced the filing of seven felony charges against James Wolfgramm aka Semisi Niu aka James Vaka Niu, and his businesses, Bitex LLC and Ohana Capital Financial, Inc. in connection with financial fraud schemes. According to the indictment, in one of the schemes, Wolfgramm and Bitex collected nearly $1.7 million from two victims by purporting to sell a high-powered cryptocurrency mining machine – the “Bitex Blockbuster” – that did not actually exist.

President of sham United Nations affiliate sentenced for cryptocurrency scheme. On September 15, the DOJ announced that Asa Saint Clair aka Asa Williams aka Asa Sinclair, was sentenced to 42 months in prison for tricking more than 60 victims into providing more than $600,000 in loans to his organization, World Sports Alliance, in connection with a digital coin offering called IGObit. Saint Clair falsely represented to investors that the World Sports Alliance was a close affiliate of the United Nations and that they would receive guaranteed returns on their investment, but instead diverted the investors’ funds for his personal expenses and benefit. Saint Clair was found guilty of wire fraud in March 2022.

Florida man pleads guilty to money laundering. On September 16, the DOJ announced that a Tochukwu Able Edeh, a Nigerian national residing in Florida, pleaded guilty to operating an unlicensed money transmitting business to launder the proceeds of a Ponzi-type scheme based out of Nigeria. The DOJ alleged that Edeh conspired with others to offer trading and bitcoin investing services, however, investor funds were stolen and later victims’ investments were used to pay purported returns to earlier investors. Edeh laundered the fraud proceeds using a network of co-conspirators in the United States and his personal and business accounts in the United States and Nigeria. Neither Edeh nor his co-conspirators held money transmitting licenses in their respective states of residence, nor were they registered as money transmitters as required by federal law.

STATE

Virtual currency

California DFPI issues cease-and-desist orders against 11 crypto/DeFi entities. On September 27, the California Department of Financial Protection and Innovation (DFPI) announced the issuance of desist and refrain orders against the following entities, alleging that such entities offered and sold unqualified securities, ten of the entities made material misrepresentations and omissions to investors, and nine of the entities solicited funds from investors to purportedly trade crypto assets on behalf of the investors. All entities are alleged to have used investor funds to pay purported profits to oth