Blockchain and Digital Assets News and Trends - May 2024

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

Shelter for the storm: Indicted Tornado Cash founder Roman Storm finds allies in industry group and senators

By: David Stier, Christian Ford, and Eric Hall

Courts continue to be the main battleground for enforcement agencies, proponents of decentralized finance (DeFi), and Tornado Cash, the once popular crypto privacy protocol. The saga, which we have previously covered extensively, involves the US Treasury’s Office of Foreign Assets Control (OFAC) sanctions, challenges in federal court including one backed by Coinbase, and the Department of Justice’s (DOJ) prosecution of the Tornado Cash founders Roman Storm and Roman Semenov in the Southern District of New York. In the latest development, Storm has filed a motion to dismiss the indictment with backing from industry heavyweights, while DOJ’s opposition may presage an important shift in the federal government’s approach to DeFi more broadly. Read more.

Argentina initiates regulation of cryptoassets

By: Nicolás Fernández Madero 

On March 15, the Argentine Congress enacted Law N°27,739, designating the Argentine securities commission (CNV), as the regulatory authority for virtual assets service providers (VASPs).

Following this, on March 22, the CNV issued General Resolution N°994, establishing a registry for VASPs as its first regulatory measure. Resolution N°944 specifies that registration in the registry does not imply the granting of a license or CNV supervision, which will be governed by future regulations.

Law N°27,739 sets the foundation for the new framework to be developed by the CNV, emphasizing principles to protect and defend users; ensure information security and personal data protection; maintain operational safety and efficiency; promote stability, solvency, and transparency; enforce good corporate governance and anti-money laundering (AML) practices; and safeguard public savings. A new, comprehensive legal framework for VASPs and crypto is expected in the coming months. Read more. 

Proposed legislation would reverse IRS position on time for taxation of block rewards

By: Tom Geraghty

On April 30, Representatives Drew Ferguson (R-GA) and Wiley Nickel (D-NC) introduced the Providing Tax Clarity for Digital Assets Act which, if enacted, would defer tax on the receipt of block rewards from proof-of-work (PoW) or proof-of-stake (PoS) networks to the time when the rewards are sold or disposed of. The IRS’s current position is that the value of such block rewards generally should be included in income when the taxpayer receives the rewards. Read more.

STATUTORY AND AGENCY DEVELOPMENTS

FEDERAL DEVELOPMENTS

SEC

SEC app roves ETH spot ETFs. On May 23, SEC approved the listing and trading of spot Ethereum Exchange-Traded Funds (ETFs) from BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy, and Franklin Templeton. The move follows the earlier approval of bitcoin ETFs in January but came as a surprise for applicants whose interactions with SEC had been icy until the week before the approval. While the exact launch date is still pending individual ETF registration statement approvals, SEC’s approval paves the way for investors to gain exposure to Ethereum through regulated and familiar ETF structures. The move may also signify growing regulatory acceptance of decentralized virtual currencies.

FBI

FBI warns consumers about unregistered money transmitting services. The FBI issued a warning on April 25 urging consumers to exercise caution against using unregistered cryptocurrency money transmitting services. These services, which facilitate the exchange of cryptocurrency for fiat currency, are required to register with FinCEN and comply with AML regulations. Failure to do so may lead to financial disruptions and potential loss of access to funds for users, as law enforcement may target such services. The FBI advises consumers to verify a service’s registration with FinCEN, and to be wary of those that lack “know-your-customer” (KYC) procedures or are known for illicit activity. The FBI’s announcement is significant in that it suggests the risk in dealing with unregistered money transmitters may come from law enforcement operations themselves.

Treasury

US Treasury issues risk assessment of NFTs. On May 29, the US Department of the Treasury announced the release of its illicit finance risk assessment of NFTs. The risk assessment covers, among others, AML/sanctions, investor protection, and market integrity risks, and touches on tax issues related to NFT marketplaces. Though the Treasury acknowledges that NFT platforms are “rarely being used for proliferation financing or terrorist financing,” the report noted that NFTs have been used to launder proceeds from predicate crimes, usually in combination with other obfuscation techniques. The assessment also noted that “NFT platforms ... may qualify as financial institutions....” and therefore may have AML and Bank Secrecy Act obligations. Furthermore, the assessment confirms that NFT platforms are subject to sanctions rules and can take workable, practical steps to mitigate the risk (eg, IP blocking, VPN detection, risk-based wallet blocking).

Biden blocks sale of land to Chinese-owned cryptocurrency mining operation. On May 13, in a significant move to protect national security, the US Department of the Treasury announced that President Joe Biden issued an order prohibiting the purchase and requiring the divestment of a cryptocurrency mining facility located near Francis E. Warren Air Force Base in Wyoming. The order, targeted at Chinese-owned company MineOne, also mandates the removal of specialized equipment and improvements from the property. This action follows concerns raised by the Committee on Foreign Investment in the US (CFIUS) about the potential national security risks posed by the facility’s proximity to a strategic missile base and the presence of foreign-sourced equipment. The order cited “credible evidence” that MineOne “might take action that threatens to impair the national security of the United States.” In a statement, Treasury Secretary Janet Yellen said the decision highlights CFIUS’s critical role in ensuring foreign investment does not come at the expense safeguarding national security.

US Treasury’s 2024 illicit finance priorities focus on virtual currency. On May 16, the Department of the Treasury announced its 2024 National Illicit Finance Strategy. The announcement outlined the Treasury's goals and priorities for 2024, which include combatting illicit finance. The Treasury’s strategy document outlined four overarching priorities with 15 “supporting actions.” Priorities include closing regulatory gaps in AML and Countering the Financing of Terrorism, and realizing the benefits of “responsible technological innovation” in new payment technologies. While virtual currency is central to these goals, the Treasury’s document overwhelmingly focused on the illicit finance uses of virtual currency. The Treasury’s report catalogues its many enforcement actions against virtual asset service providers over the past few years. It also references the use of cryptocurrencies by terrorist organizations and groups, such as Hamas, which has developed new ways to move and raise funds, including through virtual assets.

Looking domestically, the document discusses the increasing digitalization of the payments infrastructure and the surge in online financial services, including the use of virtual assets, which provides opportunities for criminal actors to perpetrate financial crimes and hide illicit proceeds.

Finally, the document highlights the need for international cooperation and communication mechanisms to counter national security threats by disseminating financial intelligence and information related to illicit finance risk, which includes the misuse of virtual assets.

Congress

President Biden vetoes measure to nullify SEC’s crypto accounting guidance. On May 31, President Biden announced he had vetoed a congressional resolution to nullify SEC’s guidance creating accounting standards for financial firms that hold crypto in custody. The resolution passed both houses of Congress with the Senate’s approval on May 16. Though votes in the House and Senate were significantly bipartisan, the Senate vote fell short of the number required to override a presidential veto. SEC’s guidance SAB 121 will therefore remain in effect, essentially requiring the majority of SEC-registered companies holding crypto assets on behalf of clients to record that risk on the custodian’s balance sheet as a liability. Lawmakers on both sides of the aisle have criticized the guidance, finding it effectively makes custodying customer crypto cost prohibitive for financial firms. Democrats opposing the resolution have argued SAB 121 is crucial for ensuring transparency and proper accounting for companies that provide custody services.

House passes historic FIT21 bill despite objections from SEC Chair. On May 22, the House of Representatives, with bipartisan support, passed the Financial Innovation and Technology for the 21st Century Act, which would establish a new regulatory framework for digital assets. Passage came despite opposition from SEC Chair Gary Gensler, who published a statement on the same day. Chair Gensler argued that the bill would weaken investor protections for cryptocurrency investments by removing blockchain-based investment contracts from SEC oversight, which could lead to more fraud and heightened risk of bankruptcies. He insisted – despite acknowledging the industry’s near-unanimous disapproval of SEC’s present oversight – that existing regulations are sufficient for innovation in the space. Under the bill, the Commodity Futures Trading Commission (CFTC) would regulate a digital asset as a commodity if the blockchain, or digital ledger, on which it runs is functional and decentralized. The bill classifies a blockchain as decentralized if, among other requirements, no person has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person has control of 20 percent or more of the digital asset or the voting power of the digital asset. In addition, the bill provides the CFTC with exclusive regulatory authority over cash or spot markets for digital commodities. The bill would assign authority to SEC to regulate a digital asset as a security if its associated blockchain is functional, but not decentralized, with certain exceptions to SEC regulation for digital assets that limit annual sales, restrict nonaccredited investor access, and satisfy disclosure and compliance requirements. The bill also sets forth requirements for primary and secondary market transactions. The CFTC and SEC would be required to jointly issue rules to define terms and exempt dually registered exchanges from duplicative rules. It is not known when the Senate intends to take up the bill.

Bipartisan letter expresses fear that rogue nations rely on virtual currencies to evade sanction. In a bipartisan letter sent to the Department of the Treasury, FinCEN, the Department of Defense, and the National Security Advisor, US Senators Elizabeth Warren and Roger Marshall expressed concern over reports that Russia is increasingly relying on the US-dollar-pegged stablecoin USDT to fund its war effort. The senators acknowledged that Treasury had taken action to sanction Russia’s most common Tether trading platform but suggested more should be done. Their letter characterized USDT as “the cryptocurrency of choice for sanctions evaders and other bad actors.” The letter also highlighted the threats posed by Iran’s and North Korea’s growing use of crypto to finance terrorist groups and nuclear weapons programs, respectively. The senators urged the officials to provide information on the additional authorities they may need to neutralize these threats and to support the Treasury Department’s request for more AML tools to combat crypto-related illicit financing.

STATE

Digital assets

UCC Article 12 adopts Controllable Electronic Records. The 2022 amendments to the Uniform Commercial Code (UCC) address emerging technologies, providing updated rules for commercial transactions involving virtual currencies, distributed ledger technologies (including blockchain), artificial intelligence, and other technological developments. The amendments span almost every article of the UCC and add a new Article 12 addressing certain types of digital assets defined as Controllable Electronic Records (CERs). The amendments provide new default rules to govern transactions involving these new technologies and clarify the UCC’s applicability to mixed transactions involving both goods and services. As of May 22, 20 states and the District of Columbia have adopted the 2022 Amendments to the UCC, including Article 12 governing property rights of intangible digital assets as CERs – Alabama, California, Colorado, Delaware, Georgia, Hawaii, Indiana, Iowa, Kentucky, Maine, Minnesota, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, South Dakota (with revisions to exclude CBDCs as “money”), Virginia, and Washington. For more information on CERs under UCC Article 12, see our prior articles from May 2023 and July 2023.

Oklahoma becomes 48th state to adopt the Revised Uniform Fiduciary Access to Digital Assets Act. On April 23, Oklahoma enacted HB3778, making it the 48th state (plus the District of Columbia) to enact the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). The RUFADAA governs access to a person’s online accounts when the account owner dies or loses the ability to manage the account. It extends the traditional power of a fiduciary to manage tangible property to include management of digital assets and property such as computer files, web domains, and virtual currency, but restricts a fiduciary’s access to electronic communications such as email, text messages, and social media accounts unless the original user consented to fiduciary access in a will, trust, power of attorney, or other record. Following its enactment in Oklahoma, only California and Massachusetts have yet to adopt the RUFADAA.

ENFORCEMENT ACTIONS AND LITIGATION

FEDERAL

Money laundering

DOJ extradites Estonian nationals accused of $575 million cryptocurrency mining scheme. On May 30, DOJ announced that two Estonian nationals, Sergei Potapenko and Ivan Turõgin, were expected in a Seattle court to face charges related to a large cryptocurrency Ponzi scheme. The duo is accused of elaborately deceiving investors, allegedly inflating the capabilities of their mining operation, HashFlare, to attract more than $550 million in contracts. Further, they reportedly used purchased virtual currency, not mined coins, to fulfill payouts, and continued to solicit investments despite knowing HashFlare was not functioning as advertised. The indictment also details a separate fraudulent scheme involving a promised virtual currency bank, Polybius, which never materialized. Potapenko and Turõgin are charged with conspiracy to commit wire fraud, 16 counts of wire fraud, and 1 count of conspiracy to commit money laundering. If convicted, they each face a maximum penalty of 20 years in prison on each count.

Once-popular crypto exchange operator admits conspiracy to commit money laundering. On May 3, DOJ and the IRS Criminal Investigation division announced that Alexander Vinnik, the operator of the once-massive cryptocurrency exchange BTC-e, had pled guilty to conspiracy to commit money laundering. According to the announcements, between 2011 and 2017, BTC-e processed $9 billion in transactions, and allegedly transformed into a haven for cybercriminals. BTC-e received criminal proceeds of numerous computer intrusions and hacking incidents, ransomware attacks, identity theft schemes, corrupt public officials, and narcotics distribution rings. Vinnik operated BTC-e with the intent to promote these unlawful activities and was responsible for a loss amount of at least $121 million. Despite operating in the US, BTC-e failed to register as a money services business with the Department of the Treasury’s FinCEN. BTC-e also had no AML and/or KYC processes, which made the exchange attractive to criminals.

Crypto futures market CEO pleads guilty to Bank Secrecy Act violations. On May 7, the US Attorney’s Office for the Southern District of Florida announced that Adam Colin Todd, the former CEO of Digitex Futures Exchange, had pleaded guilty to causing the Exchange to violate the Bank Secrecy Act by failing to establish an AML program. The announcement further alleged that Digitex Futures Exchange operated as an unregistered futures commission merchant, and that Todd publicly refused to implement KYC requirements for his customers.

NFTs

Dolce & Gabbana sued for raising $25 million selling “worthless” NFTs. On May 17, consumers filed a putative class action against fashion brand Dolce & Gabbana, alleging it sold “essentially worthless” NFTs based on promises that the digital assets would entitle holders to high-value benefits and uses that allegedly never materialized. The complaint alleges that Dolce & Gabbana and NFT marketplace UNXD Inc. collected $25 million by marketing and selling a collection of NFTs called DGFamily. Holders were promised metaverse outfits and tickets to live events, and, while some holders received some benefits, the defendants never fully delivered, instead repeatedly pushing back delivery dates. The complaint describes the events as a “rug pull,” stating that the lead plaintiff personally invested more than $6,000 into the project.

Commodities

CFTC settles charges with crypto prime brokerage firm Falcon Labs. On May 13, the CFTC announced it had brought and settled charges against Falcon Labs, Ltd. for operating as an unregistered futures commission merchant (FCM). According to the order, Falcon Labs facilitated access to digital asset exchanges by functioning as an intermediary, soliciting and accepting orders for digital asset derivatives from customers in the US. Falcon would generate accounts on foreign exchanges and then generate sub-accounts for US users to use in exchange for about $1,179,008 in total fees.

Securities

Robinhood Crypto receives Wells Notice. On May 6, Robinhood announced that SEC had issued a Wells Notice to Robinhood Crypto, indicating the possibility of an enforcement action against the company. According to the press release, this development follows Robinhood’s previous attempts to collaborate with SEC and register as a special purpose broker-dealer. Robinhood maintains that the assets listed on their platform are not securities and plans to contest SEC's claims. “If necessary we will use our resources to contest this matter in the courts,” Robinhood CEO Vlad Tenev said in a post on X.

Virtual currency

Former FINRA registered broker sentences in crypto fraud scheme. On May 31, DOJ announced that a former investment banker, Rashawn Russell, had been sentenced to over three years in prison for orchestrating a cryptocurrency Ponzi scheme. Russell, who was formerly a registered broker with the Financial Industry Regulatory Authority (FINRA), lured investors with promises of high returns, but instead misused a significant portion of their funds for personal expenses, gambling, and repaying earlier investors. He repeatedly failed to deliver promised returns and lied about sending back investments when requested. Russell also engaged in a separate identity theft scheme, fraudulently obtaining credit cards and IDs likely stolen from gym lockers to make unauthorized purchases. In addition to his prison sentence, Russell was ordered to pay $1.5 million in restitution.

Disbarred California attorney pleads guilty to $9.5 million crypto Ponzi. On May 29, DOJ announced that disbarred attorney David Kagel had pled guilty to running a cryptocurrency Ponzi scheme that defrauded victims of over $9.5 million. According to the announcement, Kagel, who is 85 years old, abused his trusted position as a longtime attorney to deceive victims with promises of high returns and fictional AI trading bots. To further the scam, Kagel fabricated a story about holding millions in bitcoin escrow, creating a false sense of security with official-looking letters on his firm's letterhead. In reality, Kagel and his co-conspirators admitted that they used victims’ funds for their own personal benefit. Kagel faces a maximum sentence of five years in prison, but the final sentencing will be determined in September.

Scammer behind fake Coinbase site pleads guilty to stealing $37 million. On May 20, the US Attorney’s Office for the Western District of North Carolina announced that Chirag Tomar, an Indian national who had stolen more than $37 million by spoofing the Coinbase website, had pleaded guilty. Tomar admitted to using a fake but similar URL to deceive users to enter their genuine Coinbase login credentials. He is charged with wire fraud conspiracy, which carries a maximum sentence of 20 years and a $250,000 fine.

Brothers arrested for stealing $25 million in 12-second Ethereum hack. On May 15, the US Attorney’s Office for the Southern District of New York announced it had arrested two brothers who managed exploit transaction ordering on the Ethereum blockchain to steal roughly $25 million dollars of virtual currency from traders on decentralized exchanges. The sophisticated exploit is commonly known as a Maximum Extractable Value (MEV) attack. According to the indictment, the brothers set up 16 of their own validators so they could manipulate the ordering of transactions and “bait” traders using bots to complete fraudulent transactions. The US Attorney’s Office suggests this prosecution is the first of its kind.

Ex-Cred LLC execs charged with $783 million crypto fraud scheme. On May 3, the US Attorney’s Office for the Northern District of California announced an indictment against Daniel Schatt, Joseph Podulka, and James Alexander, former executives at Cred LLC, a San Francisco-based financial services firm that specialized in making investments in cryptocurrencies and that filed for Chapter 11 bankruptcy on November 7, 2020. The indictment alleges the defendants all played a role in misleading Cred investors about the company’s financial health. They allegedly made false statements about Cred’s lending practices, claiming they were collateralized and hedged when they were not. Even after the value of cryptocurrency dropped significantly in March 2020, they assured investors Cred was solvent and insured, downplaying the seriousness of the situation. They allegedly continued to solicit new investments while discouraging existing ones from withdrawing funds. This allegedly allowed them to keep the company afloat for a while, but ultimately led to larger losses for investors, exceeding $783 million by the time Cred filed for bankruptcy.

Bitcoin Jesus indicted for tax fraud worth $48 million. On April 30, the US Attorney’s Office for the Central District of California announced that a grand jury had indicted Roger Keith Ver, an early bitcoin investor who went by “Bitcoin Jesus,” for fraud and criminal tax charges. Authorities arrested Ver in Spain, who allegedly started buying bitcoin in 2011. He renounced his US citizenship in February 2014, which required him to file tax returns with the IRS reporting capital gains and pay an “exit tax.” By this point, Ver allegedly held 131,000 bitcoin. In 2017, he cashed out $240 million, on which he was required to pay tax to the US. Instead, he allegedly concealed the amounts from his accountant and reported no gains for that year. The IRS claims it was deprived $48 million.

STATE

Securities

Kentucky Department of Financial Institutions enters consent order with Celsius. On May 10, the Kentucky Department of Financial Institutions entered into a consent order with Celsius Network and its affiliates, a cryptocurrency firm that offered and sold interest-bearing digital asset accounts called the Celsius Earn Program (read more in our January 2023, February 2023, May 2023, and June 2023 issues). The consent order resolves the Department's investigation into whether Celsius Earn Program Accounts involved the offer and sale of unregistered securities by Celsius to retail investors, among other things. The consent order also follows Celsius’s filing of voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code, under which Celsius proposes to distribute or manage substantially all of its assets to or for the benefit of its account holders. Under the consent order, Celsius agrees to cease and desist from violating the Securities Act of Kentucky, and the Department agrees not to impose any administrative fines, subject to certain conditions and reservations of rights. The consent order also contains provisions regarding Celsius’s public statements, testimonial obligations, and treatment of claims in the bankruptcy proceedings.

Virtual currency

Manhattan DA secures conviction of bitcoin ATM operator. On May 16, the Manhattan DA’s office announced a New York jury had convicted Robert Taylor for running an illegal bitcoin ATM business catering to criminals. Taylor operated unlicensed kiosks in laundromats and other locations, charging high fees in exchange for anonymity. Taylor advertised on Snapchat that customers did not need to provide identification or complete any KYC processes, and that his ATMs never had cameras. He also actively discouraged customers from telling others where the machines were. The investigation revealed that Taylor's business model attracted criminals and that he made more than $5 million in cash while failing to report his income accurately on tax returns.

SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS

Crypto ETFs to launch on the London Stock Exchange. As previously announced in public reporting, Wisdom Tree and 21Shares launched exchange traded funds for bitcoin and Ether on May 28 following the approval by Britain’s Financial Conduct Authority (FCA). The products were formerly only available to professional investors with the FCA calling them “ill-suited for retail consumers due to the harm they pose.”

Australia cracks down on tax evaders. On May 7, the Australian Tax Authority (ATO) reportedly announced plans to crack down on traders who may be failing to pay their taxes amid a rising interest in digital tokens. The ATO notified exchanges last month that it is requesting data on up to 1.2 million customers to help identify the tax evaders, but the ATO also expressed some sympathy for those with a “genuine lack of awareness.” The ATO has requested personal data such as dates of birth, phone numbers, and social media accounts.

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.

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.

READ 

• Colorado enacts first-in-the-nation comprehensive AI guardrails
• The Corporate Transparency Act is coming: What you should know
• CPA releases draft rules for automated decision-making technology
• Digital Services Act Tracker

Contacts

Learn more about our Blockchain and Digital Assets practice by contacting any of our editors:

Margo Tank
James Williams  
Liz Caires 
Eric Hall
 
Contributors to this issue

Dan Jewell 
Sam Gokarn-Millington
Suhail Mayor