The below articles and industry developments have been identified by Kelley Drye and Warren's Blockchain and Cryptocurrency practice group as relevant during the week of July 27 – August 2. We hope you find this useful. Access may require subscription.
Regulatory Updates
Robinhood's Crypto Division Fined $30M by New York Financial Regulator
CoinDesk, August 2, 2022The New York State Department of Financial Services (NYDFS) fined the crypto trading unit of Robinhood (HOOD) $30 million for alleged violations of anti-money-laundering and cybersecurity regulations, the Wall Street Journal reported on Tuesday.
- The fine, the first crypto-related enforcement action taken by the regulator, was handed because Robinhood Crypto LLC failed to maintain and certify compliant anti-money-laundering and cybersecurity programs, the report said.
- The NYDFS also said it found significant failures through a supervisory exam and through a subsequent enforcement investigation of Robinhood.
- Robinhood Crypto foresaw the fine and had said last year that it expects to be fined by the New York regulator. A 2020 investigation "focused primarily on anti-money laundering and cybersecurity-related issues" found the company to be in violation of numerous regulatory requirements, the firm said last year.
- In 2021, the trading firm was fined $70 million by the Financial Industry Regulatory Authority (FINRA), the largest fine ever issued by FINRA, for failing to protect customers.
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Crypto: Lawmakers Rip Industry, Demand SEC Action During Recent Hearings
Yahoo Finance, August 1, 2022Crypto winter and resulting bankruptcies are pushing lawmakers to up the ante on regulators. During a hearing last week, Senator Pat Toomey (R-PA) said the SEC is the missing cop on the crypto beat while Sen Elizabeth Warren (D-MA) ripped on the crypto industry for scamming mom-and-pop investors and pledged to introduce a bill soon to regulate the crypto market and stamp out scams.
Warren criticized the crypto industry, lambasting up to 20% returns crypto lenders like now defunct Celsius Network offered, while highlighting the influx of institutional investors into crypto from venture capital firms to hedge funds.
"Crypto has made it faster and cheaper than ever before to rip off consumers," Warren griped during a Senate Banking Committee hearing Thursday. "Across the crypto market, the big investors are funding, hyping, and then vampire-sucking money out of crypto projects that scam mom-and-pop investors."
Amid these failures and losses, as the Senate Banking Committee's ranking member, Toomey is questioning where the SEC has been. "What was the SEC doing while these companies and others were offering lending products that looked an awful lot like securities?" Toomey asked during a Senate Banking Committee hearing on crypto scams. "And what is the SEC doing now to help ensure the crypto community gets the regulatory clarity it has repeatedly asked for?"
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Binance.US Delists Cryptocurrency Cited by SEC as a Security
WSJ, August 1, 2022Binance.US, the U.S.-based arm of crypto exchange Binance delisted a small cryptocurrency in the wake of the Securities and Exchange Commission's investigation into insider trading at rival Coinbase Global Inc COIN -0.41%?.
Binance on Monday said it was delisting the AMP token as of Aug. 15. The cryptocurrency trades for less than a penny with a market value of less than $400 million, according to CoinMarketCap.
Despite its small size, AMP looms large because it was one of nine cryptocurrencies cited by the SEC as unregistered securities as part of its investigation of insider trading at Coinbase.
The entire crypto industry has grown up without clear definitions of the assets within it and regulations for trading. The SEC has informally said that the two largest tokens, bitcoin and ether, aren't securities. However, both the current SEC chairman, Gary Gensler, and his predecessor, Jay Clayton, said that most cryptocurrencies meet the legal definition of a security, potentially putting crypto exchanges in the position of selling unregistered securities.
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Why Crypto Flinches When SEC Calls Coins Securities
Bloomberg Tax, August 1, 2022Cryptocurrency traders have been put on notice that the US Securities and Exchange Commission considers a range of widely traded digital assets to be securities, a position that could impose regulatory requirements that many boosters say could be crippling. But figuring out what does or doesn't make a coin a security is a complicated question.
An asset can be under SEC purview when it involves investors kicking in money with the intention of profiting from the efforts of the organization's leadership. In December 2020, the agency sued Ripple Labs Inc. , for allegedly raising money by selling the XRP digital token, which at the time was the third biggest, without registering it as a security. The SEC claimed that the company was funding its growth by issuing XRP to investors betting that its value would rise. The case is now a massive legal battle with Ripple having hired a former SEC chair, Mary Jo White, as an attorney.
There have been efforts on Capitol Hill to give the Commodity Futures Trading Commission, the US derivatives watchdog, more power to regulate crypto assets directly. Currently it primarily oversees crypto futures and has the ability to take enforcement action if there's fraud or manipulation in the underlying market. Crypto backers argue that the CFTC, which has brought dozens of crypto enforcement actions, is better positioned than the SEC to regulate the asset class. Opponents of that approach say that the SEC's securities-focused rules offer more protections for mom-and-pop investors.
What coins are or aren't considered a security?
The short answer is that beyond the very biggest cryptocurrency there's a lot of ambiguity. US regulators including the SEC agree that Bitcoin, which is by far the largest digital asset, isn't a security. The second-biggest token, Ether, was deemed not to be a security during the Trump administration by a senior SEC official who signaled that while Ether may have started out qualifying as a security -- the Ethereum Foundation used it to raise money -- it had grown into something sufficiently decentralized that it probably no longer was one. The CFTC followed suit in deeming it a commodity, and the CME lists futures on it as well as Bitcoin.
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Philosophically, It Doesn't Matter Whether Cryptos Are Securities; Practically, It Does
CoinDesk (Opinion), July 31, 2022On July 26, it emerged that Coinbase was being probed by the SEC for allegedly listing securities. This news came on the heels of an insider-trading case brought against a Coinbase employee and two others on July 21 by the SEC and U.S. Justice Department. Making matters (somehow) worse, Cathie Wood's Ark Invest off-loaded 1.4 million Coinbase shares on July 27.
Yes, the SEC is tasked with enforcing laws against market manipulation to protect investors. And yes, that is a valiant purpose. But contending that market manipulation only matters in the context of securities is exactly wrong. Bitcoin (legally deemed a commodity in the U.S.) market manipulation should be stomped out as well. If the SEC decided tomorrow that bitcoin was a security, it would change nothing about bitcoin fundamentally. It would also change nothing about bitcoin market manipulation being bad. It would just change who thinks they can regulate it at this particular moment.
The SEC cites the Howey Test when determining whether something is a security. While the agency has said in the past that bitcoin is not a security, and while I am not a lawyer, one could make the argument that the test sure makes bitcoin look a lot like a security because investing in bitcoin:
- requires money (fiat money, but still money) unless you're a miner (and even that requires money to pay the power bills) or one of the die-hard merchants who receive it in exchange for goods and services,
- which is invested in a common enterprise (the Bitcoin network),
- with a reasonable expectation for profit (maybe unreasonable, but if bitcoin demonetized gold, the price of bitcoin would go up),
- derived from the efforts of others (I hold bitcoin and I haven't once touched the code).
And that doesn't matter one bit philosophically. It only matters practically because investors, institutional and individual, need to play by the SEC's rules.
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SEC Chairman Publishes Video Outlining Plan to Regulate Crypto Trading Platforms
Bitcoin.com, July 29, 2022U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler published a video Thursday explaining how the securities watchdog plans to regulate crypto exchanges and provide investor protection.
Gensler explained in the video the similarities and differences between crypto trading platforms and traditional exchanges like the New York Stock Exchange (NYSE). "When you trade on a stock market, you have certain protections," he began, adding that investors are "protected against fraud, manipulation, running, and the like."
Noting that crypto platforms serve "millions, sometimes tens of millions" of retail customers who are directly buying and selling crypto assets without going through a broker, the SEC chairman detailed: "With so many retail customers trading on crypto platforms, we should make sure that those platforms offer similar protections" to traditional security platforms. Gensler then brought up another risk factor inherent to crypto exchanges. "Unlike traditional securities exchanges, crypto trading platforms also may act as market makers," he described.
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FDIC Urges Banks to Police Misleading Crypto Claims on Deposit Insurance
Nasdaq, July 29, 2022A U.S. banking regulator is urging banks dealing with cryptocurrency companies that they need to make sure customers know which of their funds will be insured by the government in case of collapse, and which have no safety net.
The Federal Deposit Insurance Corporation (FDIC) said Friday it is concerned consumers may be confused about how safe their money may be when placed in crypto assets, particularly in cases where firms offer a mix of uninsured crypto products alongside insured bank deposit products.
In a new advisory, the FDIC said banks need to make sure any crypto firms they partner with do not overstate the reach of deposit insurance. The push comes as broad turmoil in the crypto market has led to the collapse of some high-profile firms, including one regulators publicly chastised yesterday for overstating deposit insurance coverage. "Inaccurate representations about deposit insurance by non-banks, including crypto companies, may confuse the non-bank's customers and cause those customers to mistakenly believe they are protected against any type of loss," the FDIC advisory stated.
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Binance and FTX, Big Crypto Exchanges, Get Bigger
WSJ, July 29, 2022Two crypto exchanges—Binance and FTX—are extending their reach amid the continuing market rout.
Binance's spot-trading market share rose to 49.7% in June from 45% in January, according to data from research firm CryptoCompare. FTX, which has been aggressive in both marketing and acquisitions, boosted its market share to 8.95% in June from 6% in January. It is now the second-largest spot market.
The crypto selloff that began in November has gutted the crypto market and crushed trading activity, the main revenue driver for most exchanges. Spot-trading volume for the nine largest cryptocurrencies was down 35% from the November highs, research firm TradeBlock reported.
The longer this downturn lasts, the more it favors dominant players such as Binance, Coinbase Global Inc COIN 1.14%?. and FTX, said Charles Hayter, CryptoCompare's chief executive and co-founder.
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U.S. Senator Seeks Safeguards Disclosures from Apple, Google Amid Rise in Fake Crypto Apps
Cryptoslate, July 28, 2022U.S. Senator Sherrod Brown (D-Ohio) sent letters to Tim Cook, CEO of Apple, and Sundar Pichai, CEO of Google and Alphabet on July 28, asking for information about what the companies are doing to protect users from fraudulent cryptocurrency apps.
The move comes after the Federal Bureau of Investigation (FBI) issued a warning on July 18 against fraudulent crypto apps, which have caused losses of about $42.7 billion.
Cybercriminals have used logos, names, and other information of crypto companies to create fake mobile apps to scam investors, Brown wrote in the letter. Therefore, it is important that crypto firms take precautions to prevent fraud, including warning investors regarding the rise in scams, Brown added. But it is also important that app stores have proper safeguards to prevent fake apps, Brown wrote.
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Tax-free Crypto Payments? Sinema and Toomey Propose Senate Bill Covering Transactions Under $50
MarketWatch, July 28, 2022A new bill proposed by a bipartisan pair of U.S. senators would make cryptocurrency transactions valued at less than $50 tax-exempt.
The Virtual Currency Tax Fairness Act of 2022, proposed by Pennsylvania Republican Pat Toomey and Arizona Democrat Kyrsten Sinema, has a stated goal to "simplify the use of digital assets for everyday purchases," according to the press release associated with the bill.
According to the United States Senate Committee on Banking, Housing, and Urban Affairs, when a crypto transaction occurs, it can be a taxable event if the digital asset appreciated in value due to capital-gains-tax rules. The bill would create a tax exemption for all transactions under the amount of $50, as well as any gains less than $50 on personal transactions.
The new bill aims to "amend the Internal Revenue Code of 1986 to exclude from gross income de minimis gains from certain sales or exchanges of virtual currency, and for other purposes," the text of the bill reads.
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US Tech Bill Creates White House Blockchain Adviser Role
CoinDesk, July 28, 2022A U.S. bill to boost computer chip manufacturing that's heading to President Joe Biden's desk will also establish a crypto advisory role inside his administration.
The bipartisan legislation, which cleared both chambers of Congress after a House vote on Thursday, will establish a new adviser on blockchain and cryptocurrency issues who will work in the Office of Science and Technology Policy.
"I am proud to foster the policy needed to ensure innovation continues to take shape in our government," said Rep. Darren Soto (D-Fla.), a crypto supporter who is co-chair of the Congressional Blockchain Caucus, in a statement.
The bill, known as the Chips and Science Act, won a number of Republican supporters on an otherwise Democrat-heavy effort that will be counted as a significant political win for the party and President Biden.
The White House's science office was directed in the president's executive order on crypto to analyze the effects digital assets are having on climate change and return later this year with a report. The office requested public input on that report in March.
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FSOC Expects to Issue Digital Assets Report in Early Fall 2022
Bloomberg Tax, July 28, 2022The US Financial Stability Oversight Council says it expects to release in early fall a report on ensuring responsible development of digital assets, according to a Treasury Department readout of the council's meeting.
The Hedge Fund Working Group made progress in developing a risk-monitoring framework to inform the Council's assessment of current and emerging risks to financial stability related to hedge fund activities.
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News Articles
The news articles cover relevant content from July 27 through August 2. Access may require subscription.U.S. Crypto Firm Nomad Hit by $190 Million Theft
Nasdaq, August 2, 2022U.S. crypto firm Nomad has been hit by a $190 million theft, blockchain researchers said on Tuesday, the latest such heist to hit the digital asset sector this year.
Nomad said in a tweet that it was "aware of the incident" and was currently investigating, without giving further details or the value of the theft.
Crypto analytics firm PeckShield told Reuters $190 million worth of users' cryptocurrencies were stolen, including ether and the stablecoin USDC. Other blockchain researchers put the figure at over $150 million.
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Attorney General James Urges New Yorkers Deceived by Crypto Platforms to Report Concerns to OAG
Office of the New York State Attorney General, August 1, 2022New York Attorney General Letitia James today issued an investor alert urging any New Yorker deceived or affected by the cryptocurrency crash to contact her office. Many high-profile cryptocurrency businesses have frozen customer withdrawals, announced mass layoffs, or filed for bankruptcy, while investors have been left in financial ruin.
As part of the Office of the Attorney General's (OAG) ongoing investigative work, OAG is interested in hearing from New York investors who have been locked out of their accounts, who are unable to access their investments, or who have been deceived about their cryptocurrency investments. New Yorkers who have been affected by this conduct are strongly encouraged to report these issues to OAG. Attorney General James also encourages workers in the cryptocurrency industry who may have witnessed misconduct or fraud to file a whistleblower complaint with her office, which can be done anonymously.
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SEC Slaps Founders, Promoters of Alleged Ponzi Scheme Forsage With Fraud Charges
CoinDesk, August 2022The U.S. Securities and Exchange Commission charged 11 people tied to the alleged $300 million crypto Ponzi scheme Forsage with fraud on Monday.
Forsage was launched in January 2020 by four founding members: Vladimir Okhotnikov of the Republic of Georgia, Jane Doe aka Lola Ferrari of Indonesia and Mikhail Sergeev and Sergey Maslakov of Russia. It quickly grew to be one of the most popular decentralized apps (dapps) on the Ethereum blockchain, and at its peak, it consumed roughly a quarter of the blockchain's bandwidth and caused gas fees to spike, data from Dune Analytics showed.
Millions of users from around the world were recruited by a network of promoters, including a group that called themselves the "Crypto Crusaders," to send money via smart contracts on the Ethereum, Tron and Binance blockchains in exchange for a payout when they recruited another investor, the SEC said – a business model the agency described as "a textbook pyramid and Ponzi scheme."
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Pearson Says NFTs Could Reap Profit in Secondhand Book Sales (1)
Bloomberg Tax, August 1, 2022The chief executive officer of Pearson Plc, one of the world's largest textbook publishers, said he hopes technology like non-fungible tokens and the blockchain could help the company take a cut from secondhand sales of its materials as more books go online.
The print editions of Pearson's titles -- such as "Fundamentals of Nursing," which sells new for £57.99 ($70.88) -- can be resold several times to other students without making the London-based education group any money. As more textbooks move to digital, CEO Andy Bird wants to change that.
"The move to digital helps diminish the secondary market, and technology like blockchain and NFTs allows us to participate in every sale of that particular item as it goes through its life," by tracking the material's unique identifier on the ledger from "owner A to owner B to owner C," said Bird, a former Disney executive.
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Crypto Prices Crashed, but True Believers Are Holding On
WSJ, July 30, 2022With the crypto market crashing, there is a growing divide between investors who are looking to make money and those who believe in its mission. Some true believers, like Mr. Larsen, tout crypto as a way to replace, or at least push back against, big banks and the traditional fiat-money system. Others are more enthusiastic about blockchain, a kind of digital ledger underpinning cryptocurrencies, that could be used to change how records are tracked and stored in areas as varied as medicine and real estate.
Some of the traders knuckling down on crypto are fairly well off, which means they have money to lose—and a higher tolerance for risk. Many, including Mr. Larsen, didn't have their investments tied up in lending platforms like Celsius Network LLC and Voyager Digital Ltd., both of which have frozen withdrawals and filed for bankruptcy protection. Customers there haven't been able to access their money for weeks.
Some investors buy cryptocurrencies as if they are stocks, holding them in a crypto exchange and hoping prices rise so they can make a profit. Others deposit their crypto into yield-earning accounts with firms that then invest those digital assets or lend them out to others for a fee. Bitcoin, the biggest cryptocurrency, is riding the wave of July's market rally. It is up about 28% in July, but is still down about 65% from its November record high.
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Voyager Digital's Clash With US Regulators Followed by Broader FDIC Warning
CoinDesk, July 29, 2022The day after demanding Voyager Digital erase its claims that customers' funds would get government protections, the U.S. Federal Deposit Insurance Corporation has issued a broader warning to bankers that they need to keep their crypto partners in line.
The agency, which maintains an insurance fund to pay back depositors if their banks fail, doesn't extend that protection to failing cryptocurrency firms that use those banks, according to an FDIC letter to banks posted Friday. "FDIC insurance does not protect a nonbank's customers against the default, insolvency, or bankruptcy of any nonbank entity, including crypto custodians, exchanges, brokers, wallet providers or other entities that appear to mimic banks but are not," the agency instructed.
The FDIC guidance added that if a bank's crypto partner "makes misrepresentations about the nature and scope of deposit insurance," there could be legal risks for that regulated lender. The FDIC and Federal Reserve sent a letter to Voyager CEO Stephen Ehrlich this week that accused the crypto lender of misleading customers about the protections on their assets by implying that they'd be covered by deposit insurance in the event of Voyager's collapse.
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Nearly 75% of Retailers Plan to Accept Cryptocurrency Payments Within the Next 2 Years
CNBC, July 29, 2022From Starbucks to Lamborghinis, consumers are using cryptocurrency to pay for a variety of goods — and retailers are taking notice.
Nearly 75% of retailers plan to accept either cryptocurrency or stablecoin payments within the next two years, according to a June survey conducted by Deloitte titled "Merchants getting ready for crypto."
Deloitte polled a sample of 2,000 senior executives from the retail industry who represent a range of subsectors including cosmetics, electronics, fashion, transportation, food and beverage.
While digital currencies like Bitcoin are typically only as valuable as users believe them to be, a stablecoin is a type of cryptocurrency that derives its value from an underlying asset. Stablecoins are often pegged to currencies such as the U.S. dollar or a commodity such as gold.
Although paying with cryptocurrency is fairly novel now, 83% of retailers expect consumer interest in digital currencies to increase over the next year and a little over half of them have invested over $1 million into enabling digital payments, according to the survey.
For consumers, that means you could soon buy clothes, drinks, beauty products and more with crypto.
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Brands Try Turning NFTs From Kitschy Collectibles Into Something Utilitarian for Consumers
WSJ, July 29, 2022Marketers are moving past offering nonfungible tokens as branded collectibles and instead trying to make their NFTs practically useful for consumers. NFT projects that give people a sense of community, access to a physical experience or rewards are now the most promising for brands, industry executives said.
"It should be about the value it gives you in completing your everyday life," said AJ Dalal, managing director for data and Web3 at digital consulting firm Publicis Sapient.
While plenty of consumers are still speculating on NFT collectibles for financial gain, the NFT industry is being forced to evolve, said Geoff Renaud, chief marketing officer and co-founder of Invisible North, a marketing agency that helped create the on-site experience for an NFT project this year at the Coachella Valley Music and Arts Festival.
Tokens offered consumers a sense of community and ownership even before brands began trying to add tangible benefits, said Mr. Renaud of Invisible North. That is the opportunity that brands can build on, he suggested. "Not everything needs to be this massive risk [and] investment for your average consumer," Mr. Renaud said. "You can actually reward people and come up with incentives for them to engage."
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SEC Scrutiny of Coinbase-Listed Tokens Rattles Crypto Traders
Bloomberg News, July 28, 2022The US Securities and Exchange Commission's scrutiny of digital currencies that are listed on Coinbase Global Inc. is igniting concerns that a major crackdown for the rest of the industry is imminent.
The SEC has been investigating whether Coinbase shirked regulations by offering trading in certain tokens. Anxieties were already running high after the regulator took the unusual step of identifying several crypto assets that it considered to be securities as part of an insider trading case.
The SEC lawsuit against a former Coinbase manager and two others, coupled with the probe into the platform's listings, signal that after more than a year of warnings by Chair Gary Gensler the regulator's stance appears to be hardening. Meanwhile, the agency's assertion last week that nine tokens fall under its jurisdiction is drawing pushback inside the Commodity Futures Trading Commission, the US derivatives watchdog that also oversees crypto.
"This is a shot across the bow of the industry, not just across one boat within that armada," said James Cox, a professor specializing in securities law at Duke University School of Law.
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Three Arrows Liquidators May Try to Force Founders to Cooperate
Bloomberg Tax, July 28, 2022Liquidators overseeing the wind-down of Three Arrows Capital may soon try to force founders Kyle Davies and Su Zhu to help clean up the mess left behind by the crypto hedge fund's collapse.
Zhu and Davies have so far provided "rather selective and piecemeal disclosures" about the fund's assets, attorney Adam Goldberg said on behalf of the liquidators in a bankruptcy hearing Thursday. Without further cooperation, lawyers will try to compel the founders to turn over more information with assistance from US Bankruptcy Judge Martin Glenn, he said.
The liquidators -- appointed by a judge in the British Virgin Islands -- have so far gained control of more than $40 million of the fund's assets. But that's a drop in the bucket compared to what Three Arrows owes creditors -- more than $2.8 billion of claims are already on file, and the figure is expected to rise significantly.
The liquidators expect to ask Glenn for help compelling Zhu and Davies to hand over information in the coming days, Goldberg said.
The case is Three Arrows Capital Ltd and Russell Crumpler, 22-10920 , U.S. Bankruptcy Court for the Southern District of New York (Manhattan).
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