In the U.S. House of Representatives, Republicans hold a slim majority and can only afford to lose four votes on the House floor. Therefore, Rep. Patrick McHenry (R-NC), Chair of the House Financial Services Committee, has a largely unified financial services agenda, including digital assets as a core focus. The Committee, however, has not yet begun seriously legislating in the digital asset space and instead has spent most of its time focused on China and data privacy. We expect that digital assets will become a priority for the committee midyear. The Committee's first push will likely be a stablecoin regulation bill, picking up where the committee left off last year.
In the Senate, we expect most significant bipartisan legislation to originate from the Senate Agriculture Committee, instead of the Senate Banking Committee, given its crypto friendly leadership from Chair Debbie Stabenow (D-MI) and Ranking Member John Boozman (R-AR). Undoubtedly, the Biden Administration is expected to continue its bullish agenda despite increased oversight by the Republican House majority.
- Akin in the News
- Spotlight on Coinbase
- Key Developments
- Key Recent Enforcement Actions
- Akin Alerts and Podcast Episodes
Akin in the News
Spotlight on Celsius Network Limited
Akin serves as Special Litigation Counsel to Celsius Network Limited and Celsius KeyFi LLC (together, “Celsius”). Celsius Network Limited, one of the largest cryptocurrency based finance platforms in the world, filed its chapter 11 petition on July 14, 2022. In August 2022, Akin, on behalf of Celsius, filed an adversary complaint against Jason Stone and KeyFi LLC, (together, “Defendants”). In the adversary proceeding, Celsius is seeking turnover of digital property and damages in excess of $100 million from the Defendants, a staking and decentralized finance executive and his privately held company. In December 2022, Chief Judge Martin Glenn (Bankr. S.D.N.Y.) conducted a hearing on the Defendants' motion to dismiss, which he denied in a 28-page written opinion largely adopting the reasoning and positions advocated by Akin in Celsius' opposition brief and at oral argument.
That ruling set the stage for an evidentiary hearing on
Celsius' motion for a preliminary injunction barring the
Defendants from accessing or transferring certain digital assets
currently in their wallets or other accounts. The hearing took
place over two days on January 11 and 12, 2023, with extensive
examination and cross-examination of four witnesses and several
hours of closing arguments. Based on Celsius' arguments and
evidence, Chief Judge Glenn granted an asset freezing order,
including by restraining the Defendants from transferring or
dissipating digital assets (or proceeds of such assets) in the
Defendants' possession, custody or control that were
transferred from, or are traceable to, Celsius and its wallets and
accounts, and from using on-chain “mixers” or any other
means of concealing the destination of digital asset transfers
regardless of source. The Court subsequently entered an order
requiring the Defendants to provide substantial additional
disclosures concerning their handling of Celsius' digital
assets to permit Celsius to further trace the Defendants'
transfers and evaluate their staking, decentralized finance and
other activities with Celsius' coins while the freezing order
remains in place.
The Akin team was led by partner Mitchell Hurley and included Dean Chapman, Lizzy Scott, Heather Peckham, Jessica Mannon, and Michael Stanley.
Former Akin Partner Ian McGinley Named Director of Enforcement for CFTC
Akin is pleased to share that former white collar defense and government investigations partner Ian McGinley has begun serving as the new Director of the Division of Enforcement at the U.S. Commodity Futures Trading Commission (CFTC).
Akin's full press release regarding Ian's new role can be found here.
Spotlight on Coinbase
New York Department of Financial Services Announces $100 Million Settlement with Coinbase, Inc.
On January 4, 2023, the New York Department of Finance Services (DFS) Superintendent Adrienne A. Harris announced a $100 million settlement with Coinbase, Inc. after a DFS investigation found significant failings in the company's compliance program that violated the New York Banking Law and the DFS' virtual currency, money transmitter, transaction monitoring and cybersecurity regulations. According to the DFS' press release, the DFS' investigation found wide-ranging and long-standing failures in Coinbase, Inc.'s anti-money laundering program. The settlement requires Coinbase to pay a $50 million penalty and to invest an additional $50 million in its compliance program.
The DFS' press release can be found here.
Department of Justice Sentences Nikhil Wahi for Trading Using Misappropriated Information about Crypto Asset Listings on an Exchange
On January 10, 2023, U.S. District Judge Loretta A. Preska sentenced Nikhil Wahi to 10 months in prison for his participation in a scheme to commit insider trading in cryptocurrency assets by using confidential information from his brother, a former product manager at Coinbase Global, Inc. (Coinbase), about which crypto assets were scheduled to be listed on Coinbase's exchanges. Wahi previously pleaded guilty to one count of conspiracy to commit wire fraud. U.S. Attorney for the Southern District of New York Damian Williams noted that the “sentence makes clear that the cryptocurrency markets are not lawless. There are real consequences to illegal insider trading, wherever and whenever it occurs.” In addition to the prison sentence, Wahi was ordered to pay $892,500 in forfeiture.
The U.S. Attorney's Office press release can be found here.
Dutch Central Bank Imposes Administrative Fine of €3,325,000 on Coinbase Europe Limited
On January 18, 2023, the Dutch Central Bank (De Nederlandsche Bank (DNB)) imposed an administrative fine of €3,325,000 on Coinbase Europe Limited (Coinbase Europe). According to the DNB's announcement, the fine was imposed because Coinbase Europe provided crypto services in the Netherlands in the past without registration with the DNB. While the base amount for violations of this nature is €2,000,000, the DNB noted that the base amount has been increased “due to the severity and degree of culpability of the non-compliance.” In increasing the fine, the DNB took into account the fact that Coinbase Europe is one of the largest crypto service providers globally, has a significant number of customers in the Netherlands, has enjoyed a competitive advantage (as it has not paid any supervisory fees to DNB or incurred other costs in connection with DNB's regular supervision activities) and the non-compliance persisted over a prolonged period (from November 15, 2020 until at least August 24, 2022). Coinbase Europe has until March 2, 2023, to object to the fine.
The DNB's press release can be found here.
Ishan and Nikhil Wahi Move to Dismiss SEC Charges in Seattle District Court
On February 6, 2023, Ishan Wahi, a former Coinbase product manager, and his brother Nikhil Wahi, moved to dismiss an action brought by the U.S. Securities and Exchange Commission (SEC) in the Western District of Washington. The SEC's complaint alleges that, while employed at Coinbase, Ishan Wahi helped to coordinate the platform's public listing announcements that included what crypto assets or tokens would be made available for trading. According to the SEC's complaint, Coinbase treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information. However, from at least June 2021 to April 2022, Ishan Wahi repeatedly tipped the timing and content of upcoming listing announcements to his brother, Nikhil Wahi, and a friend, Sameer Ramani. Ahead of those announcements, Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit. The long-running insider trading scheme generated illicit profits totaling more than $1.1 million.
The Wahi brothers moved to dismiss the SEC's action, broadly accusing the SEC of seeking to "distort the federal securities laws beyond all recognition." In particular, they argued that the tokens at issue do not qualify as investment contracts since they all were purchased on the secondary market.
The original press release announcing charges can be found here, the SEC complaint can be found here and the motion to dismiss can be found here. News articles regarding the motion to dismiss can be found here and here.
Ishan Wahi Pleads Guilty to Wire Fraud Charges in First-Ever Cryptocurrency Insider Trading Case
On February 7, 2023, the U.S. Department of Justice announced that Ishan Wahi, a former product manager at Coinbase, pled guilty to two counts of conspiracy to commit wire fraud in connection with a scheme to commit insider trading in cryptocurrency assets by using confidential Coinbase information about which crypto assets were scheduled to be listed on Coinbase's exchanges. Wahi was arrested and charged in July 2022 and pled guilty before U.S. District Judge Loretta A. Preska. U.S. Attorney Damian Williams noted that “Wahi is the first insider to admit guilt in an insider trading case involving the cryptocurrency markets. Whether it occurs in the equity markets or the crypto markets, stealing confidential business information for your own personal profit or the profit of others is a serious federal crime.”
The U.S. Department of Justice press release can be found here.
U.S. Bankruptcy Court Issues Memorandum Opinion and Order regarding Ownership of Earn Account Assets
The Memorandum Opinion and Order can be found here.
Joint Statement on Crypto-Asset Risks to Banking Organizations
On January 3, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) issued a joint statement on crypto-asset risks to banking organizations. The joint statement identified a number of key risks associated with crypto assets that banking organizations should be aware of, including the risk of fraud and scams among crypto asset participants and legal uncertainties related to custody practices, redemptions, and ownership rights. The joint statement further noted that the agencies are supervising banking organizations that may be exposed to risks stemming from the crypto asset sector and carefully reviewing any proposals from banking organizations to engage in activities that involve crypto assets.
The joint statement can be found here.
SEC Files Objection on Binance Deal to Buy Voyager Digital
On January 4, 2023, the Securities and Exchange Commission (SEC) filed a limited objection and reservation of rights before the U.S. Bankruptcy Court for the Southern District of New York pushing back on Binance's plan to buy bankrupt crypto lender Voyager Digital in a deal valued at $1.022 billion. According to the filing, the asset purchase agreement underpinning the deal did not include certain necessary information, including information pertaining to the ability of Binance US to consummate the transaction. On January 11, 2023, American Banker reported that Voyager Digital had won court approval to sell its crypto platform to Binance.
The SEC's filing can be found here and American Banker's article can be found here.
Federal Reserve System Governor Shares Remarks on Crypto Oversight
On January 10, 2023, Federal Reserve Governor Michelle Bowman noted in remarks delivered at a Florida Bankers Association event that the “Fed and other banking agencies will continue to focus” on cryptocurrency markets, but “the bottom line is that we do not want to hinder innovation” and that as "regulators, we should support innovation and recognize that the banking industry must evolve to meet consumer demand. By inhibiting innovation, we could be pushing growth in this space into the non-bank sector, leading to much less transparency and potential financial stability risk.”
Governor Bowman's remarks can be found here.
New House Subcommittee with Jurisdiction Over Crypto Legislation
On January 12, 2023, the Chairman of the House Financial Services Committee, Patrick McHenry, announced the Financial Services Committee's subcommittees, which includes the Subcommittee on Digital Assets, Financial Technology and Inclusion and places former banker Rep. French Hill at its helm. The subcommittee's jurisdiction will cover, among other things, providing clear rules among federal regulators for the digital asset ecosystem, developing policies that promote financial technology to reach underserved communities and identifying best practices and policies that continue to strengthen diversity and inclusion in the digital asset ecosystem.
The Financial Services Committee press release can be found here and Rep. Hill's statement can be found here.
Office of Financial Research Publishes 2022 Annual Report to Congress and Addresses Risks in Digital Assets Markets
On January 12, 2023, the Office of Financial Research (OFR) published its 2022 Annual Report to Congress (Report), which discusses the OFR's assessment of risks associated with the U.S. financial system and considered emerging threats posed by “non-traditional risks”, such as digital assets. According to the executive summary of the Report, (i) risks in the digital-assets markets were highlighted when several crypto asset lenders suspended customer withdrawals following the decline in crypto asset prices in June 2022, (ii) digital assets experienced a volatile 2022, with the total market capitalization falling from over $2.2 trillion in January 2022 to under $1 trillion in August 2022, (iii) while losses to date appear largely contained within the digital-asset sector, “the risk of contagion looms,” and (iv) in May 2022, the third largest stablecoin at the time depegged and the $18.5 billion loss in value highlighted risks associated with stablecoins and “spillover risks” in the digital-assets space.
The Report can be found here, the press release can be found here and the executive summary of the Report can be found here.
White House Office of Science and Technology Policy Requests Comments on Digital Assets Research and Development
On January 22, 2023, the White House Office of Science and Technology Policy (OSTP) requested public comments to help identify priorities for research and development related to digital assets, including various underlying technologies such as blockchain, distributed ledgers, decentralized finance, smart contracts and related issues such as cybersecurity and privacy, programmability, and sustainability as they relate to digital assets.Interested parties are invited to submit comments electronically on or before 5:00 p.m. ET on March 3, 2023.
The OSTP's notice can be found here.
New York Department of Financial Services Warns Crypto Custody Providers to Keep Customer Assets Segregated
On January 23, 2023, the DFS issued Guidance on Custodial Structures for Consumer Protection in the Event of Insolvency (Guidance) in which it reiterated the need to separate account for and segregate customer virtual currency from the corporate assets of the virtual currency entities that act as custodians. The Guidance emphasizes the DFS' expectations for “sound custody and disclosure practices to better protect customers in the event of an insolvency”. The Guidance further addresses the use of customer virtual currency, sub-custody arrangement and customer disclosure requirements.
The Guidance can be found here.
White House Issues Briefing on the Administration's Roadmap to Mitigate Cryptocurrency Risks
On January 27, 2023, the White House issued a briefing titled “The Administration's Roadmap to Mitigate Cryptocurrencies' Risks” (the Briefing). The Briefing noted that 2022 was a “tough year” for cryptocurrencies, in part due to the “wave of insolvencies” and serious losses suffered by everyday investors who trusted cryptocurrency companies. The Briefing confirmed that the administration's focus is on “continuing to ensure that cryptocurrencies cannot undermine financial stability, to protect investors, and to hold bad actors accountable”. At President Biden's direction, the Briefing noted that the past year has been spent identifying the risks of cryptocurrencies and acting to mitigate them using the authorities that the Executive Branch has. Furthermore, the Briefing stated that in the coming months, the administration will unveil priorities for digital assets research and development, which will help the technologies powering cryptocurrencies protect consumers by default. The Briefing also added that “Congress, too, needs to step up its efforts”.
The White House briefing can be found here.
Key Recent Enforcement Actions
SEC Charges Creator of CoinDeal Crypto Scheme and Seven Others in Connection with $45 Million Fraud
On January 4, 2023, the SEC charged Neil Chandran, Garry Davidson, Michael Glaspie, Amy Mossel, Linda Knott, AEO Publishing Inc, Banner Co-Op, Inc and BannersGo, LLC for their involvement in a fraudulent investment scheme named CoinDeal that raised more than $45 million from sales of unregistered securities to tens of thousands of investors worldwide. According to the SEC's complaint, among other things, Chandran, Davidson, Glaspie, Knott and Mossel falsely claimed that investors could generate extravagant returns by investing in CoinDeal, disseminated false and misleading statements to investors regarding the purported value of CoinDeal, and collectively misappropriated millions of dollars of investor funds for personal use.
The SEC's press release can be found here and the SEC's complaint can be found here.
New York Attorney General Sues Former CEO of Celsius Cryptocurrency Platform for Defrauding Investors
On January 5, 2023, New York Attorney General Letitia James filed a lawsuit against Alex Mashinsky, a co-founder and former CEO of cryptocurrency lending platform Celsius Network LLC and its related entities (collectively "Celsius"), for defrauding hundreds of thousands of investors, including more than 26,000 New Yorkers, out of billions of dollars' worth of cryptocurrency. According to the press release, the lawsuit alleges that Mashinsky repeatedly made false and misleading statements about Celsius's safety to encourage investors to deposit billions of dollars in digital assets onto the platform. Attorney General James' lawsuit seeks to ban Mashinsky from doing business in New York and require him to pay damages, restitution, and disgorgement.
The Office of the New York State Attorney General press release can be found here.
CFTC and SEC Charge Avraham Eisenberg with Manipulating Mango Markets' “Governance Token” to Steal Over $110 Million of Crypto Assets
On January 9, 2023, the Commodities Future Trading Commission (CFTC) filed a civil enforcement action in the US District Court for the Southern District of New York charging Avraham Eisenberg with a fraudulent and manipulative scheme to unlawfully obtain over $110 million in digital assets from a purported decentralized digital asset exchange. Eisenberg was already facing charges from the Department of Justice for the same underlying conduct. This is the CFTC's first enforcement action for a fraudulent or manipulative scheme involving trading on a supposed decentralized digital asset platform, and its first involving a scheme that is sometimes called “oracle manipulation.”
The CFTC's complaint alleges that on October 11, 2022, Eisenberg unlawfully misappropriated over $110 million in digital assets from Mango Markets, a crypto asset trading platform, by creating two anonymous accounts on Mango Markets and artificially inflating the price of MNGO by rapidly purchasing substantial quantities of MNGO on three digital asset exchanges to pump up the price of MNGO. Eisenberg then cashed out his profits by using the inflated value of his swaps as collateral to withdraw over $110 million in digital assets from Mango Markets, effectively draining all available assets from the Mango Markets platform.
On January 20, 2023, the SEC also charged Avraham Eisenberg with orchestrating an attack on Mango Markets by manipulating the MNGO token. According to the SEC's complaint, beginning on October 11, 2022, Eisenberg engaged in a scheme to steal approximately $116 million worth of crypto assets from the Mango Markets platform. The complaint further alleges that, among other things, Eisenberg engaged in a series of large purchases of thinly traded MNGO tokens to artificially raise the price of MNGO tokens. Eisenberg was arrested and detained in Puerto Rico, and has been denied bail.
The CFTC's press release can be found here, the SEC's press release can be found here and the SEC's complaint can be found here, and a Litigation Alert with more information from Akin can be found here.
SEC Charges Genesis and Gemini for the Unregistered Offer and Sale of Crypto Asset Securities
On January 12, 2023, the SEC charged Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program. According to the SEC's press release, through the unregistered offering, Genesis and Gemini raised billions of dollars' worth of crypto assets from hundreds of thousands of investors.
The SEC's press release can be found here and the SEC's complaint can be found here.
U.S. Authorities Charge Russian Crypto Exchange Founder with Money Laundering
On January 18, 2023, news reports noted that U.S. authorities had filed money laundering charges against Anatoly Legkodymov, the Russian founder of cryptocurrency exchange Bitzlato Ltd., on the basis of money laundering concerns.
News articles regarding the arrest can be found here, here and here.
SEC Charges Nexo Capital Inc. Regarding Unregistered Offering of Crypto Asset Lending Product
On January 19, 2023, the SEC charged Nexo Capital Inc. with failing to register the offer and sale of its retail crypto asset lending product, the Earn Interest Product (EIP). In order to settle the SEC's charges, Nexo agreed to pay a $22.5 million penalty and cease its unregistered offer and sale of the EIP to U.S. investors. In parallel actions announced on January 19, 2023, Nexo agreed to pay an additional $22.5 million in fines to settle similar charges by state regulatory authorities. According to the SEC's press release, in agreeing to settle with Nexo, the SEC considered remedial acts promptly undertaken by the company and the company's cooperation with SEC.
The SEC's press release can be found here and the SEC's order can be found here.
Akin Alerts & Podcast Episodes
A Fractured Framework: Regulatory Actions Against Mango Token Trader Highlight Complexities of Crypto Enforcement (February 2, 2023)
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