CryptoLink is a compilation of news stories published by outside organizations. Akin aggregates the stories, but the information contained in them does not necessarily represent the beliefs or opinions of the firm. Akin's January CryptoLink update includes developments and events that occurred between December 2023 and January 2024.

Congress continues to plug along on crypto policy. The Senate's attention – on a bipartisan basis – has been focused on extending Anti-Money Laundering (AML) regulatory authority to the digital assets space. This continues to draw fire from the crypto industry, particularly given concerns about AML application to decentralized finance. That said, it does seem that even the most aggressive crypto proponents in the House understand that some work in AML might be the price of entry on broader crypto legislation on stablecoins and market structure. House Financial Services Chairman Patrick McHenry (R-NC) and Rep. French Hill (R-AR) continue to work closely with Ranking Member Maxine Waters (D-CA) and the Administration on a stablecoin resolution, and they say that they are "close" to a deal. Given the AML concerns of the Administration, as well as continued concerns from Treasury about the systemic risk that digital assets might eventually pose to the larger financial system, there seems to be a shared interest in getting a regulatory framework to the President for signature sometime this year.

With the start of 2024, regulatory enforcement actions in the digital asset space continue to be a priority for several government agencies. First, the Commodity Futures Trading Commission (CFTC) has continued to expand its focus on the decentralized finance ("DeFi") space through providing industry and market participants with guidance on the opportunities and risks presented by decentralization through the agency's Decentralized Finance Report. The CFTC will likely continue to focus on "DeFi" in its enforcement actions this year. Further, the Securities and Exchange Commission (SEC) has continued to litigate cases against digital asset platforms. This month, many in the industry paid close attention to the oral arguments in connection with the SEC v. Coinbase case, in which Coinbase has filed a Motion to Dismiss the SEC's charges against the exchange. The Court's ruling on Coinbase's Motion to Dismiss will provide further guidance on how courts are interpreting the Howey test's application to various digital asset classes. Another headline case from last year, the criminal case against Sam Bankman-Fried, will continue to be a guidepost for criminal prosecutions of individuals involved in cryptocurrency fraud.

In this issue

  • Key Developments
  • Key Enforcement Actions
  • Akin Thought Leadership

Key Developments

CFTC Releases Decentralized Finance Report

On January 8, 2024, the CFTC's Digital Assets and Blockchain Technology Subcommittee of the Technology Advisory Committee released a detailed report on the opportunities and risks associated with the DeFi market. Commissioner Christy Goldsmith Romero noted that this foundational report serves "as a first step to facilitate a dialogue between policymakers and industry." The CFTC report provides detailed recommendations to mitigate risks to investors, consumers, market integrity, financial stability and to combat illicit finance. In particular, the report recommends (i) a resource assessment, data gathering and mapping exercise, (ii) surveying the existing regulatory perimeter, (iii) risk identification, assessment and prioritization, (iv) identifying and evaluating the range of potential policy responses to address risks, and (v) fostering greater engagement and collaboration with domestic and international standard setters, regulatory efforts and DeFi builders.

The CFTC's report can be found here and Commissioner Romero's comments can be found here.

SEC Approves 11 ETFs Holding Bitcoin to be Publicly Listed and Traded

On January 10, 2024, the SEC approved the listing and trading of spot bitcoin exchange traded fund (ETF) shares. This decision followed an earlier Court of Appeals ruling which struck down the SEC's previous decision to deny the trading of bitcoin ETF shares by Grayscale Investments, LLC. Following approval for Grayscale, 10 other companies also gained approval to have their bitcoin ETF shares publicly traded.

Following the SEC's order allowing the ETF trading, SEC chair Gary Gensler issued a statement in which he noted that the SEC had previously disapproved more than 20 exchange rule filings for spot bitcoin exchange-traded products (ETPs), one of which had been made by Grayscale and contemplated the conversion of the Grayscale Bitcoin Trust into an ETP. Gensler noted that "circumstances, however, have changed" and the "most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares." Gensler emphasized that the approval of a bitcoin ETF should not signal a willingness to approve listing for other crypto asset securities nor does it shift the SEC's position that "the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws." Gensler added that the SEC's action will include certain protections for investors, including by requiring sponsors of bitcoin ETPs to "provide full, fair, and truthful disclosure about the products." Furthermore, Gensler stressed that the SEC's approval should not be viewed as an endorsement of bitcoin. Instead, he noted that bitcoin is speculative, volatile, and used for "illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing."

The SEC order can be found here and Gensler's comments can be found here.

Crypto Advocacy Group Refuses to Answer to Accusations From Senator Warren

On January 15, 2024, Coin Center, a crypto currency lobbying group, responded to a letter issued by Senator Warren (a member of the Senate Banking, Housing and Urban Affairs Committee) to the Blockchain Association, Coin Center and Coinbase in December 2023 in which Warren questioned the presence of former defense and national security officials in crypto firms and their role in undermining efforts to regulate cryptocurrency. In their letter, Coin Center maintained that it had no obligation to answer the statements in the letter and that the letter and proposed legislation violate the First Amendment and fail to effectively regulate virtual currency.

Senator Warren's letter can be found here and a news report on Coin Center's response can be found here.

European Banking Authority Extends Anti Money Laundering Guidelines to Crypto

On January 16, 2024, the European Banking Authority (EBA) extended its guidelines on money laundering and terrorist financing risk factors to crypto-asset service providers (CASPs) in the European Union (EU). The new guidelines, which will go into effect on December 30, 2024, highlight money laundering and terrorist financing risk factors and mitigating measures that CASPs need to consider. Under the new guidelines, CASPs will be required to manage their exposure to financial crime by identifying vulnerability factors and implementing mitigating measures. The guidelines acknowledge the heightened risk for CASPs due to the speed of crypto-asset transfers and the potential for anonymity. Through extending the scope of the guidelines, the EBA seeks to harmonize the approach that CASPs across the EU should adopt when implementing the risk-based approach to anti-money laundering/counter-terrorism finance as part of their business. The EBA's press release notes that, given the interdependence of the financial sector, the new guidelines include guidance addressed to other credit and financial institutions that have CASPs as their customers or which are exposed to crypto assets.

The EBA's press release can be found here.

Terraform files for Chapter 11 Bankruptcy

On January 22, 2024, Singapore-based Terraform Labs Pte. Ltd., a cryptocurrency software developer, filed for chapter 11 bankruptcy in Delaware. Terraform is currently engaged in litigation against the SEC associated with its Terra stablecoin. According to the court filing, Terraform claimed assets between $100 million and $500 million and liabilities of the same monetary range.

Terraform's bankruptcy petition can be found here.

India Tightens Restrictions on Cryptocurrency Exchange Platforms

On December 28, 2023, India's Financial Intelligence Unit (FIU) requested that the Ministry of Electronics and Information block the URLs of nine different global cryptocurrency exchange platforms, including Binance, KuCoin, Huobi and Kraken. The FIU alleged that these platforms had operated illegally within the country and violated various crypto regulations. Following the request, Apple India and Google independently blocked the nine platforms from their respective app stores.

FIU's press release can be found here.

Key Enforcement Actions

SEC v. Coinbase: Debate over Application of the Howey Test During the Oral Arguments on Coinbase's Motion to Dismiss

On January 17, 2024, U.S. District Judge Katherine Polk Failla questioned attorneys on both sides in a hearing relating to Coinbase's motion to dismiss. The SEC brought a complaint against Coinbase in June 2023, alleging that Coinbase operated as an unregistered national securities exchange, broker and clearing agency. Coinbase filed its motion to dismiss in August 2023 on the basis that, among other things, Coinbase did not deal in securities.

The hearing lasted over five hours and focused on the application of the so-called Howey test (a three-pronged test that is used by courts to evaluate whether something is an investment contract) applies to digital assets sold on the Coinbase platform. While both the SEC and Coinbase agree that the Howey test is applicable to the case, the primary disagreement concerns whether the sale of Coinbase's digital assets creates a securities transaction and whether investment contracts require a contract between the buyer and seller. In particular, Judge Failla emphasized the need to consider the wider implications of the SEC's position that Coinbase's digital assets met the Howey test and constituted a securities transaction. If the case is not fully dismissed, both parties will proceed to discovery, which could proceed throughout the rest of 2024.

Further information can be found here and Coinbase's motion for judgment on the pleadings can be found here.

SEC Charges Individual with Fraudulent Securities Offering Involving Cryptocurrency

On December 21, 2023, the SEC charged Diana Mae Fernandez with conducting a $360,000 fraudulent securities offering. Fernandez is currently under arrest in Serbia and awaiting extradition to the United States pursuant to an indictment filed by the United States Attorney's Office for the Northern District of West Virginia. The SEC's complaint (filed in federal district court in the Northern District of West Virginia) alleges that, between 2018 and 2020, Fernandez induced investors to participate in the fraudulent securities offering by claiming that she would use their money to invest in, among other things, private and publicly traded companies, crypto assets and luxury real estate properties, and guaranteeing returns as high as 63%. Instead of investing investor funds as promised, Fernandez allegedly used them to pay for her day-to-day living expenses and lavish hotel stays, fund numerous cash withdrawals and make Ponzi-like payments to earlier investors.

The SEC's press release can be found here and the complaint can be found here.

Prosecutors Seek to Avoid Second Trial Against Bankman-Fried

On December 29, 2023, prosecutors from the U.S. Attorney for the Southern District of New York issued a letter to U.S. District Judge Lewis A. Kaplan providing notice to the Court that the government does not plan to proceed with a second trial in the ongoing litigation against FTX founder Samuel Bankman-Fried. On March 28, 2023, the grand jury returned a superseding indictment which included five additional courts (charging the defendant with conspiracy to bribe foreign officials, conspiracy to commit bank fraud, conspiracy to operate an unlicensed money transmitting business and substantive securities fraud and commodities fraud). At the trial, the government had introduced evidence of the defendant's conduct underlying the additional counts and noted that a trial on the additional courts would feature much of the same evidence that was presented at the initial trial. In its letter, the government explained that much of the evidence offered in a second trial was already offered in the first trial and can be considered by the court at the defendant's March 2024 sentencing. The letter further emphasized the "strong public interest in a prompt resolution" of Bankman-Fried's fraud case, where he was convicted on all seven charges in November 2023. In particular, the letter noted that "a second trial would not affect the United States Sentencing Guidelines range for the defendant, because the Court can already consider all of this conduct as relevant conduct when sentencing him for the counts that he was found guilty of at the initial trial."

The U.S. Attorney's letter can be found here.

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