While this issue of CryptoLink addresses developments in the month of February, March 2023 has brought a significant wave of activity in the digital assets sphere, impacting some of the largest players in the market. Binance's founder, various Binance entities and its former chief compliance officer are defending a civil enforcement action against the Commodity Futures Trading Commission (CFTC). Crypto entrepreneur Justin Sin and three of his companies, including Tronix and BitTorrent, are facing charges brought by the Securities and Exchange Commission (SEC) for fraud and securities law violations. Meanwhile, the SEC simultaneously charged eight celebrities for illegally touting the Tronix and BitTorrent securities without disclosing their compensation. Coinbase has disclosed that it received a Wells Notice from the SEC stating that the SEC had made a "preliminary determination" to recommend enforcement action against the company alleging violations of the federal securities laws. And finally, Terraform Labs founder Do Kwon was indicted in the U.S. on charges of commodities fraud, securities fraud and wire fraud in connection with an alleged year-long cryptocurrency fraud. The flood of new high profile cases in the crypto space in March reflect the dynamic and fast-paced developments in the digital assets sector and the appetite for enforcement amongst U.S. authorities, and will be addressed in greater detail in our April CryptoLink issue.
In the United States, Silicon Valley Bank (SVB), Signature Bank and crypto-focused Silvergate's failures are all consuming for the government. Many legislators are committed to figuring out what went wrong and how to best prevent another bank from failing. There are three camps emerging in Washington, D.C. One camp of progressive Democrats seeks to unwind the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155). This bill, from 2018, rolled back some of the more stringent threshold requirements in Dodd-Frank for large banks. The second camp includes conservatives who point to the banks' "woke" priorities for instigating the bank failures. The third camp is more measured, with various Democrats and Republicans jointly agreeing that deference should be given to the regulators but oversight of those regulators' rules and regulations is paramount. It appeared that Congress was going to focus the next few months on digital assets; instead, the bank failures are now occupying that space.
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. We still 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.
Spotlight on FTX
New CEO of FTX Testifies in Bankruptcy Proceedings
On February 2, 2023, the Office of the United States Trustee gave notice of the intent to call John J. Ray III, the new CEO of FTX Trading Ltd. (FTX), to testify as part of its bid to have an examiner appointed to investigate the company's downfall. On February 6, 2023, in testimony for FTX's case in the United States Bankruptcy Court for the District of Delaware, Ray stated that he and other professionals had "carefully" been conducting an investigation into FTX's activities and appeared to push back against a motion to assign an independent examiner to the bankruptcy case. Judge John Dorsey did not rule on whether to appoint an independent examiner during the hearing.
The notice can be found here and further information can be found here and here.
Bankman-Fried Wins Ruling in Texas State Securities Board Case
On February 2, 2023, the Texas State Securities Board was denied an opportunity to present its fraud case against Samuel Bankman-Fried after a judge ruled that the state had not established it had jurisdiction to act against him. Administrative Law Judge Sarah Starnes found that Bankman-Fried is not a Texas resident and cannot be sued in lieu of his former companies unless the Texas securities regulator can establish that the former FTX leader personally had done business in the state. A hearing scheduled for February 2, 2023, in which the Texas State Securities Board hoped to present evidence of Bankman-Fried's alleged fraud, was cancelled.
Further information can be found here and here.
Class Action Suit Alleges Signature Bank Aided FTX Fraud
On February 6, 2023, in a complaint filed in the U.S. District Court, Southern District of New York, Statistica Ltd. and fund trading arm Statistica Capital Ltd. alleged that Signature Bank was aware of the financial entanglement between FTX and Alameda Research LLC (Alameda) and did nothing to alert regulators or stop its own clients from contributing money to the cryptocurrency exchange's fraud scheme.
The complaint can be found here and further information can be found here.
Financial Services Committee and Oversight and Investigations Subcommittee Chairman Probe Timing of Action Against Bankman-Fried
On February 10, 2023, House Financial Services Committee Chairman Patrick McHenry and Oversight and Investigations Subcommittee Chairman Bill Huizenga sent a letter to the SEC Chair Gary Gensler demanding records and communications between and among both the SEC's Division of Enforcement, the Office of the Chair and the U.S. Department of Justice (DOJ) regarding the timing of the charges filed against Bankman-Fried and his subsequent arrest prior to his scheduled testimony before the House Financial Services Committee. The letter notes that on December 13, 2022, the House Committee on Financial Services held a hearing about the collapse of FTX and expected to hear testimony from Bankman-Fried, but the night before the Committee's hearing, Bahamian officials arrested him in anticipation of an extradition request from the United States. According to the letter, "the timing of the charges and his arrest raise serious questions about the SEC's process and cooperation with the Department of Justice. The American people deserve transparency from you and your agency."
The press release and letter to SEC Chair Gensler can be found here.
Nishad Singh, Former Director of Engineering of FTX, Charged by DOJ, SEC and CFTC and Agrees to Cooperate with Regulators
On February 28, 2023, Nishad Singh, 27, the former Director of Engineering of FTX, pled guilty to criminal charges arising from the collapse of FTX and agreed to cooperate with federal prosecutors. Singh pled guilty to one count of wire fraud, three counts of conspiracy to commit fraud, one count of conspiracy to commit money laundering and one count of conspiracy to defraud the United States by violating campaign finance laws. He became the third person to agree to cooperate with prosecutors, following in the footsteps of Caroline Ellison, former CEO of Alameda, and Gary Wang, FTX Co-Founder. The charges against Mr. Singh carry a maximum prison term of 75 years.
Further information can be found here and here.
Also on February 28, 2023, the SEC charged Singh for his role in a multiyear scheme to defraud equity investors in FTX. According to the SEC's complaint, Singh created software code that allowed FTX customer funds to be diverted to Alameda, despite false assurances by Bankman-Fried to investors that FTX was a safe crypto asset trading platform with sophisticated risk mitigation measures to protect customer assets, and that Alameda was just another customer with no special privileges. The SEC's complaint alleges that (i) Singh knew or should have known that such statements were false and misleading, (ii) Singh was an active participant in the scheme to deceive FTX's investors, (iii) Bankman-Fried, with the knowledge of Singh, directed hundreds of millions of dollars more in FTX customer funds to Alameda, which were used for additional venture investments and loans to Bankman-Fried, Singh and other FTX executives, and (iv) as FTX neared collapse, Singh withdrew approximately $6 million from FTX for personal use.
The SEC's press release can be found here and the SEC's complaint can be found here.
On February 28, 2023, the CFTC filed fraud charges against Singh. The two-count complaint filed in the U.S. District Court for the Southern District of New York charges Singh with fraud by misappropriation and with aiding and abetting fraud committed by Samuel Bankman-Fried, FTX and Alameda. According to the CFTC's press release, the charges against Singh are related to those in a previously filed and ongoing CFTC action against Bankman-Fried, FTX, Alameda, FTX Co-Founder Gary Wang and Alameda Co-CEO Caroline Ellison, that alleges a fraudulent scheme causing the loss of over $8 billion in FTX customer assets. Singh did not contest his liability on the CFTC's claims, and has agreed to the entry of a proposed consent order of judgment as to his liability on the charges in the complaint.
The CFTC's press release can be found here and the CFTC's complaint can be found here.
Collapse of Crypto-Friendly Silvergate Amidst Regulatory Inquiries and Investigations Concerning Its Ties to FTX and Alameda
On March 8, 2023, Silvergate Capital Corporation, the holding company for Silvergate Bank, announced its intent to wind down operations and voluntarily liquidate the bank. Founded in the 1980s as a small local lender, Silvergate began providing services for cryptocurrency users in 2016, and in recent years it had become a key player in the crypto industry. In February 2023, reports that Silvergate was facing scrutiny from the DOJ, Congress and other banking regulators surrounding its dealings with FTX and Alameda sent its stock plunging.
Silvergate's press release can be found here and more information can found here and here.
Bankman-Fried Charged In Connection with $40 Million Bribe to Chinese Government Officials
On March 28, 2023, U.S. prosecutors unveiled a revised indictment (filed before the U.S. District Court for the Southern District of New York) against Samuel Bankman-Fried alleging that, among other things, he authorized and directed a bribe of at least $40 million to one or more Chinese government officials in order to unfreeze certain Alameda trading accounts (which had been frozen by Chinese authorities) containing over $1 billion in cryptocurrency. The charges pertain to violations of the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act. According to the indictment, after certain Alameda cryptocurrency trading accounts were frozen by Chinese law enforcement authorities in early 2021, Bankman-Fried (and others operating at his direction) tried "numerous methods" to unfreeze the accounts, including retaining attorneys to lobby in China for Alameda's funds to be unfrozen, attempting to transfer cryptocurrency from the frozen accounts to certain fraudulent accounts in an effort to circumvent the Chinese authorities' freeze orders and, ultimately, directing a $40 million bribe to one or more Chinese government officials to unfreeze the accounts; the Alameda accounts were subsequently unfrozen and Bankman-Fried thereafter authorized the transfer of additional tens of millions of dollars in cryptocurrency to complete the bribe and used the unfrozen cryptocurrency to fund additional Alameda trading activity. Bankman-Fried now faces 13 criminal counts, an increase from the initial 8 charges he faced upon his arrest in December 2022.
The indictment can be found here.
Key Developments
Congressman Luetkemeyer Introduces the Chinese CBDC Prohibition Act to Prohibit the Use of the Chinese Central Bank Digital Currency
On February 1, 2023, Chairman of the Subcommittee on National Security, Illicit Finance and International Financial Institutions Congressman Blaine Luetkemeyer introduced the Chinese Central Bank Digital Currency (CBDC) Prohibition Act to prohibit the use of the Chinese Central Bank Digital Currency, also known as the Digital Yuan, by U.S. licensed money service businesses. According to Congressman Luetkemeyer, "[w]e must establish clear barriers to prevent the [Chinese Community Party] from monitoring the transactions and collecting the financial data of American consumers and businesses. This bill is a necessary step in building those barriers." Currently, federally licensed money service businesses are not engaging in transactions involving the digital Yuan. This bill would preempt potential attempts by money service businesses to offer services that would increase usage of China's Digital Yuan.
Congressman Luetkemeyer's press release can be found here.
Coinbase Secures Dismissal of Lawsuit over Unregistered Securities
On February 1, 2023, Reuters and Bloomberg reported that Coinbase Inc. had secured a dismissal of a lawsuit by consumers alleging that the cryptocurrency exchange facilitated the sale of unregistered securities on its platform. According to the news articles, the proposed class action suit was filed in federal court in New York in October 2021 and sought damages stemming from the sale or soliciting of 79 digital assets; U.S. District Judge Paul Engelmayer stated that customers who transacted on the Coinbase and Coinbase Pro trading platforms could not show that the company sold or held title to the 79 tokens they traded.
The Reuters article can be found here and the Bloomberg article can be found here.
U.K. Sets Out Plans to Regulate Crypto Assets and Protect Consumers
On February 1, 2023, the U.K. government announced ambitious plans to protect consumers and grow the economy by robustly regulating crypto asset activities. According to the press release, the "robust approach to regulation mitigates the most significant risks, while harnessing the advantages of crypto technologies" which "enables a new and exciting sector to safely flourish and grow, boosting jobs and investment." Under plans set out by the U.K. government on February 1, 2023, the United Kingdom will seek to regulate a broad suite of crypto asset activities, consistent with its approach to traditional finance. The public consultation is open until April 30, 2023, after which the U.K. government will consider feedback and work to set out its consultation response.
Further information can be found here.
House Committee on Agriculture Announces Sub-Committee on Commodity Markets, Digital Assets and Rural Development
On February 2, 2023, the House Committee on Agriculture announced the Sub-Committee on Markets, Digital Assets and Rural Development. The sub-committee shall have jurisdiction over, among other things, policies to bring robust oversight and retail customer protections to digital commodity markets and policies to promote robust risk-mitigation, resiliency and recovery planning for derivatives markets, intermediaries and participants.
The House Committee on Agriculture's announcement can be found here.
SEC Division of Examinations Announces 2023 Priorities, Including Crypto Assets
On February 7, 2023, the SEC's Division of Examinations (the "Division") announced its 2023 examination priorities to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets. Among the list of the Division's 2023 priorities, the Division highlighted emerging technologies and crypto assets, noting that examinations of registrants will focus on the offer, sale, recommendation of or advice regarding trading in crypto or crypto-related assets and include whether the firm (1) met and followed their respective standards of care when making recommendations, referrals or providing investment advice; and (2) routinely reviewed, updated and enhanced their compliance, disclosure and risk management practices.
The SEC's press release can be found here.
Dubai's Virtual Assets Regulatory Authority Announces Virtual Assets and Related Activities Regulations 2023
On February 7, 2023, the Virtual Assets Regulatory Authority of Dubai (VARA) published its Virtual Assets and Related Activities Regulations 2023 ("VARA Regulations"), together with a series of associated rulebooks. The VARA Regulations establish the regulatory framework governing virtual assets and all related activities in the Emirate of Dubai. In particular, under the VARA Regulations, no entity may carry out any virtual assets activities by way of business or promote, offer or purport to do so in Dubai unless it is authorized and licensed by VARA for the relevant virtual asset activity, an employee carrying on or otherwise facilitating the virtual asset activity on behalf of its employer that is licensed by VARA, or an exempt entity under the VARA Regulations.
The VARA Regulations can be found here and the associated rulebooks are available here.
European Parliament Publishes Study on Recent Trends in the U.K. Financial Sector
On February 8, 2023, the Policy Department for Economic, Scientific and Quality of Life Policies issued a paper on "recent trends in U.K. financial sector regulation and possible implications for the European Union (EU), including its approach to equivalence" (the "Paper") at the request of the European Parliament's Committee on Economic and Monetary Affairs. The Paper summarizes and discusses recent trends in financial sector legislation in the U.K. and divergence between the EU and the U.K. In relation to crypto assets, the Paper notes an expectation of "aggressive divergence especially in areas where UK authorities see growth opportunities and feel less constrained by international fora and cooperation initiatives, such as crypto." The Paper further highlights a "very positive attitude" towards crypto assets by the U.K. government and regulatory authorities. The Paper concludes that as digital finance and crypto are areas where there is not generally retained EU legislation from the U.K.'s viewpoint, "significant divergence can be expected over the coming years" particularly given "the emphasis by the UK government on digital finance and crypto assets as a growth area" and "given recent failures and fragility in the crypto space."
The Paper can be found here.
IMF Executive Board Discusses Elements of Effective Policies for Crypto Assets
On February 8, 2023, the Executive Board of the International Monetary Fund (IMF) discussed a board paper on "Elements of Effective Policies for Crypto Assets" (the "Board Paper") that provides guidance to IMF member countries on key elements of an appropriate policy response to crypto assets. The Board Paper sets out a framework of nine elements that can help members develop a "comprehensive, consistent, and coordinated policy response." The Executive Board noted that "while the supposed potential benefits from crypto assets have yet to materialize, significant risks have emerged," including macroeconomic risks, capital flow volatility, and fiscal risks, and agreed that "crypto assets have implications for policies that lie at the core of the Fund's mandate," particularly noting the widespread adoption of crypto assets could undermine the effectiveness of "monetary policy, circumvent capital flow management measures, and exacerbate fiscal risks." The Executive Board emphasized that the IMF could serve as a "thought leader" in further analytical work on rapidly evolving developments in crypto assets.
The Board Paper can be found here and the IMF's press release can be found here.
Senate Committee on Banking, Housing and Urban Affairs Conducts Hearing on Crypto Crash
On February 14, 2023, the U.S. Senate Committee on Banking, Housing and Urban Affairs conducted a hearing titled "Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets," with Lee Reiners, Policy Director, Duke Financial Economics Center, Professor Linda Jeng, Visiting Scholar on Financial Technology, Georgetown Institute of International Economic Law Adjunct Professor of Law, and Professor Yesha Yadav, Vanderbilt University Law School, providing testimony as witnesses.
Further information regarding the hearing can be found here.
SEC Proposes Enhanced Safeguarding Rule for Registered Investment Advisers
On February 15, 2023, the SEC proposed rule changes to enhance protections of customer assets managed by registered investment advisers. If adopted, the changes would amend and redesignate rule 206(4)-2 under the Investment Advisers Act of 1940 and amend certain related recordkeeping and reporting obligations. SEC Chair Gary Gensler stated that "investors would benefit from the proposal's changes to enhance the protections that qualified custodians provide. Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned." The proposed rules would broaden the application of the current investment adviser custody rule beyond client "funds and securities" to include any client assets (including digital assets) in an investment adviser's possession or when an investment adviser has authority to obtain possession of client assets. The proposed changes are intended to help ensure that qualified custodians provide certain standard custodial protections when maintaining an advisory client's assets. In separate comments, Chair Gensler has indicated his belief that investment advisers would not be able to rely on crypto trading and lending platforms as qualified custodians based on how they currently operate. The proposed rule would also enhance protections for certain securities and physical assets that cannot be maintained by a qualified custodian. The proposal retains the current requirement for an adviser with custody of client assets to obtain a surprise examination from an independent public accountant to verify client assets, but it would modify the audit exception to this provision to expand the availability of its use, but significantly increase the requirements on advisers utilizing the exception.
The SEC's press release can be found here.
FDIC Demands Cryptocurrency Exchange Cease Making False or Misleading Representations about Deposit Insurance
On February 15, 2023, the Federal Deposit Insurance Corporation (FDIC) issued letters demanding two entities, CEX.IO Corp. (a cryptocurrency exchange) and Zera Financial (a non-bank financial service provider) cease and desist from making false and misleading statements about FDIC deposit insurance and take immediate corrective action to address these false or misleading statements. Additionally, the FDIC directed two websites, Captainaltcoin.com and Banklesstimes.com, to remove similar false and misleading statements about the FDIC-insured status of CEX.IO. According to the FDIC's press release, based upon evidence collected by the FDIC, these entities made false representations, stating or suggesting that CEX.IO and Zera Financial are FDIC–insured, that FDIC insurance will protect customers' cryptocurrency, or that that FDIC-insurance would protect customers in the event of Zera Financial's failure; these representations were found to be false and misleading.
The FDIC's press release can be found here.
Majority Whip Tom Emmer Introduces CBDC Anti-Surveillance State Act
On February 23, 2023, Majority Whip Tom Emmer introduced the CBDC Anti-Surveillance State Act to "halt efforts of unelected bureaucrats in Washington, D.C. from issuing a central bank digital currency (CBDC)". The bill was co-sponsored by Reps. French Hill, Warren Davidson, Mike Flood, Byron Donalds, Pete Sessions, Andy Biggs, Young Kim, Ralph and Barry Loudermilk.
Further information can be found here.
Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities
On February 23, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve), the FDIC and the Office of the Comptroller of the Currency (OCC) issued a joint statement on the liquidity risks presented by certain sources of funding from crypto-asset-related entities, and some effective practices to manage such risks. The statement reminds banking organizations to apply existing risk management principles and highlights key liquidity risks associated with crypto assets and crypto asset sector participants. The statement notes that certain sources of funding from crypto-asset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows.
The joint statement can be found here.
Federal Trade Commission, SEC and New York State Department of Financial Services Object to Voyager's Chapter 11 Plan
On February 23, 2023, the SEC, the Federal Trade Commission (FTC) and the New York State Department of Financial Services (DFS) objected to Voyager Digital's chapter 11 plan, arguing that, among other things, it does not do enough to protect customer assets and inappropriately releases government fraud claims against Voyager. The SEC maintained that Voyager has failed to show its proposed sale to Binance.US would comply with federal law. In its objection, the FTC stated that the plan inappropriately discharges the company and its officers from "fraud-related debts" and potential government fraud and false representation claims in violation of the bankruptcy code. Furthermore, the DFS's objection maintained that Binance is not licensed to operate in New York and that the plan unfairly discriminates against New York account holders and others who live in states where the platform is unlicensed by delaying their recovery and forcing them to liquidate their assets and not giving them the option to recover cryptocurrency.
Further information (including the objections) can be found here.
CFTC Commissioner Announces New Digital Asset Markets Sub-Committee
On February 28, 2023, the CFTC Commissioner Caroline D. Pham announced the CFTC had established the Global Market Structure Subcommittee, the Digital Asset Markets Subcommittee, and the Technical Issues Subcommittee under the CFTC's Global Markets Advisory Committee (GMAC). Commissioner Pham is the sponsor of the GMAC and is seeking membership nominations for each Subcommittee, with a deadline for submissions of March 14, 2023. According to the press release, the Digital Asset Markets Subcommittee shall be responsible for identifying and assessing key issues and policy proposals with respect to digital asset markets, including digital finance and tokenization of assets, non-financial activities and Web3, and blockchain technology.
The CFTC's press release can be found here.
Key Recent Enforcement Actions
Department of Justice Charges Avraham Eisenberg in $110 Million Cryptocurrency Scheme
On February 2, 2023, the DOJ announced that Avraham Eisenberg was scheduled to make an initial appearance at the federal courthouse in Manhattan to face commodities fraud, commodities market manipulation and wire fraud charges in connection with the manipulation of the Mango Markets decentralized cryptocurrency exchange. According to the press release, Eisenberg engaged in a scheme to fraudulently obtain approximately $110 million worth of cryptocurrency from the cryptocurrency exchange Mango Markets and its customers and achieved this objective by artificially manipulating the price of certain perpetual futures contracts. He was previously arrested on December 26, 2022, in Puerto Rico, pursuant to a criminal complaint and ordered detained. He is facing parallel charges by the SEC and CFTC.
The DOJ's press release can be found here.
SEC Charges Las Vegas Resident in Crypto Fraud Targeting Filipino Community in California
On February 7, 2023, the SEC charged Las Vegas, Nevada, resident Emiliano S. Ryn and his company GexCrypto Corp. with defrauding members of the Filipino community in a scheme involving crypto assets. According to the SEC's complaint filed in the United States District Court for the District of Nevada, Ryn presented himself as a successful Filipino entrepreneur in the cryptocurrency space who could help the members of his community also become rich through investing in GexCrypto and in a second crypto asset mining business. From late 2017 through mid-2018, Ryn allegedly raised over $800,000 from 26 investors. According to the complaint, despite Ryn portraying GexCrypto as a world-class trading platform with superior service and technology, the platform was never built and was never operational. The complaint further alleges that Ryn's promises to investors of guaranteed returns from the crypto asset mining business, a minimum of $10,000 per month, were also false and, in reality, Ryn never paid any returns, and investors lost all of their contributions.
The SEC's press release can be found here.
Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges
On February 9, 2023, the SEC charged Payward Ventures, Inc. and Payward Trading Ltd. (commonly known as Kraken) with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transferred crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21%. In order to settle the SEC's charges, the two Kraken entities agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest and civil penalties. In addition, without admitting or denying the allegations in the SEC's complaint, both entities consented to the entry of a final judgment, subject to court approval, that would permanently enjoin each of them from violating Section 5 of the Securities Act of 1933 and permanently enjoin them and any entity they control from, directly or indirectly, offering or selling securities through crypto asset staking services or staking programs.
The SEC's press release can be found here and the SEC's complaint can be found here.
CEO of Cryptocurrency and Forex Trading Platform Pleads Guilty to over $240 Million Scheme to Defraud Investors
On February 10, 2023, the U.S. Attorney for the Southern District of New York announced the guilty plea of Eddy Alexandre, the leader of a purported cryptocurrency and foreign exchange trading platform called EminiFX, who solicited more than $248 million in investments from tens of thousands of individual investors after making false representations in connection with the EminiFX trading platform. According to the press release, Alexandre pled guilty to one count of commodities fraud and agreed to pay forfeiture in the amount of $248,829,276.73, as well as restitution in an amount to be specified by the Court. The offense of commodities fraud carries a maximum sentence of 10 years in prison.
The U.S. Attorney's Office press release can be found here.
Paxos Receives Wells Notice from the SEC
On February 13, 2023, Paxos (the leading regulated blockchain infrastructure platform) announced it had received a Wells notice from the SEC on February 3, 2023, which stated that the staff of the SEC is considering recommending an action alleging that Binance USD (BUSD) is a security and that Paxos should have registered the offering of BUSD under the federal securities laws. In response to the notice, Paxos issued a statement in which it noted that it "categorically disagrees" with the SEC staff because BUSD is not a security under the federal securities laws.
Paxos' press release can be found here.
CFTC Charges Vista Network Technologies and Its CEO with Fraudulent Solicitation and Misappropriation of Digital Asset Commodities
On February 16, 2023, the CFTC announced it had charged Vista Network Technologies (Vista) and its CEO, Armen Temurian, with fraudulent solicitation and misappropriation of customers' digital asset commodities. In the complaint, filed in the U.S. District Court for the Eastern District of New York, the CFTC alleges the defendants fraudulently solicited over $7 million worth of bitcoin and ether from customers. The complaint also alleges the defendants misappropriated a portion of these assets in a Ponzi-like scheme. CFTC Acting Director of Enforcement Gretchen Lowe stated that this action "demonstrates our ongoing commitment to use the tools at our disposal to hold bad actors accountable in the digital asset space ... It is just one more example of the CFTC's efforts to protect retail customers from fraud related to digital asset commodities."
The CFTC's press release can be found here and the CFTC's complaint can be found here.
SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes
On February 16, 2023, the SEC charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multibillion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities. According to the SEC's complaint, from April 2018 until the scheme's collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transaction. The SEC's complaint further alleged that Terraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value and repeatedly misleading and deceiving investors.
The SEC's press release can be found here and the SEC's complaint can be found here.
SEC Charges NBA Hall of Famer Paul Pierce for Unlawfully Touting and Making Misleading Statements about Crypto Security
On February 17, 2023, the SEC announced charges against former NBA player Paul Pierce for touting EMAX tokens, crypto asset securities offered and sold by EthereumMax, on social media without disclosing the payment he received for the promotion, and for making false and misleading promotional statements about the same crypto asset. According to the SEC's press release, Pierce agreed to settle the charges and pay $1.409 million in penalties, disgorgement and interest. SEC Chair Gary Gensler stated that "[t]his case is yet another reminder to celebrities: The law requires you to disclose to the public from whom and how much you are getting paid to promote investment in securities, and you can't lie to investors when you tout a security."
The SEC's press release can be found here.
Forsage Founders Indicted in $340 Million DeFi Crypto Scheme
On February 22, 2023, a federal grand jury in the District of Oregon returned an indictment charging four founders of Forsage, a purportedly decentralized finance (DeFi) cryptocurrency investment platform, for their roles in a global Ponzi and pyramid scheme that raised approximately $340 million from victim-investors. According to court documents, Vladimir Okhotnikov, Olena Oblamska, Mikhail Sergeev and Sergey Maslakov, all Russian nationals, allegedly touted Forsage as a decentralized matrix project based on network marketing and "smart contracts," and aggressively promoted Forsage to the public through social media as a legitimate and lucrative business opportunity, but, in reality, the defendants operated Forsage as a Ponzi and pyramid investment scheme that took in approximately $340 million from victim-investors around the world. Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department's Criminal Division stated that "the department is committed to holding accountable fraudsters who cheat investors, including in the emerging DeFi space." Okhotnikov, Oblamska, Sergeev, and Maslakov are each charged with conspiracy to commit wire fraud. If convicted, the defendants face a maximum penalty of 20 years in prison.
The Department of Justice's press release can be found here.
New York Attorney General James Sues Cryptocurrency Platform for Failing to Register in New York
On February 22, 2023, New York Attorney General Letitia James sued CoinEx, a cryptocurrency platform, for failing to register as a securities and commodities broker-dealer and for falsely representing itself as a crypto exchange. According to the press release, the Office of the Attorney General was able to buy and sell cryptocurrencies on CoinEx in New York, although the company is unregistered in the state. The action seeks to permanently stop CoinEx from operating in New York through its website and mobile apps.
The Office of the New York State Attorney General's press release can be found here.
Robinhood Confirms SEC Is Probing Its Crypto Business
On February 27, 2023, Robinhood Markets Inc. disclosed in its Form 10-K filing that it had received an investigative subpoena from the SEC "regarding, among other topics, [Robinhood Crypto LLC]'s cryptocurrency listings, custody of cryptocurrencies, and platform operations." According to the filing, the request came shortly after FTX filed for bankruptcy on November 11, 2022, and "following the bankruptcies of several other major cryptocurrency trading venues and lending platforms earlier in 2022" (including Three Arrows Capital, Ltd., Voyager Digital Holdings, Inc. and Celsius Network LLC).
The Form 10-K filing can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
