Blockchain and Digital Assets News and Trends - January 2024Achieving Digital Transformation and Securing Digital Assets
This is our first monthly bulletin for 2024, aiming to help companies identify important legal developments governing the use and acceptance of blockchain technology, smart contracts, and digital assets.
While the use cases for blockchain technology are vast, this bulletin focuses on uses of blockchain and smart contracts in the financial services sector. With respect to digital assets, we have organized our approach to this topic by discussing it in terms of traditional asset type or function (although the types and functions may overlap) – that is, digital assets as:
- Virtual currencies
- Deposits, accounts, intangibles
- Negotiable instruments
- Electronic chattel paper
- Digitized assets
In addition to reporting on the law and regulation governing blockchain, smart contracts, and digital assets, this bulletin will discuss the legal developments supporting the infrastructure and ecosystems that enable the use and acceptance of these new technologies.
SEC secures victory against Terraform Labs and founder Do Kwon: key takeaways
In late December, Judge Jed Rakoff of the federal district court for the Southern District of New York issued an opinion and order on cross-motions for summary judgment in an SEC enforcement action against blockchain and cryptocurrency creator Terraform Labs and founder Do Hyeong Kwon.
The SEC had alleged that, in developing, marketing, and selling various cryptocurrencies, the defendants had offered and sold securities without registration, offered and effected transactions in security-based swaps without registration, and engaged in fraud.
The court granted summary judgment for the SEC on its claims for unregistered offer and sale of securities, granted summary judgment for the defendants on the SEC’s claims for unregistered transactions in security-based swaps, and denied the cross-motions on the fraud claims.
Although the case involves issues similar to other SEC enforcement actions involving digital assets, the SEC’s focus on the defendants’ stablecoin and its role within the ecosystem may present a new front in the SEC’s ongoing oversight of the US cryptocurrency industry. Read more.
CFTC Tech Advisory Committee’s DeFi report: key takeaways for DeFi builders and innovators
A nuanced, and remarkably technical, report from the CFTC’s Technology Advisory Committee (TAC) approaches decentralized finance (DeFi) as a promising and, in some respects, inevitable technology that presents novel but manageable risks for users and government.
The TAC serves the CFTC’s Digital Assets and Blockchain Technology Subcommittee, which is chaired by CFTC Commissioner Christie Goldsmith Romero and features an impressive roster of industry experts and current and former government officials. The TAC’s 79-page report encourages engagement among industry and government to mitigate DeFi’s risks and prevent flight from the US of DeFi innovators whose technology has the potential to enhance financial inclusion while complementing a safe and robust financial system.
Here, we review the high points of the report, then offer six takeaways for DeFi builders and innovators. Read more.
IRS delays reporting of business transactions involving receipt of digital assets until regulations are issued
By Tom Geraghty
The Treasury Department and the Internal Revenue Service (IRS) recently issued Announcement 2024-4, informing businesses that they do not have to report the receipt of “digital assets” in the same way they report the receipt of cash, at least until Treasury and IRS issue regulations specifically.
This announcement may serve as a significant relief to businesses accepting cryptocurrency and other digital assets as payment for goods and services. Read more.
STATUTORY AND AGENCY DEVELOPMENTS
GAO report catalogs risks and benefits of digital assets. On December 13, the Government Accountability office published its report on the relationship between digital assets and economic sanctions. The report describes the risks that digital assets may pose to the dozens of economic sanctions programs the US deploys to serve its foreign policy goals. The report also acknowledges the benefits of a public ledger that can be used to track and identify illicit actors. The GAO concludes that US agencies have taken effective measures to mitigate risk and encourages further promotion of uniform global standards.
FINRA annual report adds new crypto asset section. On January 9, the Financial Industry Regulatory Authority (FINRA), the largest self-regulatory organization for securities firms, published its Annual Regulatory Oversight Report. The report provides insight into FINRA’s supervisory, regulatory, and enforcement efforts over the prior year. This year’s report introduces a new “Crypto Asset Developments” section that advises FINRA member firms to “identify and address the relevant regulatory and compliance challenges and risks,” associated with crypto assets such as AML compliance and “due diligence on crypto asset private placements.” The new section goes on to identify some of the crypto asset functions that FINRA member firms offer such as custodial services and operating “Alternative Trading Systems” for crypto assets. The section also describes “Surveillance Themes” among potential violations by FINRA members involving crypto assets and offers a list of “Effective Practices” to mitigate the risk of violations.
SEC approves bitcoin spot ETFs. On January 10, the Securities and Exchange Commission (SEC) approved a number of widely anticipated bitcoin spot exchange traded funds (ETFs). The historic approvals follow a decision by the US Court of Appeals for the District of Columbia that faulted the SEC for its “arbitrary and capricious” treatment of a Bitcoin ETF proposed by Grayscale Investments, LLC. In a statement, SEC Chair Gary Gensler, who voted to approve the ETFs, acknowledged that the Washington, DC Circuit’s ruling influenced his decision, and reiterated his belief that “the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws.” He further asserted that the SEC “is merit neutral and does not take a view of particular companies, investments, or the assets underlying an [ETF product].” Despite this assertion, Gensler expressed his view, as Chair of the SEC, that “bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.” In contrast, Commissioner Hester Pierce issued a statement in which she accused the agency of “squander[ing] a decade of opportunities to do [its] job.” Commissioner Pierce blamed the SEC’s disparate treatment of cryptocurrency ETFs for several harms, including diminished public trust in the SEC, creating an “artificial frenzy around [the ETFs],” and alienating “a generation of product innovators.”
CFTC votes to approve clearinghouse license for Bitnomial over dissenting vote. On December 13, the Commodities Futures Trading Commission (CFTC) voted 4 to 1 to approve a clearinghouse license for Bitnomial, Inc., a digital asset derivatives exchange. The licensure is significant because Bitnomial already held exchange and brokerage licenses, meaning Bitnomial will become the first crypto-focused licensee as a clearinghouse, brokerage, and a derivatives exchange. In a dissenting statement, Commissioner Christy Goldsmith Romero wrote that the Commodity Exchange Act and its implementing regulations “do not contemplate such a novel integrated market structure.” She cautioned that vertically integrated market structures like Bitnomial’s could pose unique risks to customers and expressed a need for further study and public engagement. In a separate statement the same day, Commissioner Goldsmith Romero called on the CFTC to initiate formal rulemaking addressing vertically integrated market structures common among virtual asset service providers. Bitnomial, however, viewed the approval as an important step for safety and transparency in the US digital assets derivative market.
CFTC approves notice of proposed rulemaking for protecting funds held in derivatives clearing organizations. At the CFTC’s open meeting held on December 18, the agency approved a notice of proposed rulemaking that would enhance protections for clearing member funds and assets held by derivatives clearing organizations (DCOs). Among other things, the rule would require clearing member funds to be segregated from the DCO’s own funds and enable DCOs to hold customer and clearing member funds at certain foreign central banks. The CFTC is also proposing to require DCOs to conduct a daily calculation and reconciliation of the amount of funds owed to customers and clearing members and the amount actually held for customers and clearing members. In a statement released the same day, Commissioner Kristin Johnson argued that protections like those in the proposed rule played a key role in protecting DCOs that offered digital asset derivatives contracts against the fallout from the FTX bankruptcy.
ENFORCEMENT ACTIONS AND LITIGATION
SEC obtains $1.7 million consent order against BarnBridge DAO. On December 22, the SEC announced it had reached settlement with BarnBridge DAO and its two founders. BarnBridge DAO, a purported decentralized autonomous organization, was accused of offering for sale digital assets called SMART Yield bonds which the SEC alleged were unregistered securities. According to the order, SMART Yield bonds pooled digital assets and generated yields for holders who invested more than $500 million. In addition, the order raised the novel allegation that each automated yield pool was its own unregistered investment company. The SEC’s position is remarkable because the yield pools were essentially collections of permissionless smart contracts. BarnBridge DAO agreed to disgorge $1.5 million, while each founder agreed to pay $125,000 in civil money penalties.
CFTC obtains default judgment against California pig-butchering scammers. On December 20, the CFTC announced it obtained its first court judgment against so-called “pig butchering” scammers. The common scam involves developing a friendly or romantic relationship with a victim and then luring them into a fraudulent investment scheme. The US District Court for the Central District of California entered a default judgment against Cunwen Zhu and his company Justby International Auctions. According to the Order, Zhu and his company acted as “money mules” transferring approximately $1.3 million between other players in the scheme.
IcomTech Ponzi scammer pleads guilty. On December 22, the US Attorney’s Office for the Southern District of New York announced that David Carmona, founder of a Ponzi scam known as IcomTech, pled guilty to a single count of conspiracy to commit wire fraud. According to the press release, IcomTech claimed to be a mining and trading company that promised investors outlandish returns on their investments. Carmona and several co-conspirators used those investments to pay off prior investors, promote the scheme with lavish expos, and enrich themselves with luxury goods and real estate.
Fraudulent crypto mining scheme founder charged with wire fraud. On December 19, the US Attorney’s Office for the District of Arizona announced charges against Jeremie Sowerby in connection with an alleged cryptocurrency scheme known as Dunamis Global Technologies. The indictment alleges that Sowerby claimed to own warehouses in Arizona that housed cryptocurrency mining facilities and sold victims mining machines that he would maintain at his warehouses. In reality, Sowerby allegedly kept the money and used it to buy luxury goods, cryptocurrency, and real estate. Both the FBI and the IRS Criminal Investigation unit participated in the investigation.
Security engineer pleads guilty to hacking decentralized cryptocurrency exchanges. On December 14, the US Attorney’s Office for the District of New York announced that Shakeeb Ahmed, a senior security engineer for an international technology company, pled guilty to hacking Nirvana Finance and another unnamed decentralized exchange (DEX) in July 2022. The sophisticated hacks allowed him to steal more than $12 million in cryptocurrency that he then attempted to launder through mixing services and “chain hopping.” According to the press release, the guilty plea represents the first conviction for hacking a DEX, a service many view as a disintermediated collection of smart contracts with no recognized legal entity. Ahmed pled guilty to computer fraud and agreed to pay more than $5 million in restitution.
Genesis Global surrenders New York BitLicense, agrees to pay $8 million. On January 12, the New York State Department of Financial Services (DFS) announced a consent decree with Genesis Global Trading that would require the trading platform to pay $8 million in penalties. According to the Order, Genesis Global Trading failed to maintain adequate anti-money laundering controls, sanctions screening, cybersecurity, consumer protection disclosure, and reporting programs. Despite noting that Genesis Global Trading’s “ongoing efforts to remediate the shortcomings…by devoting significant financial and other resources to updating both its BSA/AML and cybersecurity programs,” DFS nevertheless required the firm to surrender its BitLicense and cease operations.
SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS
Interpol seizes $300 million across 34 countries in virtual asset police operation. On December 19, Interpol announced the conclusion of a six-month operation against online financial crimes involving virtual assets such as “pig butchering” fraud schemes and an NFT “rug pull.” The operation, called HAECHI IV, involved nearly 3,500 arrests and $300 million in seized assets across 34 countries.
Nigerian central bank lifts ban on crypto trading. The Central Bank of Nigeria has reportedly lifted restrictions on virtual asset service providers enabling them to transact with banks and other financial service providers. Though banks are still not permitted to hold, trade, or transact with virtual currencies, virtual asset service providers can now open a bank account and apply for a license from the country’s SEC. Nigerian media reports that the new rules are unclear – however, industry participants are hopeful they signal an easing in the government’s historically hostile treatment of crypto.
UK’s Digital Securities Sandbox goes live. Starting January 8, participants in the UK’s Digital Securities Sandbox will begin experimenting with new models for blockchain-based securities that would otherwise be prohibited under UK law. The program is part of the Financial Services and Markets Act which authorizes the government to create sandboxes in which innovators can experiment within a modified regulatory regime. The Sandbox will last until January 2029.
EU Banking Authority to investigate ties between banks and crypto companies. On January 3, the European Banking Authority reportedly announced plans to investigate the relationships between European banks and non-bank financial institutions (NFBIs), which include virtual asset service providers (VASPs). The Authority, which is responsible for stress testing European Union banks, is reportedly concerned that crypto exposure represents a potential threat to lenders and, therefore, the wider banking system.
EU Banking Authority publishes new guidelines on illicit finance risks. On January 16, the European Banking Authority announced amendments to its guidelines on money laundering and terrorist financing risk for crypto asset service providers. Notably, the updated guidelines provide a list of factors that may indicate different levels of money laundering or terrorist financing risk. The list includes anonymizing features and the use of self-hosted wallets as factors that may increase risk, while KYC and transaction limits may reduce risks. Among other recommendations, the guidelines suggest using blockchain analytics tools to help providers assess their risk profile. These guidelines are the first in a series of crypto-related updates the European Banking Authority is planning to release.
DLA Piper news
- The Legal 500 ranks DLA Piper Tier 1 in FinTech: Crypto. DLA Piper was also ranked in Tier 2 for FinTech, and Margo Tank was ranked as a "Leading Individual."
- Chambers FinTech Legal ranks DLA Piper in all four categories including Band 2 for Blockchain and Digital Assets, with Margo Tank individually recognized in Band 3 in the Blockchain & Digital Assets and Payments & Lending areas.
- DLA Piper’s Commodities, Digital Assets, and Carbon Compliance and Enforcement team draws on decades of collective experience in the commodities and securities industry to help companies navigate new and complex commodities enforcement matters, including those related to agriculture, metals, energy, digital assets, and carbon/sustainable commodities, among others.
RECENT AND UPCOMING EVENTS
- American Bar Association Futures & Derivatives Law Committee. On January 26, Deanna Reitman will present at the winter meeting of the ABA’s Futures & Derivatives Law Committee. Her panel will discuss ethical considerations in digital assets and AI.
DLA Piper attorneys presented at the following:
- AI ChatRoom, a DLA Piper video series hosted by Danny Tobey covering various topics in AI.
- Small Splash, Large Ripple. Our latest webinar, held on November 16, covers the ripple effects stemming from the banking failures earlier this year, including emerging risks and predictions of what is to come in 2024. Speakers Rich Hans, Isabelle Ord, Margo Tank, Whitney Cloud, and Nicolas Véron (Senior Fellow, Peterson Institute for International Economics) shared their insight surrounding the business, regulatory, and litigation activities that their clients are facing in this discussion relevant to all financial services companies.
- Cryptocurrency and Digital Asset Regulation, published by the American Bar Association and co-edited by Deborah Meshulam and Michael Fluhr, includes chapters by Meshulam, Fluhr, and Margo Tank.
- The Corporate Transparency Act is coming: What you should know
- CPA releases draft rules for automated decision-making technology
Learn more about our Blockchain and Digital Assets practice by contacting any of our editors:
Contributors to this issue
CFTC settles enforcement action against DeFi platform Polymarket
25 January 2022 .3 minute read
December brings flurry of Treasury activity against virtual currency services
20 December 2023 .8 minute read