This is our third monthly bulletin for 2022, aiming to help companies identify important and significant 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 will be primarily on the use of blockchain and or 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.
President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets: Consumer protection implications, and 3 steps for digital asset issuers
Consumer protection is a key issue in President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, which was issued on March 9.
Digital assets, the Order states, have “profound implications for the protection of consumers.” The Order further states that it is necessary to “take strong steps to reduce the risks that digital assets could pose to consumers” through the development of “sufficient oversight and standards.” Read more.
SEC Chair responds to letter of Congressional Blockchain Caucus. On. On February 17, Congressperson Tom Emmer (R-MN) announced the Congressional Blockchain Caucus had received a response to its November 13, 2021 letter regarding bitcoin spot exchange-traded products (ETPs) and exchange-traded funds (ETFs). For information on this November 13 letter, see our November 2021 issue. The response from Chair Gary Gensler of the Securities and Exchange Commission (SEC) asserted that ETPs and ETFs “are different products and contain different underlying holdings [and] [t]he Commission reviews each product under the standards applicable to the product itself.”
FinCen issues alert on red flags on potential Russian sanctions evasion attempts using virtual currency. On March 7, the Financial Crimes Enforcement Network announced the issuance of an Alert advising all financial institutions to be vigilant against potential efforts to evade the expansive sanctions and other US-imposed restrictions implemented in connection with the crisis in Ukraine. The Alert notes that convertible virtual currency (CVC) exchangers and administrators and other financial institutions “may observe attempted or completed transactions tied to CVC wallets or other CVC activity associated with sanctioned Russian, Belarusian, and other affiliated persons.” The Alert further reminds all financial institutions of the dangers posed by Russian-related ransomware campaigns and encouraged all financial institutions to identify and report suspicious activity associated with potential sanctions evasion.
FSB reports on risks of crypto-assets. On February 16, the Financial Stability Board (FSB) issued Assessment of Risks to Financial Stability from Crypto-assets, a report examining risks related to unbacked crypto assets, stablecoins, decentralized finance and cryptocurrency trading platforms. The report noted vulnerabilities associated with crypto-asset markets, including (1) increased linkages between crypto-asset markets and the regulated financial system; (2) liquidity mismatch, credit and operational risks that make stablecoins susceptible to sudden and disruptive runs on reserves, with the potential to spill over to short term funding markets; (3) increased use of leverage in investment strategies; (4) concentration risk of trading platforms; and (5) opacity and lack of regulatory oversight of the sector.
New York Fed questions stablecoins. On February 7, the Federal Reserve Bank of New York published The Future of Payments is Not Stablecoins, an article which asserts that stablecoins are not the best form of “money” for use as a means of exchange on a distributed ledger platform (DLT). The bank argues that stablecoins tie up liquidity unnecessarily or are risky and less fungible, and tokenized deposits would better integrate with existing banking and payment systems.
Colorado to accept cryptocurrency as payment. On February 23, Colorado Governor Jared Polis announced that Colorado will accept cryptocurrency as payment for state taxes and fees. The cryptocurrency payments would be processed by an intermediary and converted into a dollar value, which would then be deposited into the state treasury. In a February 15 interview, Polis said the program is expected to begin before summer. Polis further stated that he hopes to expand the program to include other state business such as driver’s licenses and hunting licenses.
Bank consortium for USDF stablecoins adds members. On March 9, the USDF Consortium announced that three new banks have joined its membership-based association of FDIC-insured banks to further the adoption and interoperability of USDF, a bank-minted tokenized deposit that will facilitate the compliant transfer of value on the blockchain. Amerant Bank, ConnectOne Bank and Primis Bank join the five founding bank members to represent more than $200 billion in total assets. For information on the Consortium, see our February issue.
Yuga Labs buys NFT projects CryptoPunks and Meebits from Larva Labs. On March 11, Yuga Labs, developer of Bored Ape Yacht Club (BAYC), announced the acquisition of the intellectual property of the CryptoPunks and Meebits collections from Larva Labs, combining the two largest picture for proof (PFP) non-fungible token (NFT) projects. The terms of the acquisition were not disclosed.
The Yuga Lab and Larva Labs projects have different approaches to exploitation of the intellectual property in the individual NFTs. Yuga Labs provides very broad commercial rights to BAYC. Larva Labs, in contrast, is unclear on the commercial rights granted to holders of CryptoPunks, which are limited, at best. Even though CryptoPunks was the original leader in the PFP market, this difference in business model has permitted BAYC prices and volume to overtake similar metrics for CryptoPunks. Yuga Labs launched BAYC as a collection of 10,000 JPEG images of cartoon apes in April 2021 at an average sales price of $186. At the end of February 2022, its market capitalization was estimated to be $1,073,506,022 and the average sales price was $282,000. Many owners of BAYC NFTs use the image as their profile picture on Twitter, but owners are also permitted to commercialize their NFT image, so BAYC hoodies, t-shirts and even wine are available. In addition, the ownership of a BAYC NFT provides access to certain virtual spaces and “special” parties at conferences. Yuga Labs announced that it would grant the holders of CryptoPunks and Meebits the same commercial rights granted to BAYC holders. The prices for CryptoPunks and Meebits increased significantly after the acquisition.
ENFORCEMENT ACTIONS AND LITIGATION
CFTC charges operators in $4 million bitcoin Ponzi schemes. On March 8, the Commodity Futures Trading Commission (CFTC) announced the filing of a federal civil enforcement action in the US District Court for the Eastern District of New York charging Dwayne Golden of Florida, Jatin Patel of India, Marquis Egerton of North Carolina, and Gregory Aggesen of New York with fraud for operating Ponzi schemes involving bitcoin, for fraudulently soliciting more than $44 million of investments, and misappropriating millions of dollars. According to the complaint, the men allegedly operated the websites Empowercoin and Ecoinplus, through which they fraudulently solicited individuals of more than $23 million of bitcoin, and operated the website JetCoin, through which the men fraudulently solicited individuals of more than $21 million of bitcoin. The CFTC seeks restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA) and CFTC regulations.
The US Attorney’s Office for the Eastern District of New York announced the separate indictment of three of the four men on criminal charges of wire fraud and money laundering.
SEC files charges in Ormeus Coin crypto fraud scheme. On March 8, the SEC announced charges against John and JonAtina Barksdale for defrauding thousands of retail investors out of more than $124 million through two unregistered fraudulent offerings of securities involving a digital token called Ormeus Coin. According to the complaint, the defendants falsely claimed that Ormeus Coin was supported by one of the largest crypto mining operations in the world, manipulated Ormeus Coin’s price and misused millions of dollars of investor funds for personal expenses. The SEC seeks injunctive relief, disgorgement plus interest and civil penalties.
Third founder of BitMEX pleads guilty. On March 9, the US Attorney’s Office of the Southern District of New York announced that Samuel Reed, one of the three founders of the offshore cryptocurrency derivative exchange BitMEX, pled guilty to violating the Bank Secrecy Act by willfully failing to establish, implement, and maintain an anti-money laundering (AML) program at BitMEX. Reed faces a maximum sentence of 5 years. For more information on BitMEX, see our August 2021 and October 2020 issues.
Founder of BitConnect indicted. On February 25, the Department of Justice announced that a federal grand jury in San Diego returned an indictment charging Satish Kumbhani, the founder of BitConnect, with orchestrating a global Ponzi scheme. According to court documents, Kumbhani misled investors about BitConnect’s Lending Program, touting BitConnect’s purported proprietary technology and obtaining approximately $2.4 billion from investors. However, the indictment alleges that BitConnect operated as a Ponzi scheme by paying earlier BitConnect investors with money from later investors. Kumbhani is charged with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodity price manipulation, operation of an unlicensed money transmitting business, and conspiracy to commit international money laundering. If convicted of all counts, he faces a maximum total penalty of 70 years in prison. For information on related BitConnect litigation, see our December 2021, September 2021, and June 2021 issues.
Yuga Labs and two NFT exchanges sued over stolen NFTs. Robert Armijo, the owner of one Bored Ape Yacht Club (BAYC) NFT and two Mutant Ape Yacht Club (MAYC) NFTs, claims that the NFTs were stolen from his wallet when he tried to exchange one MAYC NFT for three NFTs from another collection on the NFT trade site. The buyer allegedly tricked Armijo and took all three of Armijo’s NFTs from his wallet. Armijo also reached out to two NFT platforms, OpenSea and LooksRare, as well as Yuga Labs, in attempts to prohibit the resale of his allegedly stolen NFTs. He then filed suit in the United States District Court of Nevada, alleging claims of negligence due to the failure to implement appropriate consumer protections, negligent supervision and hiring and negligent hiring against OpenSea and LooksRare, and alleging negligence against Yuga Labs for failing to use reasonable care in monitoring and verifying the ownership of BAYC NFTs. The complaint seeks damages $6 million, as well as punitive damages.
SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS
UK authorities seize NFTs. On February 14, officials at Her Majesty’s Revenue and Customs reportedly made the first seizure of non-fungible tokens (NFTs) in connection with a probe into $1.9 million of suspected value-added tax fraud. The three NFTs seized have yet to be valued. UK officials assert that the seizure should “serve as a warning to anyone who thinks they can use cryptoassets to hide money from HMRC.”
Canadian police block crypto donations to Freedom Convoy. On February 17, the Royal Canadian Mounted Police (RCMP) reportedly issued letters to cryptocurrency exchanges ordering the exchanges to freeze transactions with 34 cryptocurrency accounts under the Emergency Economic Measures Order. According to reports, the accounts hold nearly $1 million in cryptocurrency and the RCMP assert the accounts are connected to donation campaigns for the Canadian Freedom Convoy 2022 truck driver protests.
Ukraine receiving crypto donations to purchase non-lethal military equipment. On March 9, Ukraine reportedly received nearly $100 million in crypto donations, according to Alex Bornyakov, Ukraine’s deputy minister at the Ministry of Digital Transformation. The donations include $1 million in Ethereum from the Bored Ape Yacht Club NFT collection. Donations are reportedly being spent on non-lethal equipment, including fuel, food and bulletproof vests for soldiers, with the suppliers directly accepting the cryptocurrency as payment. An additional donation of $10 million was recently announced by Kraken.
Anti-Money Laundering (AML) Bulletin Regulatory News Update, Winter 2022. In this issue, DLA provides updates on AML developments in the UK, the EU and internationally.
Come to our webinar
Enterprises are increasingly interested in entering crypto markets — but it’s not always clear what the boundaries of the playing field are. Please join us on April 14, 2022, for our 60-minute webinar, “Enterprise crypto: A discussion of trading crypto from structure, data, and regulation to tax.” Learn more and sign up here.
DLA Piper, in collaboration with TOKO, the digital asset creation engine empowering value creation, has joined the Shyft Network‘s Shyft Network Federation and will attest virtual asset provider (VASP) data on its blockchain. Read more.
TOKO issues digital private debt on Hedera public network with Hex Trust custody » Interview with Margo H.K. Tank by Börsen-Zeitung on cryptocurrency regulation.
Listen to our podcast, Crypto Savvy – Bringing a Token to Life, featuring HashKey Group, which discusses TOKO and its tech. The podcast is now available on on Spotify, Apple and Google Podcasts. Feel free to check out more on LinkedIn.
Learn more about our Blockchain and Digital Assets practice by contacting any of our editors:
Contributors to this Issue