The extensive landscape of blockchain technology finds its focal point in the financial services sector, especially concerning the utilization of blockchain and smart contracts. This article organizes its exploration of digital assets by examining them through the lens of traditional asset types or functions, encompassing securities, virtual currencies, commodities, deposits, accounts, intangibles, negotiable instruments, electronic chattel paper, and digitized assets. Delving beyond the legal framework governing blockchain, smart contracts, and digital assets, this piece will shed light on the legal advancements supporting the infrastructure and ecosystems essential for the integration and acceptance of these groundbreaking technologies.
SEC Settlement with Stoner Cats: NFT Space Under SEC Scrutiny
The Securities and Exchange Commission (SEC) has recently concluded a settlement with Stoner Cats 2 LLC (SC2), the entity behind the Ethereum-based NFT project Stoner Cats. This generative collection of 10,420 cat-themed NFTs raised approximately $8 million and produced an animated web series accessible exclusively to Stoner Cats NFT holders. This development signals the SEC’s intention to assert its authority over unregistered securities within the NFT space.
IRS and Treasury’s Proposed Regulations: Navigating the Digital Asset Reporting Regime
In response to the Infrastructure Investment and Jobs Act enacted in November 2021, the Internal Revenue Service (IRS) and the Treasury Department have proposed regulations outlining a new digital asset reporting regime. These regulations, unveiled on August 25, 2023, aim to align tax reporting rules for brokers of digital assets with those for securities and other financial instruments, marking a significant step in regulating the rapidly evolving digital asset landscape.
Uniswap Labs Class Action Dismissal: Legal Insights
The US District Court for the Southern District of New York dismissed a putative class action against Uniswap Labs, Inc., the developer of a popular decentralized exchange (DEX) on the Ethereum blockchain. The court’s decision, rendered on August 30, sheds light on the legal landscape surrounding decentralized exchanges and their associated liquidity providers.
STATUTORY AND AGENCY DEVELOPMENTS
Federal Developments: Navigating the Regulatory Landscape
- Commodities: Coinbase secures National Futures Association (NFA) approval as a Futures Commission Merchant (FCM), a milestone enabling eligible US customers to access regulated, leveraged, and cash-settled crypto futures. This move positions Coinbase as the first crypto-native leader to provide such access.
- CFTC: The Commodity Futures Trading Commission (CFTC) Global Markets Advisory Committee (GMAC) is set to hold a meeting on October 5, 2023. The meeting will focus on industry standards, best practices for tokenized asset markets, and the regulation of non-fungible tokens (NFTs) and utility tokens, among other topics.
- OFAC: A federal court upholds the Office of Foreign Assets Control (OFAC) designation of Tornado Cash, a cryptocurrency mixing service. The court’s decision, made on August 17, reinforces OFAC’s authority and underscores Tornado Cash’s alleged involvement in laundering money from high-profile cybercriminal activities.
- Federal Reserve: The Federal Reserve seeks authority over stablecoins, with Vice Chair Michael S. Barr emphasizing the need for a robust federal framework. Barr’s speech on September 8 highlights concerns over stablecoins’ impact on financial stability, monetary policy, and the US payments system.
- Securities: SEC Chair Gary Gensler testifies before the US Senate, characterizing the crypto industry as “rife with misconduct.” Gensler emphasizes the SEC’s commitment to bringing clarity and transparency to the crypto industry through enforcement actions, rulemaking, and education.
FBI Warning: NFT Scams and Vigilance in the Crypto Space
The Federal Bureau of Investigation (FBI) issues public service announcements cautioning against scams involving non-fungible tokens (NFTs) and crypto recovery companies, emphasizing the importance of vigilance in the evolving crypto landscape.
New York Department of Financial Services (NYDFS) Virtual Currency Guidance: Stricter Standards
Effective immediately, the NYDFS updates its virtual currency guidance, introducing heightened risk assessment standards for coin-listing policies and tailored, enhanced requirements for retail consumer-facing products or service offerings. Public comments on these updates are accepted until October 20.
NFTs: OpenSea’s Policy Shift and FASB’s Accounting Standards Update
- OpenSea announces the disabling of its NFT royalty enforcement tool, transitioning to optional creator fees. This move prompts discussions on creator empowerment and ongoing compensation.
- The Financial Accounting Standards Board (FASB) tentatively votes to finalize updates to accounting standards for cryptocurrencies and digital assets. The updates require companies to account for digital assets at fair market value on the balance sheet, with implications for cryptocurrencies and stablecoins.
Blockchain Experiments by Swift: Seamless Transfer of Tokenized Value
Swift reports successful experiments showcasing its infrastructure’s capability to facilitate the transfer of tokenized value across multiple public and private blockchains. The results affirm the potential of existing Swift infrastructure in providing a secure and scalable solution for financial institutions connecting to diverse blockchain networks.
ENFORCEMENT ACTIONS AND LITIGATION
SEC Enforcement Actions: NFTs, Bitcoin ETFs, and Linus Financial
- The SEC settles its first enforcement action against an NFT project, Impact Theory, for an alleged unregistered offering of crypto asset securities in the form of NFTs.
- The DC Circuit reverses the SEC’s rejection of Grayscale’s Bitcoin ETF, emphasizing the SEC’s failure to explain its disparate treatment of similar products.
- The SEC settles charges against Linus Financial for the failure to register offers and sales of its virtual currency lending product, highlighting the company’s cooperation and prompt remedial actions.
NFT Insider Trading: Former OpenSea Employee Sentenced
A former OpenSea employee is sentenced to three months in prison for NFT insider trading. This marks the first instance of imprisonment for insider trading in digital assets and underscores regulatory accountability in the cryptocurrency space.
CFTC Settlements: DeFi Protocols Face Charges
The CFTC brings and settles charges against three DeFi protocols—Opyn, ZeroEx, and Deridex—for violating the Commodities Exchange Act and failing to register as required. The penalties highlight the importance of adherence to regulatory requirements even in decentralized finance operations.
DOJ Indictment: Tornado Cash Founders Face Charges
The Department of Justice, FBI, and US Attorney’s Office announce an indictment against Tornado Cash founders for conspiracy to commit money laundering, violation of sanctions, and operating an unlicensed money transmitting business. This development amplifies regulatory scrutiny on privacy-focused cryptocurrency services.
Virtual Currency Fraud and Extortion: Sentencing and Indictment
- OneCoin co-founder is sentenced to 20 years for orchestrating one of the largest fraud schemes globally, conning investors out of billions through a fake cryptocurrency.
- The founder of a Bitcoin-for-cash exchange pleads guilty to AML failures, allowing his platform to be exploited for money laundering by scammers and drug traffickers.
- A former New Jersey corrections officer is charged with orchestrating a cryptocurrency fraud scheme targeting law enforcement, involving a fake crypto pension and a fraudulent investment group.
- A Pennsylvania man is sentenced to three years in prison for cryptocurrency fraud and extortion, participating in a SIM swapping scheme that defrauded cryptocurrency owners.
Federal Reserve Enforcement Action: Farmington Bank Faces Consequences
The Federal Reserve issues an enforcement action against Farmington State Bank and its holding company, FBH Corporation, for changing its business plan without notifying supervisors and obtaining prior approval. The action ensures the orderly wind-down of the bank’s operations while protecting depositors and the Deposit Insurance Fund.
SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS
Singapore Stablecoin Regulation and UK’s Adoption of the Travel Rule
- The Monetary Authority of Singapore (MAS) finalizes a stablecoin regulatory framework, ensuring value stability for stablecoins pegged to the Singapore Dollar or G10 currencies.
- The UK Financial Conduct Authority (FCA) adopts the Travel Rule, requiring cryptoasset businesses to collect, verify, and share information about cryptoasset transfers, reinforcing regulatory expectations for compliance.
IOSCO Recommendations for DeFi Regulation
The International Organization of Securities Commissions (IOSCO) releases policy recommendations for decentralized finance (DeFi), focusing on investor protection and market integrity. The recommendations emphasize the need for regulators to assess the responsibilities of founders, developers, and other entities in the DeFi space.
This comprehensive overview underscores the multifaceted developments and challenges within the blockchain, smart contracts, and digital assets landscape, highlighting the ongoing efforts by regulators to navigate this dynamic and evolving sector.