Summer 2023 News Sweep
- SIFMA Raises Concerns Over SEC's Proposed Rule on DeFi Systems`
On June 14, 2023, the Securities Industry and Financial Markets Association (SIFMA) expressed concern regarding a proposed rule by the U.S. Securities and Exchange Commission (SEC) that could bring certain decentralized finance (DeFi) systems under its purview. SIFMA submitted comments urging caution regarding the expansion of Regulation ATS, which governs alternative trading systems, arguing that DeFi systems should have separate guidelines. SIFMA pointed out that complying with the proposed regulations could compromise the decentralized nature of DeFi systems.
- Ripple Claims Hinman Was Warned About Speech Confusion in SEC Lawsuit
In a June 13, 2023 filing, Ripple Labs, in its ongoing lawsuit with the SEC, alleged that ex-SEC director William Hinman was advised against the potential confusion his speech on crypto might create. Ripple pointed to internal SEC communications suggesting concerns over certain statements conflicting with the agency's stance. Ripple argues that the ambiguity from Hinman's speech and the SEC's varying interpretations of it contributed to the agency's enforcement case against them. The SEC has not commented on these allegations. The case continues in the Southern District of New York.
- CFTC Declares Victory in Ooki DAO Litigation
On June 9, 2023, the U.S. Commodity Futures Trading Commission (CFTC) declared victory in the Ooki DAO litigation after U.S. District Judge William H. Orrick issued a default judgment order requiring Ooki DAO, a decentralized autonomous organization accused of operating an illegal trading platform and unlawfully acting as a futures commission merchant, to pay a civil monetary penalty of $643,542. The court affirmed that the Ooki DAO qualifies as a "person" under the Commodity Exchange Act and is liable for violations. The order requires the shutdown of Ooki DAO's website and permanent trading and registration bans.
- SEC Alleges Coinbase Operating as Unregistered Securities Exchange in Lawsuit
On June 6, 2023, in a five-count complaint, the SEC alleged Coinbase, Inc. is operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also alleges Coinbase’s crypto asset staking-as-a-service program amounts to the offer and sale of unregistered securities. The complaint further highlights 13 crypto tokens in particular as tokens the SEC alleges are being traded on Coinbase in unregistered securities transactions. Many commentators have opined that, should the SEC prevail in its suit, centralized U.S.-based crypto exchanges may face significant challenges to operate without new legislation or SEC approval. Coinbase vigorously denies the allegations, as evidenced by its recent petition to the 3rd Circuit Court, compelling the SEC to respond to its rulemaking petition for digital assets. The company maintains that the SEC's delayed response is untenable and calls for urgent transparency and a clearer regulatory framework for the cryptocurrency industry.
- SEC Alleges Binance Operating as Unregistered Securities Exchange in Lawsuit
On June 5, 2023, the SEC filed a 13-count complaint against Binance Holdings Ltd., its U.S.-based affiliate BAM Trading Services Inc., and their founder, Changpeng Zhao, alleging multiple securities law violations. The SEC alleges Binance is operating as an unregistered national securities exchange, broker-dealer, and clearing agency, and engaging in the unregistered offer and sale of securities. The SEC alleges that despite public claims of restricted access for U.S. customers on Binance.com, Zhao and Binance allowed high-value U.S. customers to continue trading. The SEC further claims that Binance controlled operations of the Binance.US platform. The complaint contains a list of 12 particular tokens that the SEC alleges are being traded on Binance in unregistered securities transactions. On June 16, 2023, U.S. District Court Judge Amy Berman Jackson approved a stipulation and consent order, agreed to by Binance and the SEC after two days of mediation, allowing Binance.US to continue operations and ensuring U.S. customers’ assets remain in the country.
- SEC Proposes Settlements in Crypto Insider Trading Case
On May 30, 2023, the SEC unveiled proposed settlements in its first crypto insider trading case involving former Coinbase product manager Ishan Wahi and his brother, Nikhil. In a parallel criminal action, Ishan and Nikhil each pled guilty and were sentenced to 24 and 10 months in prison, respectively, and were ordered to disgorge all ill-gotten gains. The SEC settlement proposals, which await approval from U.S. District Judge Tana Lin, require no further disgorgement but bar the Wahis from denying the SEC’s allegations of insider trading. A friend implicated in the case, Sameer Ramani, remains at large. The proposed settlements do not address whether any of the tokens traded are securities.
- Gemini and Genesis File Motions to Dismiss SEC Claims Over Gemini Earn
On May 26, 2023, crypto exchange Gemini Trust Co. and bankrupt crypto lender Genesis Global Capital LLC filed motions to dismiss SEC claims that their investment program, Gemini Earn, violated securities laws. The companies argued that the program's contracts were simple lending arrangements, not unregistered securities, and that the SEC case is complicating the process of returning funds to investors. The SEC had claimed that the loan agreements outlining the service's terms constituted investment contracts, but Genesis argued that the payout was determined by a reliable, disclosed interest rate, not tied to Genesis or Gemini's business performance. Genesis also contended that Earn customers did not share in any risk or potential profits beyond a predetermined amount, hence the agreements did not constitute a “common enterprise” under the Howey test.
- Kim Kardashian Must Face Investor Suit Over Crypto Promos
On May 30, 2023, U.S. District Court Judge Michael Fitzgerald ruled that a proposed class action suit accusing Kim Kardashian of defrauding investors through her promotion of the EthereumMax token can proceed. The lawsuit, which also names other celebrities as defendants, alleges that Kardashian and others made misleading statements promoting the project in what the investors allege was a "pump-and-dump" scheme. Despite previous dismissals of the case due to inadequate allegations, Judge Fitzgerald found that the investors' latest complaint provides sufficient detail. The ruling allows most allegations in the amended complaint to advance, with the judge granting requests to block certain claims under California's Securities Law, pending further amendments to the complaint.
- Media Heiress Says Crypto Project Scammed Her Out Of $43M
On June 13, 2023, Taylor Thomson, billionaire media heiress and member of the Thomson Reuters family, filed a complaint against Persistence Technologies and its CEO, Tushar Aggarwal, alleging a fraudulent scheme involving the unregistered crypto token XPRT which caused her to lose $43 million of her investment. The lawsuit, filed in a California federal court, accuses Aggarwal and co-defendant Ashley Richardson of inducing Thomson to invest through false promises of returns and then manipulating her investment to mislead other investors. Thomson asserts that XPRT is an unregistered security based on the Howey test and is seeking compensatory damages of at least $24.7 million, plus punitive damages and the rescission of her token purchases.
- Class Action Lawsuit Against PoolTogether Dismissed Due to Lack of Standing
On June 7, 2023, a putative class action lawsuit, filed against decentralized finance (DeFi) startup PoolTogether in the Eastern District of New York in October 2021, was dismissed after the court found the plaintiff, former congressional staffer Joe Kent, lacked standing due to a failure to prove an injury in fact, despite genuine concerns about PoolTogether’s legality under New York law. PoolTogether responded to the lawsuit by launching an NFT collection called "Pooly" to raise funds for the case in 2022, ultimately raising $1.4 million for its defense costs.
- Bittrex Granted Court Approval for Repayment Plan
On June 15, the U.S. arm of the Bittrex cryptocurrency exchange will resume customer withdrawals after receiving court approval for its repayment plan. The court order allows customers with undisputed claims to withdraw their funds in cryptocurrency or fiat. However, the court's decision was careful to state that it does not set a precedent for other bankruptcy cases or determine the priority between the firm's creditors and customers in asset ownership and repayment. In addition to its customer obligations, Bittrex separately owes nearly $28 million collectively in fines to the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN).
- Celsius Submits Updated Bankruptcy Plan Post Fahrenheit Asset Bid
On June 15, 2023, Defunct crypto lender Celsius has submitted an updated bankruptcy plan following the successful asset bid by the Fahrenheit consortium. The proposed plan requires approval from the New York bankruptcy court overseeing the wind-up. Under the Fahrenheit agreement, the new company is set to receive $450 to $500 million in liquid cryptocurrency, while US Bitcoin Corp will develop various crypto mining facilities, including a 100-megawatt plant.
- FTX loses bid for documents from Fenwick & West
On June 23, 2023, Judge Lewis Kaplan denied a subpoena request from Sam Bankman-Fried, the founder of FTX and Alameda Research, in a written order that labelled the request a "fishing expedition." The request, filed on May 30, 2023, sought access to documents tied to the legal advice that Fenwick & West provided during the establishment of FTX and Alameda, which Bankman-Fried claimed were vital to his defense. The ruling followed a successful motion by the FTX debtors to intervene, as the requested records were likely shielded by the attorney-client privilege held by the bankrupt FTX.
- Trial Date Set for Former Billionaire Crypto Founder Guo Wengui
Former billionaire crypto founder Guo Wengui’s trial for an alleged $1 billion fraud scheme has been set for April 8, 2024. Wengui allegedly raised $262 million from the Himalaya Exchange, a purported cryptocurrency ecosystem that included the alleged stablecoin Himalaya Dollar and trading coin Himalaya Coin. The SEC alleges that Wengui raised hundreds of millions of dollars from investors in Himalaya Coin by falsely stating that 20% of the coin's value was backed by gold and that he would personally compensate investors for any potential losses.
- Senators Call for DOJ Investigation of Binance Holdings Ltd.
On June 8, 2023, in an open letter, U.S. Senators Elizabeth Warren and Chris Van Hollen urged Attorney General Merrick Garland to probe Binance and Binance.US regarding their compliance practices and company structure statements made to Congress in March. They argue that despite Binance CEO Changpeng Zhao's ownership in both entities, the companies insisted they operated independently. The complaint filed by the SEC alleges a close relationship between the two entities, contradicting their claims of separation. The senators accuse Binance and Binance.US of providing misleading information to Congress, thereby undermining a bipartisan investigation and legislative process.
Regulatory and Policy Developments
- Congressional Hearing Analyzes Regulatory Challenges and Future of Digital Assets
On May 5, 2023, the Committee on Financial Services and Agriculture released a memo titled "The Future of Digital Assets: Closing the Regulatory Gaps in the Digital Asset Ecosystem." Various industry representatives testified at a subsequent hearing that centered on the challenges of classifying digital assets as either securities or commodities under U.S. law. The memo underscored ambiguity in the current regulatory framework, which has prompted market participants, consumers, and investors to seek clarity.
- CFTC Issues Staff Advisory on the Risks Linked to Clearing of Digital Assets
On May 30, 2023, the CFTC's Division of Clearing and Risk (DCR) issued a letter (No. 23-07) to all DCR registrants and applicants, stressing the need to identify and mitigate potential risks linked to digital asset clearing expansion. Highlighting system safeguards, physical settlement procedures, and conflicts of interest, the DCR emphasized managing cyber and operational risks, minimizing conflicts of interest, and ensuring appropriate management of obligations linked to digital asset delivery.
- Congressional Gridlock Slows Progress Stablecoin Bill Progress
On May 18, 2023, lawmakers discussed current progress on bipartisan stablecoin legislation. Despite interest in the bill, differing views persist on issues such as the role of non-bank entities in issuing tokens and the extent of state regulator autonomy under a federal proposal. There is agreement on both sides for foundational consumer protection, capital requirements, and oversight for stablecoin issuers, regardless of trust charters. Differences primarily lie in choosing a regulator, determining regulatory and enforcement aspects, and deciding on the role of state oversight in the regulatory regime.