The below articles and industry developments have been identified by Kelley Drye and Warren’s Blockchain and Cryptocurrency practice group as relevant during the week of August 17 – August 23. We hope you find this useful. Access may require subscription.
Regulatory Update
As Crypto Slumps, Goldman Sachs Aims for a Wall Street Built on Blockchain
WSJ, August 22, 2022
Wall Street’s biggest banks have largely avoided investing directly in cryptocurrencies. But many are quietly working to integrate blockchain, the technology behind crypto, into trading and other businesses.
Goldman Sachs GS -1.84%▼ Group Inc. is already trading some bonds and other debt securities for clients on blockchain-based networks such as Ethereum, and the bank is building its own blockchain-based trading platform. JPMorgan Chase JPM -2.39%▼ & Co. already has a platform in place, called Onyx. Big Wall Street firms help make the economy run, connecting buyers and sellers of securities and lending money to businesses. But their sophisticated trades are often run on creaky old systems. Goldman and others hope they will be able to run faster, less-costly and ultimately more-profitable systems based on blockchains.
Blockchain-driven systems on Wall Street would be different in some respects from the systems behind bitcoin and other cryptocurrencies. They would be permissioned networks, meaning a central party—such as a bank or a consortium of banks—would decide who is allowed on.
Goldman and others say that using blockchain in trading platforms should lower the risk associated with trading partners. Backers also say it could make it easier for issuers to track who owns their shares or other assets.
“Blockchain technology is going to rewire all financial services,” said Tom Farley, the former president of the New York Stock Exchange.
Read more here.
Former CFTC Chair: Here's How SEC and CFTC Can Work Together to Regulate Crypto
CoinDesk, August 22, 2022
Former Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad said current gaps in crypto regulation can be filled if the Securities and Exchange Commission (SEC) and the CFTC come together to form a self-regulatory organization (SRO).
Massad, now a research fellow at Harvard University’s School of Government, told CoinDesk TV on Monday that as it stands now, “neither agency has the power” to regulate cryptocurrency. "There is the gap. There's a gap with respect to regulation of what I would call the cash market for crypto assets, which are not securities," he said.
The SEC oversees the securities markets including stocks and bonds while the CFTC’s purview is in commodities futures such as agriculture and metals. The CFTC has taken a role in crypto because exchanges such as the CME have active futures markets in bitcoin (BTC) and ether (ETH). Meanwhile, the SEC has taken action against crypto firms because it deems some tokens as securities based on the way they are marketed to the public.
The issue is determining which U.S. agency regulates cash markets – such as buying crypto on exchanges like Coinbase (COIN) or Kraken. Several bills in the U.S. Congress are trying to address this question of how crypto is regulated. But Massad sees the better path in the two agencies joining together in an SRO.
Read more here.
Block.one Ruling Questions Where Crypto Transactions Take Place
Bloomberg Law, August 22, 2022
A federal judge’s recent refusal to approve blockchain-technology developer Block.one’s $27.5 million settlement with cryptocurrency investors is spotlighting plaintiffs’ challenges in class actions to recoup their money from foreign crypto companies.
Federal securities law’s reach is limited to “domestic transactions” in legal disputes involving securities not traded on a US exchange. Determining what’s a domestic or foreign transaction is more difficult in cryptocurrency, which is developed, bought and sold through a set of decentralized computers worldwide. And as Williams et al v. Block.one shows, that distinction is important when considering proper class representation in crypto investors’ disputes.
The case illustrates “the difficulty of trying to determine whether you have a US transaction,” Proskauer Rose LLP attorney Jonathan Richman said. The ruling also underscores the challenges of dealing with those questions on a classwide basis.
Read more here.
FDIC Announcements and Fed Pronouncements: The Week in Crypto Policy
The Block, August 21, 2022
New guidance from the Federal Reserve Board gave crypto firms aiming to get a master account a reason to celebrate. While the guidelines are not hard rules they standardize consideration for master accounts for firms with "novel charters." Those can include cryptocurrency custody banks and their trade associations. On the other hand, a Federal Reserve Governor is pumping the breaks on the creation of a US central bank digital dollar (CBDC). In a recent speech, Governor Michelle Bowman appeared to show a preference for the FedNow Service over a US CBDC.
The FDIC took action against a number of crypto firms including FTX over "false and misleading statements" about federal deposit insurance. The recent collapse of firms like Celsius and Voyager has raised questions about how the safety of deposits was represented to clients. The FDIC, along with the US Federal Reserve, sent a cease-and-desist letter to Voyager in July stating the now-bankrupt firm falsely transmitted to customers that they "would receive FDIC insurance coverage for all funds provided to, held by, on, or with Voyager." The agency later reaffirmed the point that Crypto companies are not protected by federal deposit insurance issuing a new fact sheet about it.
In other news related to the FDIC this week, a Pennsylvania Senator said in a letter that the agency "may be improperly taking action to deter banks from doing business with lawful cryptocurrency-related (crypto-related) companies," for example asking them to avoid providing credit.
Read more here.
Opening Remarks of Commissioner Kristin Johnson for the CFTC and OMWI Roundtable on Digital Assets and Financial Inclusion
CFTC Roundtable, August 19, 2022
Over the last few years, digital asset markets have grown significantly and suffered notable periods of decline similar to the current crypto-winter. In this current period, characterized by persistent volatility, a precipitous decline in pricing, and a notable number of firms facing the decision to declare bankruptcy, we examine the specific implications of crypto-investing for diverse communities and the potential benefits of well-tailored, carefully crafted regulation. As Treasury Secretary Janet Yellen recently observed, while regulations should be “tech-neutral,” “great care must also be applied to ensure innovations do not cause disparate harm to vulnerable communities or exacerbate social, racial, or economic inequities.”
The CFTC must maintain high standards of enforcement and educational outreach to protect retail participants in the cryptocurrency market—a group that includes greater representation of younger and diverse investors. A June 2022 report by the Federal Reserve Bank of Kansas City highlights the disparities among the investor population in cryptocurrency and digital asset markets based on race, ethnicity, gender, level of education, and financial resources. The report indicates that historically underserved groups have higher levels of participation in the crypto-investment community than the investment communities for traditional financial products. Diverse and young investors are also more likely to view digital assets or cryptocurrency investments as “as less risky” and “more attractive” investment opportunities.
“It is vital for the U.S. to bolster its role as a leader in the global financial system by developing a strong regulatory framework for digital assets,” Commissioner Johnson explained. “I would also emphasize that our markets are global and, consequently, underscore the importance of fostering international cooperation. Our global financial system, like this new technology, increasingly operates as frictionless, cross-border network. We must reinforce our willingness to work with our counterparts around the globe to ensure the integrity and soundness of our markets.”
Read more here.
The SEC Treats Crypto Like the Rest of the Capital Markets
Wall Street Journal (Opinion), August 19, 2022
Our federal securities laws, which President Franklin D. Roosevelt signed in the depths of the Great Depression, were designed to protect investors. There’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology.
Recent market events show why it is critical that crypto firms comply with securities laws. In recent months, some crypto lending platforms have frozen their investors’ accounts or gone bankrupt. When it comes to bankruptcy, these investors have to get in line at the court.
We can dispense with the idea that crypto lending isn’t subject to regulation. On the contrary, the rules have been around for decades. The platforms aren’t following them. Noncompliance isn’t the inevitable result of the crypto business model or underlying crypto technology. Rather, it is as if these platforms are saying they have a choice—or even worse, saying “Catch us if you can.”
As I said in a speech last year, “Make no mistake: If a lending platform is offering securities, it . . . falls into SEC jurisdiction.” On many occasions, the commission and state regulators have addressed how the relevant case law implicates crypto assets, including crypto lending.
There are costs of complying with securities laws, just as there are costs to car makers of adding seat belts. Platforms that offer crypto lending need to comply anyway, not merely because that’s the law, but also because it helps protect investors and increase trust in our markets. Fortunately, there is a path forward. I encourage platforms offering crypto lending to come in and talk to SEC staff. Getting these platforms into compliance with the securities laws will benefit investors and the crypto market.
Read more here.
Sudden Crypto Market Drop Sends Bitcoin Below $22,000
CNBC, August 19, 2022
Bitcoin on Friday fell to its lowest level in more than three weeks, dipping below $22,000 amid a sudden crypto sell-off in early European trading.
Bitcoin plunged from $22,738 to below $21,12.34 at 4:00 p.m. ET, according to CoinDesk data. Earlier in the morning, the cryptocurrency fluctuated between $21,500 and $22,000.
It comes shortly after the world’s largest digital coin surpassed the $25,000 level for the first time since June following a rise in U.S. stocks.
Ether fell from $1,808 to $1,728 at the same time before staging a muted rebound. It had slipped again, falling further to $1,683.90 by 4:00 p.m. ET.
“With the tight correlation between US equities and crypto in recent months I suspect this has filtered through to crypto markets and it’s why we are seeing the sell-off. The trend has also perhaps been exacerbated by liquidation of long positions on bitcoin perpetual futures markets.”
Read more here.
FDIC Orders Crypto Exchange FTX US, 4 Others to Cease 'Misleading' Claims
CoinDesk, August 19, 2022
The U.S. Federal Deposit Insurance Corp. (FDIC) published five cease-and-desist orders Friday, including one to crypto exchange FTX US, alleging they mislead investors by suggesting their accounts are insured through the government agency.
The Cryptonews.com, Cryptosec.com, SmartAsset.com and FDICCrypto.com websites were also directed to cease these alleged misrepresentations. The FDIC said these "companies made false representations" that suggested their products might be insured by the agency. The FDIC covers federally regulated bank accounts, up to $250,000 per account.
The FDIC previously ordered now-bankrupt Voyager Digital to cease making claims that implied its customers' funds might have been insured by the FDIC. It later issued a broader warning to the crypto industry at large, saying FDIC protections extend to banks but not to crypto companies that have bank accounts.
"The Federal Deposit Insurance Act (FDI Act) prohibits any person from representing or implying that an uninsured product is FDIC-insured or from knowingly misrepresenting the extent and manner of deposit insurance. The FDI Act further prohibits companies from implying that their products are FDIC-insured by using 'FDIC' in the company’s name, advertisements or other documents," the agency said. "The FDIC is authorized by the FDI Act to enforce this prohibition against any person."
Read more here.
CFPB Alleges Block Is ‘Slow-Walking’ Cash App Investigation
Bloomberg Law, August 19, 2022
The Consumer Financial Protection Bureau asked a federal judge to force Block Inc. to fully comply with a pair of investigative demands related to its Cash App payments tool. The CFPB’s petition, filed Thursday, urged the US District Court for the Northern District of California to enforce a civil investigative demand.
Block, the digital payments company led by CEO Jack Dorsey, has yet to provide all of the documents and data the CFPB requested in August 2020 and August 2021, the consumer finance industry regulator alleged in its petition. The investigation is looking into Cash App’s handling of complaints and disputes. The San Francisco-based company disclosed the investigation in a March 2022 securities filing.
“The Bureau cannot sit back while its investigation is stymied by Block’s slow-walking,” the CFPB’s petition said.
Block is “disappointed” that the CFPB elected to file its petition despite the company’s “regular communication” and cooperation, a Block spokesperson said in an email. “We have been waiting weeks for the CFPB to respond to our most recent communication, which outlined the scope of our prior responses, set-forth a proposed timeline for the remainder of the production of materials, and posed additional clarifying questions for the bureau,” the spokesperson said.
The CFPB didn’t immediately responded to a request for comment.
Read more here.
Bankrupt Lender Celsius CEO Owes Creditors Transparency, Crypto Lawyer Says
CoinDesk, August 19, 2022
The U.S. Trustee overseeing the Celsius Network bankruptcy is right to seek an independent examiner because the crypto lender’s CEO hasn’t been forthright with information.
Sasha Hodder, founder of Hodder Law Firm, told CoinDesk TV Friday there needs to be more “transparency” from Celsius CEO Alex Mashinsky, including a list of what creditors are owed money. Hodder's firm, which works with bitcoin and crypto entrepreneurs, is not involved in the bankruptcy proceeding.
Creditors “are upset that [Celsius is] burning through the money very quickly,” Hodder said. The lender has been in bankruptcy proceedings since filing for Chapter 11 bankruptcy protection in July. On Thursday, the U.S. Trustee’s office filed with the Bankruptcy Court of the Southern District of New York seeking the appointment of an independent examiner.
“No one has been able to get any straight information out of Celsius CEO Alex Mashinsky about how much they actually owe certain creditors,” Hodder said.
Read more here.
US Lawmakers Eye Environmental Impact of Crypto Mining
The Block, August 18, 2022
US House lawmakers are seeking information from four crypto mining companies in an effort to understand the environmental impacts of blockchain technology.
The House Energy and Commerce Committee sent letters to Core Scientific, Marathon Digital Holdings, Riot Blockchain, Inc. and Stronghold Digital Mining on Wednesday. The committee is studying the impact of proof of work and how it relates to emissions and “excess electronic waste.”
The move comes as Washington regulators take a closer look at cryptocurrency amid this summer’s market crash. Additionally, Ethereum is expected to merge its proof-of-work blockchain with its proof-of-stake chain next month.
“While we understand that blockchain technology holds immense promise that could make our personal information more secure and economy more efficient, the energy consumption and hardware required to support PoW-based cryptocurrencies may, in some instances, produce severe externalities in the form of harmful emissions and excess electronic waste (e-waste),” reads the committee letter to Stronghold Digital Mining.
Read more here.
News Articles
The news articles cover relevant content from August 17 through August 23. Access may require subscription.
Crypto Exchange Coinbase Faces Class Action Lawsuit Over Alleged Lapses in Security
CoinDesk, August 23, 2022
Coinbase (COIN) failed to properly secure customers' accounts, leaving them vulnerable to theft and unauthorized transfers, a putative class action lawsuit filed against the crypto exchange last week alleges.
The complaint, filed in the U.S. District Court for the Northern District of Georgia, also accuses the company of causing financial harm to users by locking them out of their accounts permanently or for long periods of time, as well as violating federal law by listing securities on its trading platform.
Coinbase, which last year became the first cryptocurrency exchange to go public in the U.S., is facing a string of lawsuits from unhappy investors. In addition to another aspiring class action lawsuit filed in New Jersey alleging the company allowed U.S. persons to trade unregistered securities, earlier this month, a Coinbase shareholder accused the company of misleading investors about last year's public listing. The platform is also trying to settle two separate lawsuits filed by investors through arbitration.
Read more here.
Wire Fraud: The Most Powerful Law in Crypto Right Now
Reuters, August 23, 2022
Regulation and enforcement in the cryptocurrency space are hot topics, with the debate centered around the complex issue of whether to classify digital assets as securities, commodities, or a separate asset class entirely. In the middle of this debate, the Department of Justice (DOJ) has sent a message — the classification does not matter for its purposes. In recent prosecutions, DOJ has used the wire fraud statute, 18 U.S.C. § 1343, a law with origins dating back to the 1800s, to bring innovative cases in the cryptocurrency space that do not depend on how a digital asset is classified.
Read more here.
Clearinghouse’s Blockchain-Based Settlement System Goes Live
Bloomberg Tax, August 22, 2022
The main clearinghouse for the US stock market has switched on a settlement system built on blockchain, calling it a “milestone achievement” for adopting digital technologies in markets.
Depository Trust & Clearing Corp. said on Monday that its “Project Ion” platform is now processing around 100,000 bilateral equity transactions a day in parallel with its existing settlement systems, which remain the authoritative record. At peak level, the platform can reach about 10% of the bilateral equity volumes handled by the firm’s classic settlement systems.
There is no specific timeline for when and if the Project Ion platform, roughly two years in the making, will replace the current system, Michele Hillery, DTCC’s general manager of equity clearing and DTC settlement service, said in an interview. The decision will depend on the technology’s performance, client feedback and regulatory approval.
Read more here.
FTX Could Buy BlockFi for Only $15M – or a Lot More If Crypto Lender Hits Big Goals
CoinDesk, August 22, 2022
As cryptocurrency lenders crumbled earlier this year, billionaire Sam Bankman-Fried swooped in several times as a backstop. His actions prodded creative headline writers to evoke the market panic of 1907 and argue the co-founder of the FTX exchange and trading giant Alameda is a modern day J.P. Morgan – a financier with deep enough pockets to save the industry.
BlockFi was one beneficiary, getting a $400 million credit line from the U.S. arm of Bankman-Fried’s exchange empire. His company also got the option to acquire BlockFi entirely for up to $240 million.
The “up to” part is important. That maximum price tag was widely reported. What was not made public, however, was what BlockFi must do to earn that amount, and how far it is from those goals. And nobody accurately revealed how little Bankman-Fried’s company could end up paying.
Read more here.
NFT Prices Diverge Sharply as Ethereum ‘Merge’ Mania Intensifies
Bloomberg Tax, August 19, 2022
Prices of Ether and nonfungible tokens that often run on the Ethereum network have diverged sharply as investors snap up the second-largest cryptocurrency ahead of the blockchain’s highly anticipated software upgrade.
Ether has soared 54% between June 13 to Aug. 15, according to data compiled by Bloomberg. NFTs, on average, have declined almost 19% over the same period, according to researcher NonFungible. Cryptocurrencies hit a low in mid-June -- with Ether falling below $1,000 on June 18 -- after the collapse of the Terra blockchain and when its ripple effects began to topple hedge fund Three Arrows Capital and lender Celsius Network.
“The usual path was, if Eth went up or down, if Eth goes sideway, then NFTs had room to move,” said Sasha Fleyshman, portfolio manager at investment firm Arca. “Now it’s underperforming under any circumstances -- up, down, sideways.”
Read more here.
Many Bored Ape NFTs Are in Danger of Getting Liquidated as Borrowed Money Comes Back to Bite
CoinDesk, August 19, 2022
Dozens of Bored Ape Yacht Club non-fungible tokens (NFT) used as collateral for loans sit perilously close to being forcibly sold, and there's worry that could trigger even more liquidations.
The problem is brewing at BendDAO, a peer-to-peer lending service that lets users borrow ether (ETH) against their NFTs. Customers can typically take out a loan equal to 30% to 40% of the NFT collection’s floor price, or the minimum price to purchase one on the open market, with the NFT pledged as collateral.
Floor prices have tumbled in recent months, so much so that 45 of the 272 Bored Apes with BendDAO loans tied to them are now in the platform's “danger zone,“ when an NFT used as collateral is close to being auctioned off. In other words, $5.3 million worth of Bored Apes are at risk of being liquidated.
Read more here.
Crypto Lender Celsius' Collapse Into Bankruptcy Should Be Probed, US Says
CoinDesk, August 18, 2022
U.S. government officials asked that an independent examiner be appointed to look into crypto lender Celsius Network's collapse into bankruptcy, seeking the sort of investigation previously deployed in the high-profile restructurings of Enron and Lehman Brothers.
The U.S. Trustee office, which oversees bankruptcy matters, said there are "numerous questions" about Celsius' operations and its financial health, as well as how its management allowed it to enter bankruptcy, according to a court filing Thursday.
An independent probe, which the judge overseeing the case would have to approve, would answer questions about the company's financials and address "significant transparency issues" in the bankruptcy case, according to the filing.
Read more here.
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