ICYMI: A Brief Summary of Recent Events - May 2023

Seward & Kissel LLP

Seward & Kissel LLP

On May 8, Bittrex Inc., once among the country’s biggest crypto trading platforms, filed a Chapter 11 petition in the U.S. Bankruptcy Court for the District of Delaware. According to the filing, overseas exchange Bittrex Global is not impacted and will continue operations for non-US customers. https://cases.omniagentsolutions.com/?clientId=3662 

On May 9, Ishan Wahi, a former Coinbase Global Inc. manager, was sentenced to two years in federal prison for trading on confidential information about when the exchange would list new tokens. Earlier this year Wahi pleaded guilty to two counts of conspiracy to commit wire fraud. This case is significant because this prosecution was the first involving allegations of cryptocurrency insider trading. The United States Attorney for the Southern District of New York was able to make its claims without claiming that the tokens in question were securities. The case is US v. Wahi, 22-cr-392 (S.D.N.Y.).

The court in the Ripple case denied the SEC’s motion to keep internal emails relating to the speech given by then-Director of Corporation Finance Bill Hinman sealed, meaning that they will be made public. The SEC can appeal the ruling, which would delay the much-anticipated release of the emails. [link to the court decision to come]

On May 17, the Texas Blockchain Council announced that the Texas Legislature passed the “Texas Proof of Reserves Bill.” The Bill applies to “Digital Asset Service Providers,” which are defined as electronic platforms facilitating trading of digital assets and would include exchanges, custodians and lenders, provided they service more than 500 digital asset customers in Texas and hold at least $10 million in customer funds. Among other things, the law forbids (i) comingling customer funds with house funds, including the provider’s operating capital, proprietary accounts; digital assets or any other property; and (ii) using customer funds to secure or guarantee a transaction other than a transaction for the customer. The providers are required to maintain reserves in an amount sufficient to fulfill all obligations to digital asset customers and cannot hold customer funds in such a way that any of their customers may be unable to fully withdraw their funds. The law requires service providers to “create a plan” to allow: (1) each customer to view at least quarterly an accounting of (a) any outstanding liabilities owed to it; and (b) the customer's assets held in reserve; and (2) allow auditors to review the information made available to the customer. Finally, providers will be required to file reports, a component of which is auditor-attested 'proof-of-reserves' reporting, within 90 days after the end of each fiscal year. Notably, banks as defined under the Texas Finance Code as well as companies that are not otherwise required to be registered Money Services Businesses are expressly carved out from this law. The bill will now be presented to Governor Abbott for signature and would become law on September 1. https://www.prnewswire.com/news-releases/texas-passes-proof-of-reserves-legislation-301827948.html; https://capitol.texas.gov/tlodocs/88R/billtext/pdf/HB01666I.pdf

On May 18, the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion debated two bills on stablecoin regulation, one brought by committee chairman Patrick McHenry and the other by ranking member Maxine Waters. Arguing that both bills "fall short," the American Bankers Association submitted a proposal arguing that stablecoin issuers should be regulated like banks. https://www.aba.com/-/media/documents/testimonies-and-speeches/aba-sfr-to-house-subcommittee-re-stablecoin-05182023.pdf

IOSCO released a Consultation Report seeking comments to Recommendations it seeks to finalize in Q4 relating to market integrity and investor protection. The Recommendations are intended to apply to all forms of crypto assets. Comment period ends 7/31/23. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD734.pdf

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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