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Senate Democrats request bitcoin ATM fraud information
On September 11, Senate Democrats sent a letter addressed to ten of the largest CEOs of bitcoin ATMs calling for “immediate action” to address reports that the ATMs may be contributing to financial fraud against elderly Americans. The senators’ letter emphasized the growing prevalence of ATMs and their supposed association with criminal activity because of their anonymity and irreversibility of cryptocurrency transactions. The letter also cited a 2021 FBI Public Service Announcement detailing how scammers exploited ATMs by directing victims to withdraw money and deposited it into ATMs using QR codes linked to the scammers’ cryptocurrency wallets.
To gain a clearer understanding of the measures that these companies are taking to address this issue, the senators have requested responses to questions by October 4. These questions cover topics such as: (i) the display of fraud warnings on BTMs; (ii) identification requirements for transactions; (iii) transaction size limits; (iv) daily deposit limits; (v) measures to reverse fraudulent transactions; (vi) fraud insurance; and (vii) customer support for defrauded individuals.
Court upholds California’s daily transaction limit for crypto asset kiosks
On August 30, the Superior Court for the State of California dismissed a lawsuit challenging the California Digital Financial Asset Law’s (DFAL) $1,000 daily transaction limit. The plaintiff, an alliance for cryptocurrency terminals, argued that the daily transaction limit was unreasonable and exceeded legislative authority, but the court found it to be a reasonable measure to prevent fraud.
The DFAL, signed into law by the Governor on October 13, 2023, requires companies to be licensed by the California DFPI to engage in digital financial asset business activity in California and is effective starting July 1, 2025. Besides the daily transaction limit, the DFAL imposes several other requirements on kiosk operators. From January 1, kiosk operators had to provide the DFPI with a list of all kiosk locations and adhere to a $1,000 daily transaction limit per customer. By January 1, 2025, kiosk operators must also provide pre-transaction disclosures to customers and limit fees based on the transaction’s dollar equivalent.
The court’s decision reinforced the DFPI’s authority to implement and enforce the DFAL, ensuring that the regulatory framework is in place to protect consumers from fraudulent transactions and illicit activities.
Department of Energy discontinues crypto mining survey following a settlement agreement
On March 1, a cryptocurrency company (plaintiff) and the U.S. Department of Energy submitted a settlement agreement to the U.S. District Court for the Western District of Texas to discontinue an emergency crypto mining survey once approved by the Office of Management and Budget.
According to the settlement agreement, the Department of Energy initiated an emergency three-year collection of a Cryptocurrency Mining Facilities Survey in January, which the plaintiff claimed did not comply with various statutory and regulatory requirements for the emergency collection of information. Following the court’s approval of the plaintiff’s temporary restraining order, which protected plaintiffs from completing the survey issued by the Department of Energy and protected any information they may have already submitted, the Department of Energy discontinued its emergency collection, and said it will proceed through notice-and-comment procedures for approval of any collection of information covering such data. As a result of the discontinuation of the emergency collection request, no entity or person is required to respond to the survey.
As part of the settlement agreement, the Department of Energy will destroy any information it had already received from survey responses. In addition to a $2,199.45 payment for the plaintiffs’ litigation expenses, the Department of Energy also agreed to publish a new Federal Register notice of a proposed collection of information and withdraw its original notice.
SEC approves Bitcoin use in 11 exchange-traded products
On January 10, the SEC issued an order approving 11 exchange-traded products (ETPs) holding Bitcoin to be publicly traded. According to the order, the SEC found that the proposed ETPs are consistent with the Securities Exchange Act of 1934, specifically Section 6(b)(5), which requires that the rules prevent fraudulent and manipulative acts and practices and protect investors and the public interest. The SEC also found that the 11 proposed ETPs are consistent with Section 11A(a)(1)(C)(iii) which states that it is in the public interest to make the ETPs available to brokers, dealers, and investors. The order goes into further detail and outlines how the two subsections of the ‘34 Act are applied.
As previously covered on InfoBytes, the SEC originally denied a similar application from a company but had to reexamine that company’s application following the D.C. Court of Appeals overturning of the SEC’s initial rejection. The appellate court alleged the SEC “acted arbitrarily and capriciously by denying the listing of [the company]’s proposed bitcoin ET[F],” and members of Congress also urged the Chair of the SEC to approve Bitcoin’s use within ETPs in a September 2023 letter (covered in InfoBytes here).
Congressmembers urge SEC’s Gensler to approve spot Bitcoin ETPs
On September 26, a group of bipartisan members from the House Financial Services Committee sent a letter to Gary Gensler, the Chair of the SEC, to promptly approve the listing of spot Bitcoin exchange-traded products (ETPs). They have criticized the SEC's stance on these products, which they deem to be discriminatory, arguing that the commission’s purpose of making compliant products available to investors. In addition, the letter cites the recent D.C. Circuit decision that overruled the SEC’s denial of a company’s application to convert its Bitcoin trust into an ETF (covered by InfoBytes here). The members, including Tom Emmer (R-MN), Mike Flood (R-NE), and Wiley Nickel (D-NC) and Ritchie Torres (D-NY), argue that approving Bitcoin ETPs would enhance investor safety and transparency by providing a regulated framework.
D.C. Circuit overturns SEC rejection of an investment company’s Bitcoin ETF
On August 29, the D.C. Circuit overturned the SEC’s denial of a company’s application to convert its bitcoin trust into an exchange-traded fund (ETF). In October 2021, the company applied to convert its bitcoin trust to an ETF pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 19b-4 thereunder, a proposed rule change to list and trade shares. In June 2022, the SEC denied the company’s application on the basis that the burden under the Exchange Act and the SEC’s Rules of Practice, which requires among other things, that the rules of national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”
The company promptly appealed, alleging that the SEC “acted arbitrarily and capriciously by denying the listing of [the company]’s proposed bitcoin ET[F] and approving the listing of materially similar bitcoin futures ET[F]s”. The three-judge panel held that the SEC “failed to provide the necessary “reasonable and coherent explanation” for its inconsistent treatment of similar products” and “in the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”
This decision does not mean that the SEC must approve the company’s application. However, the SEC must review the application again.
District Court splits order against crypto platform
On August 11, a split U.S District Court of the Southern District of New York partially granted and partially denied a crypto platform’s (defendant) motion to dismiss most charges for failure to state a claim upon which relief can be granted. Four months after plaintiff opened an account with defendant, a hacker siphoned approximately $5 million worth of Bitcoin from the account. Between the time the hacker accessed the account and withdrew the Bitcoin, plaintiff contacted the platform about being locked out of the account, to which defendant responded that the password change email could be in plaintiff’s spam folder. The complaint alleged that had the company locked the account, plaintiff would still have access to their Bitcoin, and that the platform has a duty to protect its customers’ assets and accounts. Among other things, the complaint also alleged that the platform violated the Electronic Fund Transfer Act (EFTA), the New York General Business Law, and the Michigan Consumer Protection Act.
In its motion to dismiss, defendant argued that Regulation E does not apply to the platform because the EFTA language does not explicitly cover cryptocurrency and only references denominations of the U.S. dollar. Although a separate case against the same defendant determined EFTA did apply to the platform since the statute’s “funds” reference could reasonably cover cryptocurrency (covered by InfoBytes here), the judge’s order focused on, “electronic fund transfer”. The court more closely considered the purpose of the account, expressing uncertainty as to whether it was for personal, family, or household purposes. The court found that the definition of an “account” under EFTA does not include plaintiff’s electronic fund transfer account which was established for investment purposes. In the previous case against the same defendant, the court held that the defendant deceived the users regarding its security measures, but the judge presiding over this case disagreed. The court cut the claims of misrepresentation finding that plaintiff failed to allege that the statements were false at the time they were made. The order denies two claims: (i) that the defendant misrepresented its security level; and (ii) that the defendant failed to meet EFTA requirements and its implementing Regulation E, because investment purposes accounts are precluded from the statute’s protections. The court granted the other four counts.
D.C. Department of Insurance, Securities and Banking says certain Bitcoin activity subject to money transmission laws
Recently, the District of Columbia’s Department of Insurance, Securities and Banking (DISB) issued a bulletin informing industry participants engaging in or planning to engage in money transmission involving Bitcoin or other virtual currency “used as a medium of exchange, method of payment or store of value in the District” that such transactions require a money transmitter license. Specifically, the bulletin noted that DISB considers Bitcoin to be money for money transmission purposes. Relying on United States v. Larry Dean Harmon, DISB stated that while “money transmission is vaguely defined in DC Code,” the court’s decision “relied on the common use of the term “money” to mean a “medium of exchange, method of payment or store of value,” and that therefore Bitcoin functions like money. The bulletin also noted that the court found that while the D.C. Money Transmitters Act of 2000 specifically defined certain banking and financial terms, it did not define “money,” thereby reasoning “that the goal of the MTA is to regulate all kinds of transfers of funds, whether fiat currency, virtual currency or cryptocurrencies.”
Additionally, DISB noted that “engaging in the business of ‘money transmission’” includes “transactions where entities receive for transmission, store, and/or take custody, of Bitcoin and other virtual currencies from consumers via kiosks (aka BTMs), mobile applications and/or online transactions.” However, transactions where entities propose to sell and buy Bitcoin and other virtual currencies from consumers in exchange for cash payments via kiosks and/or online transactions are not considered to be money transmission. Entities that plan to engage in covered activities are subject to money transmission licensing requirements, DISB stated, explaining that whether an entity is required to obtain a money transmitter license depends on the individual facts and circumstances of each applicant, which include but are not limited to an applicant’s proposed business plan and flow of funds, as well as an applicant’s business model.
CFTC charges U.K. company with fraudulent bitcoin scheme
On June 18, the CFTC announced it filed a complaint in the U.S. District Court for the Southern District of New York against a United Kingdom-based bitcoin trading and investment company and its principal (collectively, “defendants”) for allegedly fraudulently obtaining and misappropriating almost 23,000 bitcoin from more than 1,000 customers. The CFTC alleges the defendants violated the Commodity Exchange Act by fraudulently soliciting customers to purchase bitcoin with cash and then deposit the bitcoin in accounts controlled by the defendants. The CFTC alleges that the defendants misrepresented that they “employed expert virtual currency traders who earned guaranteed daily trading profits on customers’ Bitcoin deposits.” Additionally, the CFTC alleges the defendants also fabricated weekly trade reports and “manufactured an aura of profitability” by depositing new customer bitcoin purchases to other customer accounts. The scheme, according to the CFTC, obtained almost 23,000 bitcoins “from more than 1,000 members of the public,” “which reached valuation of at least $147 million.” The CFTC is seeking civil monetary penalties, restitution, rescission, disgorgement, trading and registration bans, and injunctive relief against further violations of the federal commodity laws.
CFTC, SEC settle with foreign trading platform conducting Bitcoin transactions without proper registration
On March 4, the CFTC resolved an action taken against a foreign trading platform and its CEO (defendants) for allegedly offering and selling security-based swaps to U.S. customers without registering as a futures commission merchant or designated contract market with the CFTC. The CFTC alleged that the platform permitted customers to transact in “contracts for difference,” which were transactions to exchange the difference in value of an underlying asset between the time at which the trading position was established and the time at which it was terminated. The transactions were initiated through, and settled in, Bitcoin. The CFTC alleged that these transactions constituted “retail commodity transactions,” which would have required the platform to receive the proper registration.
According to the CFTC, the defendants, among other things, (i) neglected to register as a futures commission merchant with the CFTC; and (ii) failed to comply with required anti-money laundering procedures, including implementing an adequate know-your-customer/customer identification program. The consent order entered by the U.S. District Court for the District of Columbia imposes a civil monetary penalty of $175,000 and requires the disgorgement of $246,000 of gains. The consent order also requires the defendants to certify to the CFTC the liquidation of all U.S. customer accounts and the repayment of approximately $570,000 worth of Bitcoins to U.S. customers.
In a parallel action, the SEC entered into a final judgment the same day to resolve claims that, among other things, the defendants failed to properly register as a security-based swaps dealer. The defendants are permanently restrained and enjoined from future violations of the Securities Act of 1933 and are required to pay disgorgement of approximately $53,393. This action demonstrates the potential application of CFTC and SEC registration requirements to non-U.S. companies engaging in covered transactions with U.S. customers.