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  • District Court prevents disposal of cryptocurrency linked to hack

    Courts

    On August 23, the U.S. District Court for the Southern District of New York preliminarily enjoined defendants “from selling, transferring, assigning, encumbering, or otherwise disposing of cryptocurrency transferred in [] transactions” following a July attack on a cryptocurrency exchange network with New York-based operations. According to the cryptocurrency exchange plaintiff’s petition for a temporary restraining order (TRO), the defendants allegedly hacked the network in order to make fraudulent transfers and defraud U.S. users by generating fake bitcoin in violation of the Commodities Exchange Act. The plaintiff contended that the defendants “transferred the cryptocurrency to other exchanges serving New York customers with the intent to sell them,” adding that if the defendants “are permitted to undertake such sales, they will almost certainly transact with New York-based counterparties.” The plaintiff urged the court to issue an injunction, arguing that because the defendants are foreign and it is “impossible to identify hackers intent on fraud, there is almost no likelihood that they would pay a damage award. Short of receiving an injunction of already-identified, fraud-begotten cryptocurrency, there is no way for Petitioner to secure ultimate recovery.” The court’s order also kept in place other third-party exchanges’ existing freezes on accounts thought to hold any of the cryptocurrency at issue. The order is intended to aid the plaintiff in its impending arbitration with the defendants.

    Courts Digital Assets Cryptocurrency Commodity Exchange Act Of Interest to Non-US Persons

  • SEC settles with company selling securities through DeFi platform

    Securities

    On August 6, the SEC announced a settlement with two individuals and their company for the alleged unregistered sale of over $30 million of securities using smart contracts and decentralized finance technology, and for misleading investors regarding the operations and profitability of their business. According to the SEC’s order, the company offered and sold securities in unregistered offerings through a program from February 2020 to February 2021, which used smart contracts to sell two types of digital tokens: one type that could be purchased using specified digital assets and paid 6.25 percent in interest; and the other type that purportedly provided holders certain voting rights, some excess of profits, and the ability to profit from resales in the secondary market. The SEC alleged that the company violated provisions of the Securities Act, such as Section 5(a) and 5(c), by offering and selling securities without having a registration statement filed or in effect. In addition, the company violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, by making materially false statements and engaging in other deceptive acts regarding business operations and profitability. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $125,000 to each individual and a total of $12,849,354 in disgorgement. The order also provides that the company must cease and desist from committing or causing any future violations of the Exchange Act. 

    Securities Digital Assets SEC Cease and Desist Cryptocurrency Securities Exchange Act

  • SEC obtains TRO and asset freeze against investment scam

    Securities

    On July 19, the SEC announced that it had obtained a temporary restraining order and asset freeze to halt an ongoing fraud offering by a Las Vegas-based company and two individual defendants, including a recidivist, (collectively, “defendants”) that allegedly raised more than $12 million from nearly 300 retail investors. According to the complaint, the defendants violated several provisions of securities laws by allegedly promising investors that their money would be invested in securities, bitcoin, and other cryptocurrencies based on recommendations made by an “[a]rtificial intelligence supercomputer,” which allegedly “consistently generate[d] enormous returns” and allowed the defendants to guarantee fixed returns of 20-30 percent annually with compounding interest. However, the SEC alleged that over 90 percent of the defendants’ funds came from investors, and that the defendants did not use these funds for the stated purposes. Rather, defendants transferred millions of dollars to one of the individual defendant’s personal bank accounts, paid millions of dollars to promoters who led investors to the defendants, and made “Ponzi-like” payments to other investors. The complaint seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.

    Securities Digital Assets SEC Enforcement Cryptocurrency

  • New Jersey orders company to stop selling unregistered securities

    Securities

    On July 19, the New Jersey Bureau of Securities (Bureau) announced a cease and desist order against a financial services company for allegedly selling unregistered securities in the form of interest-earning cryptocurrency accounts and failing to explain to investors that the accounts were not licensed in New Jersey. According to the order, the company has been funding its lending operations and proprietary trading business since 2019 by selling interest-bearing cryptocurrency accounts that are not protected by or registered with any federal or state securities regulator. The order notes that the company “held the equivalent of $14.7 billion from the sale of these unregistered securities in violation of the Securities Law.” In addition, the order, which become effective July 22, requires the company to stop selling any unregistered security or violating any securities law. According to the Bureau, the recent action “comes amid rising concerns over the proliferation of decentralized finance platforms like [the company] that seek to reinvent traditional financial systems such as banks and brokerages for digital asset investors,” and that “[u]nlike traditional, regulated banks and brokerage firms, however, investors’ losses are not insured against or protected by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation.”

    Securities Digital Assets State Issues New Jersey Cease and Desist Cryptocurrency

  • DFPI addresses cryptocurrency MTA licensing exemptions

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to certain cryptocurrency activities. According to the letter, the requesting company intends to provide an internet-enabled peer-to-peer (P2P) marketplace for the purchase and sale of certain decentralized digital currencies. The P2P marketplace will enable buyers and sellers of the specified cryptocurrency “to connect and arrange for the direct settlement of purchases and sales between such users” through a variety of means, such as bank transfers, gift cards, money transmission, debit card, credit card, among others. Additionally, the company’s P2P marketplace will allow customers to (i) buy goods or services with the specified cryptocurrency from unaffiliated, third-party online retailers who accept that cryptocurrency as a form of payment; (ii) exchange their cryptocurrency for the rights to a US dollar-backed stablecoin; and (iii) remit funds in different currencies, including foreign currency. The company emphasized that it will “not collect, store, or transmit any digital or fiat currency” in any of its four proposed products. DFPI concluded that the Delaware company’s proposed services are not subject to licensing under the MTA, explaining that the sale and purchase of cryptocurrency directly between two parties, in which the company does not facilitate the exchange of the fiat currency or the cryptocurrency, does not meet the definition of money transmission. Likewise, the company’s other proposed products do not constitute money transmission either. DFPI reminded the company, however, that its determination is limited to the facts as presented and that at any time DFPI may determine that the activities are subject to regulatory supervision. Moreover, the letter does not relieve the company from any FinCEN or federal agency obligations.

    Licensing State Issues California Money Transmission Act Cryptocurrency Virtual Currency Fintech Digital Assets

  • FINRA reminds firms to disclose digital asset involvement

    Federal Issues

    On July 8, FINRA issued Regulatory Notice 21-25, reminding firms to notify their FINRA risk-monitoring analysts if they currently engage in, or plan to engage in, activities regarding digital assets. The notice discusses the types of activities of interest to FINRA, which include, among other things: (i) transactions in digital assets; (ii) pooled funds investing in digital assets; (iii) derivatives associated with digital assets; (iv) engagement in an initial or secondary offering of digital assets; (v) participation in cryptocurrencies and other virtual coins and tokens; (vi) acceptance or mining of cryptocurrency; and (vii) “recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.” The notice encourages firms to promptly notify their risk monitoring analyst in writing on an ongoing basis.

    Federal Issues FINRA Cryptocurrency Digital Assets Fintech

  • FinCEN recognizes law enforcement agencies for use of BSA data

    Financial Crimes

    On June 24, the Financial Crimes Enforcement Network (FinCEN) honored the recipients of its 2021 Law Enforcement Awards Program, which recognizes agencies that use Bank Secrecy Act (BSA) data provided by financial institutions to successfully pursue and prosecute criminal investigations. The awards were presented in eight different categories related to: (i) Covid-19 fraud; (ii) cyber threats; (iii) transnational organized crime; (iv) transnational security threats; (v) state and local law enforcement; (vi) third-party money launderers; (vii) a suspicious activity review team; and (viii) significant fraud. Awards work included investigation into Paycheck Protection Program fraud that resulted in the seizure of case over $3 million, seizure of over $47 million dollars in narcotics proceeds, and seizure of 300 cryptocurrency accounts, among other work. FinCEN acting Director Michael Mosier stated that “[t]he law enforcement work that we recognize today highlights both the importance of an effective partnership between FinCEN, financial institutions, and our law enforcement agencies, and the value of BSA reporting in protecting the American people from fraud, cybercrime, and the illicit finance threats confronting our nation.”

    Financial Crimes Digital Assets FinCEN Of Interest to Non-US Persons Bank Secrecy Act Enforcement Investigations Anti-Money Laundering Covid-19 SBA Cryptocurrency Fraud

  • Nebraska law establishes a cryptocurrency bank charter

    State Issues

    On May 25, the Nebraska governor approved LB 649, the Nebraska Financial Innovation Act, which creates a bank charter for companies that hold cryptocurrencies. The new act defines “digital asset depository institutions” as banks or financial institutions that hold certain digital assets, and will allow existing state-chartered banks to establish areas focused on cryptocurrency services. New businesses will also be able to gain a state banking charter as digital asset depositories. The act provides, among other things, that “at all times, a digital asset depository shall maintain unencumbered liquid assets denominated in United States dollars valued at not less than one hundred percent of the digital assets in custody” and that “compliance with federal and state laws, including, but not limited to, know-your-customer and anti-money-laundering rules and the federal Bank Secrecy Act, is critical to ensuring the future growth and reputation of the blockchain and technology industries as a whole.”

    State Issues Digital Assets State Legislation Nebraska Cryptocurrency Bank Charter Bank Compliance Bank Secrecy Act

  • Fed highlights potential of central bank digital currencies

    Federal Issues

    On May 20, Federal Reserve Chairman Jerome Powell released a video message outlining the potential use of central bank digital currencies (CBDCs) in the U.S. payment system. Powell discussed how “the rise of distributed ledger technology, which offers a new approach to recording ownership of assets, has allowed for the creation of a range of new financial products and services—including cryptocurrencies,” which may carry potential risks to those users and to the broader financial system. Powell highlighted that the Fed is contemplating whether and how a U.S. CBDC would impact the domestic payments system, emphasizing that CBDCs “could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar.” Powell also noted that, as part of the Fed’s ongoing efforts in exploring the potential benefits and risks of CBDCs from a variety of angles, the Fed will begin broader consideration of the creation of a U.S. CBDC by issuing a discussion paper and requesting public comment on benefits and risks. Powell stated he expects the Fed to play a leading role in developing international standards for CBDCs by “engaging actively with central banks in other jurisdictions as well as regulators and supervisors here in the United States throughout that process.”

    Federal Issues Digital Assets Regulation Federal Reserve Cryptocurrency Bank Regulatory Fintech Central Bank Digital Currency

  • DOJ files criminal charges against individual who operated bitcoin money laundering service

    Federal Issues

    On April 28, the DOJ announced the arrest of a dual Russian-Swedish national on criminal charges related to his alleged operation of a bitcoin money laundering service on the darknet. The DOJ referred to the individual’s money-laundering service as the “longest-running cryptocurrency ‘mixer,’” stating that it moved over 1.2 million bitcoin valued at approximately $335 million at the time of transactions over the course of 10 years. According to the DOJ, the majority of the cryptocurrency came from darknet marketplaces tied to illegal narcotics, computer fraud, and abuse activities. The individual is charged with (i) money laundering; (ii) operating an unlicensed money transmitting business; and (iii) money transmission without obtaining a license in the District of Columbia.

    Federal Issues Digital Assets Financial Crimes DOJ Cryptocurrency Fintech Anti-Money Laundering Of Interest to Non-US Persons Money Service / Money Transmitters

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