Crypto and NFT Firms Make Announcements; Treasury Interprets Crypto Reports; Crypto Enforcement Actions by CFTC, SEC, IRS, DOJ and States – JD Supra

Exchange Reaches Agreement to Sell Assets; New Crypto Products Launch
By Robert A. Musiala Jr.
In a press release this week, Voyager Digital, a cryptocurrency exchange that recently filed for Chapter 11 bankruptcy, announced that it selected the FTX US cryptocurrency exchange “as the highest and best bid for its assets” in a competitive auction. According to the press release, “FTX US’s bid is valued at approximately $1.422 billion, comprised of (i) the fair market value of all Voyager cryptocurrency at a to-be-determined date in the future, which at current market prices is estimated to be $1.311 billion, plus (ii) additional consideration that is estimated as providing approximately $111 million of incremental value.” The press release notes that the agreement “will be presented for approval to the United States Bankruptcy Court for the Southern District of New York on Wednesday, October 19, 2022.”
In another recent press release, The INX Digital Co. (INX) “announced … that its security token trading platform and cryptocurrency trading platform have converged and now offer … the world’s first and only fully-regulated, end-to-end platform for listing and trading both SEC-registered security tokens and cryptocurrencies.” Separately, according to recent reports, UK-based digital bank Revolut recently achieved registration from the UK Financial Conduct Authority to offer cryptocurrency services in the UK.
For more information, please refer to the following links:
Reports Provide New Data on Cryptocurrency Adoption and Exchange Activity
By Robert A. Musiala Jr.
According to a recent report from blockchain analytics firm Chainalysis, African countries contain “some of the most well-developed cryptocurrency markets of any region.” Among other things, the report finds that Nigeria and Kenya see strong cryptocurrency adoption “when weighted for purchasing power and population, especially on P2P exchanges”; South Africa “leads the region in raw transaction volume”; and in sub-Saharan Africa, retail cryptocurrency transactions make up 95 percent of all transfers.
In a final notable item, a recent report from Forbes said that “[a] new Forbes analysis of 157 crypto exchanges finds that 51% of the daily bitcoin trading volume being reported is likely bogus.” Among other things, the report also found that USDT “continues to be a dominant player in the crypto trading economy, especially when it comes to trades against bitcoin”; “21 crypto exchanges generate $1 billion or more in daily trading activity, while the next 33 exchanges had volume between $200 million and $999 million”; offshore exchanges make significant use of stablecoins to “synthetically” create U.S. dollar liquidity on their platforms because they do not have access to U.S. bank accounts; and “some of the largest trading pair activity occurs against fiat currencies like the Japanese yen and Korean won and against major stablecoins like Binance U.S. dollar and the USD coin.”
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Auction House Launches NFT Market; Startup Launches NFT Cloud Database
By Maya A. Rivera
Earlier this week, a major British auction house launched a new NFT marketplace in collaboration with smart contracts startup Manifold. According to reports, the platform will record transactions in full on the Ethereum network and will provide compliance and tax tools. In addition, partnerships with blockchain analytics firm Chainalysis and metaverse platform Spatial will reportedly provide additional functionality on the platform. According to reports, while the new marketplace will enable an experience similar to that of the OpenSea and Rarible platforms, it will differ from those platforms by limiting who can list artwork and collectibles on the marketplace.
In other NFT developments, Fortress Blockchain Technologies recently announced the launch of The Fortress Vault, a new cloud-based NFT database created in collaboration with a major global cloud services provider. According to a press release, “Prior to Vault, content on the blockchain was either publicly viewable or had to be hosted on unsupervised databases on distributed computers around the world. … With Vault, enterprise customers can now privately store tokenized IP with a cloud-based, secure, and unified solution.” In a quote from the press release, the Vault CTO and co-founder said, “NFTs are a technology that allow[s] us to access unique or non-fungible data via a distributed ledger to prove the authenticity and establish the provenance of the asset. If you can pair the token to data that is accessible exclusively by the token holder – and only to the token holder – then NFTs become a digital key to unlock everything from music to event tickets to real estate deeds to healthcare records to estate documents, essentially to everything in the world that’s digital.”
For more information, please refer to the following links:
US Treasury Further Interprets Reports Related to EO on Digital Assets
By Keith R. Murphy
Last week the U.S. Department of the Treasury (Treasury) issued a fact sheet summarizing key provisions of a report recently published by Treasury in accordance with President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets (EO). According to the fact sheet, the report, “Crypto-Assets: Implications for Consumers, Investors, and Businesses,” offers a set of recommendations for agencies to address risks associated with the crypto-asset sector, using their existing authorities. Those recommendations include (1) monitoring for illicit activity and pursuing investigations and civil and criminal actions to enforce applicable laws, focusing on consumer, investor and market protection; (2) issuing supervisory rules and guidance to address risks in crypto-asset products and services, and collaborating with other agencies to promote consistent and comprehensive oversight; and (3) working to ensure that consumers, investors and businesses have access to trustworthy information on crypto-assets. The BakerHostetler Blockchain Technologies and Digital Assets team will publish an alert in the coming weeks further analyzing the Treasury report.
In related news, Nellie Yiang, the U.S. undersecretary for domestic finance, recently gave a speech addressing the reports issued by Treasury in response to the EO. Her remarks focused on the ways digital assets could affect the future of money and payment systems in the United States, and on related recommendations set forth in the reports. The undersecretary highlighted multiple findings from the Treasury reports, including findings related to operational failures, market manipulation, fraud, theft and scams in the use of crypto-assets; recommendations concerning the use of digital assets and other technologies for money and payments; a recommendation for the United States to advance work on a potential central bank digital currency if determined to be in the national interest; recommendations on the promotion, development and use of instant payment systems; a recommendation to consider establishing a federal regulatory framework for nonbank providers; and finally, a recommendation concerning a more efficient and more transparent international payments system.
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CFTC Enforcement Action Targets DAO; SEC Targets Crypto Market Making
By Alexandra Karambelas
Last week, according to a press release, the U.S. Commodity Futures Trading Commission (CFTC) “issued an order simultaneously filing and settling charges” against a decentralized autonomous organization (DAO). In the press release the CFTC announced that it had issued and settled charges against bZeroX LLC and its two founders and simultaneously filed an enforcement action against the Ooki DAO, as successor to bZeroX. The CFTC alleges that bZeroX and the Ooki DAO violated the Commodity Exchange Act and CFTC regulations by operating as an unregistered futures commission merchant, failing to implement a customer identification program as required by the Bank Secrecy Act, and illegally offering leveraged and margined retail commodity transactions.
The CFTC complaint alleges that the Ooki DAO is an unincorporated association that became the successor to bZeroX when the founders transferred control of the bZx protocol to the DAO. According to the CFTC, this transfer was a deliberate attempt to insulate the protocol from regulators and become “enforcement-proof.” Due to the pseudonymous membership of the DAO, the CFTC reportedly served the Ooki DAO by posting the complaint on an online discussion forum for DAO members and simultaneously submitting the complaint to the help chatbot on the DAO’s website.
In another recent enforcement action, the U.S. Securities and Exchange Commission (SEC) announced charges against Hydrogen Technology Corp., its former CEO and the CEO of market maker Moonwalkers Trading Limited for allegedly perpetrating a scheme to manipulate the trading volume and price of the Hydro token, which the SEC characterized as an unregistered “crypto asset security.” In addition to the defendants’ offering the Hydro token through “direct sales on crypto asset trading platforms,” the complaint alleges that they distributed Hydro through employee compensation, bounty programs that awarded Hydro to individuals who promoted the token, and “airdrops” that gave Hydro to users for free. According to the SEC, Hydrogen hired Moonwalkers to use bots to artificially inflate the Hydro token price and made more than $2 million in profits as a result. “Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” said Carolyn M. Welshhans, associate director of the SEC’s Enforcement Division, in a press release accompanying the filing.
For more information, please refer to the following links:
IRS Issues ‘John Doe’ Summons for Crypto Info; DOJ Targets Crypto Fraud
By Joanna F. Wasick
According to a press release from the U.S. Department of Justice (DOJ), on Thursday a U.S. district judge entered an order authorizing the Internal Revenue Service (IRS) to issue a “John Doe” summons (a summons to obtain information about possible violations by individuals whose identities are unknown) requiring a New York-based bank to produce information about U.S. taxpayers who may have failed to report to the IRS and pay taxes on cryptocurrency transactions. Specifically, the summons seeks information about customers of SFOX, a cryptocurrency prime broker, which used banking services that the bank offered to SFOX customers engaged in cryptocurrency transactions. Deputy Assistant Attorney General David A. Hubbert said: “Taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable. The information sought by the summons approved today will help to ensure that cryptocurrency owners are following the tax laws.”
According to another DOJ press release, James Wolfgramm and two of his businesses, Bitex LLC (Bitex) and Ohana Capital Financial Inc. (OCF), were recently charged by a federal grand jury with seven felony counts in connection with multiple crypto financial fraud schemes. In one of these alleged schemes, Wolfgramm and Bitex collected nearly $1.7 million from two victims by purporting to sell a high-powered cryptocurrency mining machine that did not exist. In another alleged scheme, Wolfgramm and OCF marketed the business with the motto “Banking the Unbankable” and purported to offer financial services to entities ineligible for traditional bank accounts. OCF allegedly received millions of dollars from customers who falsely believed their money would be kept on deposit until the customers directed the release of their funds. Instead, according to the DOJ press release, Wolfgramm and OCF spent these funds on unrelated business expenses. In the final alleged scheme, Wolfgramm fraudulently agreed to purchase the Sports City complex and land in Draper, Utah, for $15 million. According to the indictment, Wolfgramm took possession of the property and collected about $160,000 in customer billing without ever making any of the promised payments to the seller on the sales contract.
For more information, please refer to the following links:
State Enforcement Actions Target Crypto Securities Violations and Crypto Scams
By Jordan R. Silversmith
Earlier this week, New York Attorney General Letitia James joined the California Department of Financial Protection and Innovation (DFPI) and six other state regulatory bodies in filing a suit against Nexo Capital Inc. (Nexo) for failing to register as a securities or commodities broker-dealer and for lying to investors about its registration status. The lawsuit, filed in New York County State Supreme Court, alleges that Nexo promoted and sold unregistered securities in the form of an interest-bearing cryptocurrency account called the “Earn Interest Product.” The company allegedly promised investors high returns while failing to register as a securities broker-dealer as required by state law. The state securities regulators of California, Kentucky, Maryland, Oklahoma, South Carolina, Washington and Vermont all filed their own administrative actions against Nexo.
In a separate action, the Delaware Department of Justice’s Investor Protection Unit (IPU) recently issued a cease-and-desist order against 23 entities and individuals involved in a cryptocurrency scam known as the “pig butchering scam.” The moniker comes from scammers’ practice of grooming investors to make investments using cryptocurrencies (“fattening” the victims) before absconding with stolen funds (“butchering”). According to a press release, the IPU received complaints from Delawareans who had been contacted online by unknown persons urging them to invest in cryptocurrencies. After investors saw large returns on initial investments, they were encouraged to invest more and were ultimately prohibited by the scammers from withdrawing their funds. The scam reportedly involved thousands of victims across the country with losses upward of billions of dollars.
For more information, please refer to the following links:
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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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