Crypto Regulatory Updates – Lexology

Securities

The Securities and Exchange Commission (“SEC”) charged RvT token issuers and the CEO of the Cayman Islands-based token issuing entity with $18 million illegal securities offering (8 September 2021). The SEC filed a complaint in the District of Massachusetts, charging Rivetz Corp. (“Rivertz”),Rivetz International SEZC (“Rivertz International”), as well as the President of Rivetz and the CEO of Rivetz International (together “the Defendants”), with “conducting an illegal, unregistered offering of securities through an initial coin offering”. At the time of offering, allegedly, “Rivertz did not have an operational product and the RvT token had no use”. The SEC has alleged that the Defendants offered and sold RvT Tokens to the general public for the purpose of capitalizing Rivetz’s business. Furthermore, the SEC has alleged that RvT token was marketed as an investment opportunity by promoting its value to investors; highlighting potential tradability of the RvT tokens on digital asset trading platforms; describing places for resale of the RvT tokens; touting the CEO’s abilities and managerial skills, including his past experience; and making claims re. RvT’s potential increase in value as a result of Rivertz’s efforts. The SEC requests the court for injunctive relief, the return of allegedly ill-gotten gains or unjust enrichment, together with prejudgment interest, and a civil penalty. SEC has charged three media companies with illegal offerings of stock and digital assets (13 September 2021). The SEC charged the U.S.-based companies GTV Media Group Inc. (“GTV”), Saraca Media Group Inc. (“Saraca”), and Voice of Guo Media Inc. for “conducting an illegal unregistered offering of GTV common stock.” The SEC also charged GTV and Saraca for “conducting an illegal unregistered offering of a digital asset security referred to as either G-Coins or G-Dollars.” The SEC and the companies have reached a settlement, which includes cease-and-desist orders, and payment of more than $539 million, without the companies admitting or denying the SEC’s findings. Derivatives and Commodities The Commodity Futures Trading Commission (CFTC) Commissioner Dawn D. Stump has published a clarification on CFTC regulatory authority applicable to digital assets (23 August 2021). Among others, it emphasizes the difference between CFTC’s regulatory and enforcement authorities under the Commodity Exchange Act (“CEA”), and stipulates that the CFTC does not regulate digital assets even if they are commodities (as opposed to futures contracts and other derivatives based on digital assets). CFTC imposed $1.25 million civil penalty against Kraken for illegal offering of margined retail commodity transactions and for failing to register as Futures Commission Merchant (FCM) (28 September 2021). The CFTC has pressed and settled charges against Payward Ventures, Inc. d/b/a Kraken (“Kraken”) for “illegally offering margined retail commodity transactions in digital assets, including Bitcoin, and failing to register as a futures commission merchant (FCM).” The CFTC has filed charges against 12 companies offering binary options based off the value of crypto for having failed to register as FCMs, and against 2 derivatives trading services companies for providing misleading information to the CFTC (29 September 2021). All complaints were filed in a single day, and seek cease and desist orders from committing the charged violations of the CEA and CFTC regulations. The CFTC has issued two orders imposing on Tether and Bitfinex fines totaling $42.5 million (15 October 2021). The first order, filing and settling charges against Tether Holdings Limited, Tether Limited, Tether Operations Limited, and Tether International Limited (d/b/a Tether) concerned Tether’s untrue or misleading statements and omissions of material fact with regard to the USDT stablecoin’s reserves. The order imposed $41 million civil penalty and required Tether to cease and desist from further violation of the CEA and CFTC regulations.

The second order, filing and settling charges against Bitfinex in relation to its cryptocurrency trading platform, concerned iFinex Inc., BFXNA Inc., and BFXWW Inc.’s (d/b/a Bitfinex) engagement “in illegal, off-exchange retail commodity transactions in digital assets with U.S persons” on its platform, as well its operation as an unregistered FCM. The order imposed a $1.5 million civil penalty and required Bitfinex to “implement and maintain additional systems reasonably designed to prevent unlawful retail commodity transactions”.

The CFTC has mentioned the assistance of the following regulators: Securities Commission of The Bahamas, British Virgin Islands Financial Services Commission, Ontario Securities Commission, Superintendencia del Mercado de Valores de Panama, Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Commission), and the Financial Services Authority Seychelles.

Sanctions The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has included the first virtual currency exchange in the list of entities sanctioned by the U.S. (21 September 2021). OFAC designated SUEX OTC, S.R.O. (SUEX), a Moscow-based virtual currency exchange, for its involvement in facilitation financial transactions for ransomware actors. OFAC has published Sanctions Compliance Guidance for the Virtual Currency Industry (15 October 2021). The guidance intends to provide virtual currency industry members with guidelines concerning compliance with OFAC sanctions. Furthermore, OFAC has also updated two sections of “Frequently Asked Questions” with regard to virtual currency (559 and 646). Establishment of National Enforcement Team The US department of Justice has established National Cryptocurrency Enforcement Team (NCET) (6 October 2021). NCET will, among others: (i) deal with complex investigations and prosecutions of cryptocurrency cases; (ii) develop, in consultation with other agencies, strategic priorities for investigations and prosecution involving cryptocurrency; (iii) identify areas for increased focus, from investigatory and prosecutor perspective; (iv) collaborate and build relationships with private sector with relevant expertise; (v) provide training and advise to federal and prosecutorial agencies; (vi) support information and evidence coordination and sharing among law enforcement offices; (vii) develop and maintain relationship with U.S. and international enforcement agencies involved in cryptocurrency cases. Stablecoins U.S. Presidents Working Group of Financial Markets, joined by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (OCC) has released its report and recommendations on stablecoins (1 November 2021). The report emphasizes that the potential for the increased use of stablecoins as a means of payments raises concerns with regard to the “potential destabilizing runs, disruptions in the payment system, and concentration of economic power”. The report outlines the gaps in the regulators’ authority required to properly address and reduce such risks. The report includes recommendations to enact legislation which would subject payment stablecoins to comprehensive federal framework, and would include the following: requiring stablecoin issuers to be insured depository institutions; requiring custodial wallet providers to be subject to proper federal oversight; requiring to meet risk-management standards from actors which are criticial to the functioning of stablecoins; imposing limitations on stablecoin issuers’ affiliation with commercial entities; allowing supervisors to implement standards for the promotion of interoperability between stablecoins. Tax The President of the U.S. has signed into law an Infrastructure Investment and Jobs Act, which extends certain tax information reporting requirements to actors involved in digital asset transactions (15 November 2021). The definition of transaction-reporting “broker” as per the Bill has been expanded to include “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets”, and therefore the Bill may potentially impose tax information reporting requirements on validators (including miners, stakers, lightning nodes), software developers of non-custodial wallets and services or protocols (such as DeFi swap platforms creators), and other actors, which do not have the ability to satisfy these requirements and do not possess the information the reporting of which is required.

Senator Lummis and others introduced a bill which aims to revise the language of the signed Infrastructure Bill and exclude from the tax reporting obligation the following actors: (i) validators of distributed ledger technology transactions; (ii) non-custodial hardware or software providers; and (iii) developers of “digital assets or their corresponding protocols for use by other persons, provided that such other persons are not customers of the person developing such assets or protocols”.