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Elanit Snow is a senior counsel in the Corporate Department and a member of the Finance Group.

Elanit represents financial institutions, hedge funds, private equity funds and multinational corporations on complex over-the-counter derivatives and other synthetic financing transactions and secondary market and distressed debt trading. She represents clients in structuring and negotiating ISDA, MRA, GMRA, MSFTA, clearing, prime brokerage and other related documentation. Elanit advises clients on structuring bespoke transactions to gain synthetic leverage or to hedge exposure to key market risks. Elanit also advises clients on the legal, compliance and regulatory requirements of the Dodd-Frank Act applicable to derivatives transactions.

Elanit represents both buyers and sellers on a diverse range of transactions involving syndicated loans, bankruptcy claims and other distressed and illiquid assets.

Last month, the Commodity Futures Trading Commission (CFTC) announced settled charges against three decentralized finance (DeFi) protocols for various registration and related violations under the Commodity Exchange Act (CEA) during the relevant period of investigation.  As a result, each entity paid a civil monetary penalty and agreed to cease violations of the CEA.  According to a statement by Commissioner Kristin N. Johnson, these latest settlements are the first time the CFTC charged a DeFi operator (e.g., Opyn, Inc. and Deridex, Inc.) with failing to register as a swap execution facility (SEF) or designated contract market (DCM). Moreover, these latest enforcements against DeFi entities arrive soon after the CFTC’s successful enforcement and default judgment against Ooki DAO, which the CFTC alleged was operating a decentralized blockchain-based software protocol that functioned in a manner similar to a trading platform and was violating the CEA (prior coverage of the Ooki DAO enforcement can be found here).

On July 12, 2023,  U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-N.Y.) proposed a revised version of their previously introduced crypto regulation bill to create better safeguards for the crypto industry generally while adding new, stronger consumer protection provisions and AML provisions.  The Lummis-Gillibrand bill, also known as the Responsible Financial Innovation Act (“RFIA”), identifies the need for enhanced regulation of digital assets.  The proposal addresses this need, in part, by creating clearly defined regulatory roles for the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”), which are two of the leading regulatory bodies currently engaged in regulating the U.S. crypto market, as well as creating a new Customer Protection and Market Integrity Authority self-regulatory organization.  The need for greater clarity in the roles of the CFTC and the SEC and with respect to cryptocurrency regulations generally is certainly timely, given the recent CFTC actions against Blockratize, bZeroX (and its successor Ooki DAO), and others and recent high-profile SEC actions against major crypto exchanges.

In a post-FTX environment, several financial regulators are taking action to emphasize a policy of sound custody and disclosure practices and to better understand certain risks to protect customers in the event of an insolvency or similar proceeding. For example, back in January 2023, the New York Department of Financial Services announced that it had issued certain Guidance on Custodial Structures for Customer Protection in the Event of Insolvency in which it highlighted the significance of consumer protection upon insolvency or similar proceeding. And in February 2023, the Securities and Exchange Commission (“SEC”) proposed amendments to the Custody Rule under the Investment Advisers Act of 1940, which, among other changes, clarified aspects of the existing rule and expanded its application to a broader array of client assets managed by registered investment advisers.

This past month, the Commodity Futures Trading Commission (“CFTC”) acted to ensure proper risk management within the derivatives markets in relation to, among other things, digital assets, by issuing two separate releases: (1) a proposed rulemaking on potential amendments to certain Risk Management Program (“RMP”) requirements applicable to swap dealers (“SDs”), major swap participants (“MSPs”), and futures commission merchants (“FCMs”); and (2) an advisory letter reminding derivatives clearing organization (“DCO”) registrants and DCO applicants about compliance obligations when expanding the types of products cleared and services offered by DCOs, including those related to digital assets.  The CFTC stated that re-evaluating its risk management rules is necessary to keep pace with evolving markets that can give rise to new risks from emerging technologies such as digital assets and artificial intelligence.

Binance is the latest major crypto industry player to be sued by a U.S. regulator.  On March 27, 2023, the CFTC announced that it had filed a civil enforcement action against Binance Holdings Limited (and related legal entities) (collectively, “Binance”), its CEO, Changpeng Zhao (“Zhao”), and its former chief compliance officer, Samuel Lim (“Lim”), for violating the Commodity Exchange Act and CFTC regulations. (CFTC v. Zhao, No. 23-01887 (N.D. Ill. Filed Mar. 27, 2023)).  The CFTC, among other things, alleges that Binance allowed U.S. customers to make use of their centralized digital asset trading platform without Binance first properly registering with the CFTC and also allegedly failed to implement an effective anti-money laundering (“AML”) program as required under applicable law. The complaint states that Binance has “never been registered with the CFTC in any capacity.” The CFTC is seeking disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations.

On September 22, 2022, the CFTC announced an order simultaneously filing and settling charges against bZeroX, LLC (“bZeroX”) and its creators for illegally offering leveraged and margined retail commodity transactions in digital assets, operating as an unregistered futures commission merchant and failing to conduct KYC on its customers. According to the CFTC, a month prior to this settlement announcement, bZeroX transferred control of the bZx Protocol to the bZx DAO, a decentralized autonomous organization (“DAO”), which later renamed itself as the Ooki DAO.  On the same day as the bZeroX settlement was announced, the CFTC filed an enforcement action against the Ooki DAO (successor to bZeroX) for violating those same regulations.  The CFTC stated that bZeroX and its creators engaged in this unlawful activity in connection with their decentralized blockchain-based software protocol that functioned in a manner similar to a trading platform.  The transactions executed on bZeroX, and subsequently on the Ooki DAO, were required to take place on a registered designated contract market.  Additionally, the complaint asserted that bZeroX and Ooki DAO were operating as unregistered futures commission merchants by soliciting and accepting orders from customers, accepting money or property as margin and extending credit.

The structure of Ooki DAO, and the CFTC’s enforcement action against the DAO itself, has garnered a lot of media attention (and industry reaction) and raised novel legal issues.

On January 3, 2022, the Commodity Futures Trading Commission (the “CFTC”) entered an order charging Blockratize, Inc. (d/b/a Polymarket.com) (“Polymarket”) with offering off-exchange binary options contracts and failing to register with the CFTC as a designated contract market or swap execution facility as required under the Commodity Exchange Act (the “CEA”). (In re Blockratize, Inc. d/b/a Polymarket.com, CFTC Docket No. 22-09 (Order Jan. 3, 2022)).  The CFTC ordered Polymarket to cease and desist all such unregistered market making activities and issued a $1.4 million fine (which the order noted was reduced in light of Polymarket’s “substantial cooperation” with the investigation).