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Jonathan Mollod

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Jonathan P. Mollod is an attorney and content editor and a part of the firm’s Technology, Media and Telecommunications (TMT) Group. Jonathan earned his J.D. from Vanderbilt Law School. He focuses on issues involving technology, media, intellectual property and licensing issues and general online/tech law issues of the day.

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Customer lists held by providers and the personal information users enter to obtain digital wallets or set up crypto exchange accounts are enviable targets for hackers.  Such data can be used to launch targeted phishing schemes and related scams to trick holders into divulging their private keys or else unknowingly transferring anonymized crypto assets to hackers.  One recent case involves a suit brought by customers who purchased a hardware wallet to secure cryptocurrency assets and are seeking redress for harms they allegedly suffered following data breaches that exposed their personal information.

A recent Ninth Circuit decision analyzed whether a federal court had personal jurisdiction over a foreign crypto asset wallet provider, an issue that can be important when litigating in this area, given the boundary-less nature of the world of crypto assets and related services. (Baton v. Ledger SAS, No. 21-17036 (9th Cir. Dec. 1, 2022) (unpublished)). 

On November 30, 2022, amidst the tumult roiling the cryptocurrency industry following the latest collapse of a major crypto exchange and its reverberations throughout the crypto economy, European Central Bank (ECB) Director General Ulrich Bindseil and Adviser Jürgen Schaaf published a post on the ECB Blog, “Bitcoin’s last stand,” declaiming that Bitcoin “has never been used to any significant extent for legal real-world transactions” and that its market valuation is “based purely on speculation” and, on top of that, “the Bitcoin system is an unprecedented polluter.”  The scathing rebuke of Bitcoin, the largest crypto asset by market cap, was hurled at what the ECB officials see as Bitcoin’s technological shortcomings that make it “questionable as a means of payment” and “rarely used for legal transactions,” given that real Bitcoin transactions are “cumbersome, slow and expensive.” With the current price of Bitcoin having fallen since it peak of $69K in November 2021, the ECB officials described its current price (below $20K) as “an artificially induced last gasp before the road to irrelevance.” The remarks echo statements made by Fabio Panetta, Member of the Executive Board of the ECB, back in April 2022 where he decried the entire “crypto gamble,” seeing crypto-assets as “bringing about instability and insecurity – the exact opposite of what they promised.” (See also recent statements by a Bank of England deputy governor noting that cryptocurrency was a “gamble” that needs to be regulated similar to the traditional financial sector, echoing his own remarks from November 2022 that urged “bringing the activities of the crypto world within the relevant regulatory frameworks”).

In late October, a New York district court refused to dismiss the Department of Justice’s (DOJ) indictment against defendant Nathaniel Chastain, who was charged with wire fraud and money laundering relating to his using insider knowledge to purchase non-fungible tokens (NFTs) prior to them being featured on OpenSea, an online NFT marketplace, and later selling them at a profit. (U.S. v. Chastain, No. 22-cr-305 (S.D.N.Y. Oct. 21, 2022)). Despite the headlines and the fact that the DOJ’s press release labeled this enforcement as charges brought in “the first ever digital asset insider trading scheme,” the Chastain indictment was not actually based on the typical insider trading statutes involving securities law violations, but instead the federal wire fraud statute.  Indeed, despite having an insider trading flavor, the word “security” does not appear in the indictment and the court, in refusing to dismiss the DOJ’s wire fraud claim, ruled that the Government’s wire fraud claim does not require the presence of a “security.”

In what is the New York Department of Financial Services’ (NYDFS) first enforcement action against a NYDFS-licensed “virtual currency business,” on August 1, 2022, the agency announced $30 million settlement with cryptocurrency investing platform Robinhood Crypto, LLC (“RHC”).  The settlement addressed  charges stemming from what the NYDFS cited as various deficiencies during 2019-20 of RHC’s Bank Secrecy Act (BSA) and anti-money laundering (AML) program and RHS’ cybersecurity obligations under the agency’s Virtual Currency “BitLicense” regulation (23 NYCRR Part 200) and Cybersecurity Regulation (23 NYCRR Part 500), among other things

NYDFS has been active in crypto regulation for many years. In 2015, New York was the first state to promulgate a comprehensive framework for regulating virtual currency-related businesses. The keystones of the BitLicense regulations are consumer protection, anti-money laundering compliance and cybersecurity rules that are intended to place appropriate “guardrails” around the industry while allowing innovation. In addition, NYDFS’s Cybersecurity Regulation went into effect in March 2017 and generally requires all covered entities, including licensed virtual currency businesses, to establish and maintain a cybersecurity program designed to protect the confidentiality, integrity, and availability of its information systems. Licensed virtual currency companies are subject to the same AML and cybersecurity regulations as traditional financial services companies.

There have been a number of developments swirling around stablecoins in the past month, including, earlier this week, the recent introduction in the U.S. Senate of a bill (the “Responsible Financial Innovation Act”) that would put in place a regulatory framework for digital assets and enact certain requirements and consumer protections surrounding stablecoins. The topic of stablecoins’ utility and risk has been in the headlines and on the minds of both legislators and state and federal financial regulators. In a timely move, the New York Department of Financial Services (NYDFS), released its “Guidance on the Issuance of U.S. Dollar-Backed Stablecoins” meant to set foundational criteria for USD-backed stablecoins issued by DFS-regulated entities on the issues of redeemability, assets reserves and attestations about such reserves. The NYDFS is the first state regulator to release such guidance. With the fate of Congressional action on stablecoins this year uncertain (and equally uncertain whether federal agencies or banking regulators will step in to offer certain guardrails), it will likely be left to the states (and the industry itself) to establish certain baselines that offer consumer protection and stability without harming innovation. Given NYDFS’s experience in the virtual currency space and its prominence, its latest guidance may be influential to other regulators around the country. 

In a speech given this week at Columbia University by Fabio Panetta, Member of the Executive Board of the European Central Bank (ECB), he decried the entire “crypto gamble,” seeing crypto-assets as “bringing about instability and insecurity – the exact opposite of what they promised” and calling for tighter regulation in the EU (and coordination with international partners) to curb the financial and associated risks from crypto-assets.

Panetta’s speech (entitled “For a few cryptos more: the Wild West of crypto finance”) evoked remarks made by SEC Chair Gary Gensler back in August 2021 that labeled crypto the “Wild West” and requested Congress give the Commission more authority “to write rules for and attach guardrails to crypto trading and lending” that would boost consumer trust and allow the industry to prosper.  Panetta’s scathing broadside was lobbed against what he sees as the risky, seamier side of crypto – the speculative fervor and greed, the high volatility of crypto markets, the facilitation of criminal financial activity, the lack of adequate disclosures, the largely unregulated or “insufficiently supervised” cryptocurrency miners and service providers, and other un- or under-regulated aspects of the “crypto bubble” that, if left ignored, could pose risks to financial stability (citing the sub-prime mortgage market that triggered the last global financial crisis). While far more strident in tone than President Biden’s March 2022 executive order, Panetta’s speech similarly articulated a high-level strategy for regulating and fostering innovation in the burgeoning digital assets space and pushed for central banks to move more quickly to develop central bank digital currencies (CBDCs) and “respond to the people’s growing demand for digital assets and a digital currency by making sovereign money fit for the digital age” or else sit by as the private sector satisfies this demand.

Taking a wide view, Fabio Panetta’s remarks, coupled with the multiple crypto-related regulatory developments ongoing both in the EU and U.S., suggest that some changes are afoot for the crypto industry. While there has been some industry-friendly legislation at the state level in recent years to encourage innovation, at the federal level it seems that the honeymoon period of light touch or no regulation (or largely, regulation by agency enforcement) for the crypto industry is over. Innovation in this space continues at a furious pace at the same time as regulators are slowly gaining experience and expertise about the public policy and investor risks surrounding crypto-assets. Thus, providers should expect more scrutiny and additional compliance hurdles going forward, as multiple regulators have stated that the lasting innovations and societal benefits of cryptocurrencies and DeFi applications can only occur alongside responsible regulation. Panetta stated that pulling off such responsible oversight will not be easy, as there will be “complex trade-offs, balancing the goals of promoting innovation, preserving financial stability and ensuring consumer protection.”