Digital Assets

Subscribe to Digital Assets via RSS

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.

On 8 June 2023, the UK Financial Conduct Authority (“FCA”) published a policy statement (PS23/6) on the financial promotion rules for cryptoassets (the “Policy Statement”). This is accompanied by a guidance consultation (GC23/1), where the FCA is seeking feedback on proposed guidance to the Policy Statement.

This blog post summarizes recent federal bills that have been introduced (but not yet passed), proposals by the Biden Administration, and guidance issued by the Internal Revenue Service with respect to the taxation of digital assets.

Read the full post on our Tax Talks blog.

Crypto firm bankruptcies and resulting disruption in the crypto ecosystem will continue to exacerbate liquidity and regulatory concerns in this space.  Since all participants supporting the crypto ecosystem are at risk, managing that risk is critical.

Fund managers should be prepared on multiple fronts.

Read the full post written by…

As discussed in Part I of this series, Ordinals are a pioneering new method of utilizing the Bitcoin blockchain that will usher in new and innovative use cases on Bitcoin. As promised, in Part II we will discuss the implications for creators and owners.

Implications of Ordinal NFTs for Creators and Owners

As with most crypto innovation, capable users quickly flocked to the shiny new object. Copies of popular Ethereum NFT projects began appearing on the Bitcoin blockchain after the Ordinals launch. For example, a clone of CryptoPunks, named Ordinal Punks, popped up and is reportedly gaining traction. Further, the owner of Bored Ape Yacht Club (“BAYC”) #1626 permanently removed the NFT from its spot as one of the most valuable in the space by “burning” it, then inscribing the NFT on Bitcoin using Ordinals.  While the owner of BAYC #1626 effectively deleted – or symbolically transferred – the NFT, it appears that some NFT creators are not purists and are willing to experiment on Bitcoin. For example, Yuga Labs, the creator behind the Bored Ape Yacht Club Ethereum-based NFT phenomenon, announced that it would release a NFT project called TwelveFold on the Bitcoin blockchain.

In our December article we asked: what do hard forks mean for my NFTs? In this article we ask a similar question: how does a copy of an NFT on completely different chain (Bitcoin, not Ethereum), affect value and licenses?

A number of questions arise. Does the holder of the copycat Ordinal on Bitcoin require a license corresponding to the Ethereum NFT? What happens to the Ethereum NFT purchaser’s rights granted to it under the license, which may or may not include a commercial right to exploit and sublicense? Does an Ordinal inscription of an Ethereum NFT fall under a purchaser’s general non-commercial use and public display rights that are generally given to purchasers on NFT marketplaces? Does the original Ethereum NFT holder hold one set of rights and the holder of the copycat on Ordinals possess any rights that may be in conflict with the original NFT holder’s? Generally speaking, would the value of the NFT be affected if two identical copies exist on two different blockchains? Does the NFT owner or project have a say in which blockchain to recognize? Has any IP infringement occurred?

The NFT community has been humming in 2023 after the recent rise in Bitcoin NFT mints. Ordinals, a non-fungible token (“NFT”) protocol, sent the community buzzing in January 2023 when it launched on the Bitcoin blockchain (as updated by soft forks in the protocol in 2017 and 2021, which among other things, added new features to the blockchain and increased the block size from 1MB to 4MB and allowed for the inscription of data). Bitcoin evangelists – true believers in Bitcoin as hard money – appreciate that the Bitcoin blockchain’s development is optimized for non-censorable, decentralized money but not file storage and consider Ordinals as immutable JPEG garbage that will only create network congestion, thereby increasing fees, and should be viewed as beneath the original peer-to-peer mission. Conversely, NFT enthusiasts and the blockchain curious are celebrating Bitcoin’s NFT scene as an innovative use of the chain: unlike traditional Ethereum-based NFTs (where the original underlying asset generally resides on a centralized server or the IPFS), Ordinals reside on-chain.  Needless to say, the rise of NFTs on the original blockchain is not without questions.

This article is Part I of a two-part article on Ordinals. In this part, we will break down Ordinals, explaining Ordinal Theory, ins-and-outs and functions. In Part II, we will dive into the implications of having NFTs on two separate blockchains.

A recent guilty plea in U.S. v. Wahi in the U.S. District Court for the Southern District of New York, a crypto insider trading case, sets up an interesting situation where the defendants — who have already pled guilty to wire fraud — are challenging the SEC’s parallel civil charges…

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)).