With new types of digital assets and related business on the rise, federal authorities have been busy investigating. Recently, the SEC, FinCEN and the CFTC have imposed some notable settlements involving cryptocurrency trading platforms for allegedly operating without appropriate approvals from financial regulatory authorities. This may be the start of
Enforcement Action
SEC Brings Charges against Allegedly Fraudulent Unregistered Decentralized Finance Project That Ran on the Ethereum Platform
By Karen J. Garnett on
On August 6, 2021, the Securities and Exchange Commission (SEC) announced that it had charged two men, Gregory Keough and Derek Acree, and their company, Blockchain Credit Partners, doing business as DeFi Money Market (collectively, the “Respondents”), for unregistered sales of more than $30 million of securities using smart contracts and so-called “decentralized finance” (DeFi) technology and for making false and misleading statements about their business to investors in violation of the federal securities laws. (In re Blockchain Credit Partners, No. 3-20453 (SEC Order Aug. 6, 2021)).
In recent days, many eyeballs were closely watching the drama behind the cryptocurrency taxation and transparency measures contained in the Senate’s infrastructure bill and are still digesting SEC Chair Gary Gensler’s recent remarks before the Aspen Security Forum that offered some clues on where the agency will go with respect to cryptocurrency regulation and enforcement. Meanwhile, the SEC continued its enforcement efforts to shut down what it deems fraudulent and unregistered securities offerings involving digital assets. After ceasing operations in February 2021, Respondents consented to a cease-and-desist order that includes disgorgement totaling almost $13 million and civil penalties of $125,000 each of the individual Respondents. The SEC’s order provides another example of how the now-familiar investment contract analysis applies to tokens, with some additional insights on the impact of voting rights under the Howey test and a further analysis of tokens as notes.
When is a Token More Than a Token? SEC Settlement over Anti-Touting Provision Raises Familiar Questions
By Karen J. Garnett on
On July 14, 2021, the Securities and Exchange Commission (“SEC”) settled an action against the operator of a platform that promoted current and upcoming digital token offerings for violations of the anti-touting provision of the Securities Act of 1933. In the Matter of Blotics Ltd. f/d/b/a Coinschedule Ltd. (July 14, 2021). The SEC claimed that the primary source of revenue for the platform operator, Coinschedule Ltd., was compensation received from issuers that paid to list, market, and rate their token offerings on the platform. The SEC charged that Coinschedule’s failure to disclose the consideration it received from token issuers for promoting their token offerings was a violation of the anti-touting provisions (Section 17(b)) of the Securities Act. The respondent, Blotics Ltd. (successor to Coinschedule Ltd.), was ordered to pay disgorgement of $43,000, plus interest, and a civil penalty of $154,434.
The settlement order does not shed any light on when a digital token is a security. The anti-touting provisions of Section 17(b) apply only if the instrument being touted is a security, and the order states that some portion of the digital tokens offered and sold on the Coinschedule platform were securities in the form of investment contracts. However the settlement order does not address how many or which of the 2,500 individual token offerings profiled on the Coinschedule platform involved securities, providing no analysis and only a conclusory statement that “[t]he digital tokens publicized by Coinschedule included those that were offered and sold as investment contracts, which are securities pursuant to Section 2(a)(1) of the Securities Act.”
DOJ Tax Division Shows Sustained Interest in Cryptocurrency
By Lindsey Olson on
On May 5, 2021, another federal district court, this time for the Northern District of California, permitted the IRS to proceed with a John Doe summons very similar to the one served on Circle last month (the subject of a recent post). This time, the Summons seeks information on…
A Warning to Cryptocurrency Users from the Justice Department’s Tax Division
By Lindsey Olson on
As you might expect during tax season, the Justice Department’s press releases seem particularly focused on tax-related issues these days. At the start of this month, DOJ sent a stern reminder to the public that non-traditional currency users should not expect to escape federal tax law enforcement.
SEC Division of Examinations Releases Risk Alert for Digital Asset Securities
By Robert E. Plaze & Frances P. Kelley on
On February 26, 2020, the Security and Exchange Commission’s (“SEC”) Division of Examinations (the “Division”) published a Risk Alert, “The Division of Examinations’ Continued Focus on Digital Asset Securities.” In the Risk Alert, the Division offered insight into its current examination focus with respect to the activities of market participants, including investment advisers, concerning digital assets that are securities (“Digital Asset Securities”) and distributed ledger technologies.
The Alert outlines the observations of the Division, which were the product of examinations of investment advisers, broker-dealers, and transfer agents and their use of Digital Asset Securities. At only eight pages, the Alert is not an exhaustive compliance document for market participants and does not detail explicitly how firms might remain in compliance with securities laws and regulations. The Division’s outline of the risks it has observed from recent examinations is, however, a useful roadmap, outlining the areas of focus for the Division’s future examinations and compelling firms to take another look at their relevant compliance practices. It also raises some questions about the scope of the applicability of federal securities to digital assets that have yet to be explored.
Three Critical Questions That Will (Hopefully) be Answered by the SEC’s Lawsuit against Ripple
Late last year, the SEC filed a litigated action in the U.S. District Court for the Southern District of New York against Ripple Labs Inc. and two of its executive officers (collectively, “Ripple”), alleging that Ripple raised over $1.3 billion in unregistered offerings of the digital asset known as XRP.…
SEC Brings Charges against Individuals Behind Allegedly Fraudulent Unregistered Digital Asset Securities Offering
On February 1, 2021, the U.S. Securities and Exchange Commission (SEC) announced that it had brought charges against several individuals involved in an alleged scheme to induce investors to transfer more than $11 million to buy into an unregistered initial coin offering (ICO) of B2G tokens, which the SEC claimed was merely an elaborate sham. (SEC v. Krstic, No. 21-0529 (E.D.N.Y. Filed Feb. 1, 2021)). The complaint, filed in the Eastern District of New York, alleged that Kristijan Krstic (“Krstic”), John DeMarr (“DeMarr”), and Robin Enos (“Enos”) (collectively, “Defendants”) conspired, in violation of securities laws, to defraud over 460 investors of $11.4 million with promises of large returns on investments from its offerings, including for B2G tokens that the defendants claimed were genuine digital assets for a mining and trading platform.