The gloves are off. The SEC’s recent enforcement actions against leading crypto exchanges suggest that the SEC has decided that time’s up for the crypto industry as it currently exists in the United States.
After spending years urging industry participants to come in and register, the SEC has made clear,…
As of this writing, the Ethereum “Merge,” one of the most anticipated events in blockchain history, is finally expected to occur in September 2022. The “Merge” will shift the Ethereum blockchain (native token ETH, or ether) from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism that uses over 99.9% less energy. Technically, the Merge involves transitioning the current Ethereum proof-of-work Mainnet protocol (the blockchain used for ETH-based transactions) to the Beacon Chain proof-of-stake network. As a result, transactions will be conducted on the new proof-of-stake network and new ETH tokens will be minted by nodes on the network staking a fair amount of ether tokens into a pool to secure the network and validate transactions. Post-Merge, the practice of ether cryptomining on the Ethereum 2.0 network will end, either forcing miners to pivot to mining on Ethereum Classic or find a new endeavor.
While the move to Ethereum 2.0 is being closely-watched, akin to the countdown to the New Year’s Eve Times Square ball drop, it’s a little more complicated and more of a series of actions (and accompanying benefits) that will happen over time. The Merge is but the first step in a series of five (notably followed by upgrades titled ‘the Surge,’ ‘the Verge,’ ‘the Purge,’ and ‘the Splurge’) that intend to make Ethereum faster, more scalable, more powerful, more energy efficient and more robust.
The Securities and Exchange Commission (SEC) announced today that it would hire 20 additional positions to the Crypto Assets and Cyber Unit (formerly known as the Cyber Unit) within the Division of Enforcement, increasing the number of dedicated positions to 50. The “Crypto Unit” is tasked with protecting investors in crypto markets and from cyber-related threats. With more personnel and resources available, the SEC believes the unit will be “better equipped to police wrongdoing in the crypto markets” while still staying involved in disclosure and controls issues with respect to cybersecurity.
According to the release, the 20 additional hires will include supervisors, investigative staff attorneys and fraud analysts, with a focus on investigating securities law violations in: crypto asset offerings, exchanges, and lending and staking products; decentralized finance (“DeFi”) platforms; non-fungible tokens (“NFTs”); and stablecoins.
As we stated in a recent post, statements and proposals by financial regulators suggest that providers should expect more scrutiny and additional compliance hurdles going forward.
The SEC’s push to regulate the next generation of blockchain-based applications will likely give rise to disputes and enforcement actions, particularly in the developing decentralized finance (DeFi) space. Although DeFi has the potential to enhance or replace traditional financial products by speeding execution and reducing transaction costs using blockchain technology,…
On January 10, 2022, the Securities and Exchange Commission (“SEC” or the “Commission”) announced it settled charges in In re tZERO ATS, LLC, No. 93938 (SEC Order Jan. 10, 2022) (“Order”). The Order details how the SEC fined blockchain-based trading platform tZERO ATS, LLC (“tZERO”), an alternative trading systems (“ATS”), for alleged violations of Regulation ATS, which requires certain disclosures to the Commission.
An ATS is a trading system that meets the definition of “exchange” under federal securities laws but is not required to register as a national securities exchange if the ATS operates under an exemption provided under regulations under the Securities Exchange Act of 1934 (“Exchange Act”). As stated in the Order, tZERO is an ATS that offers both “digitally enhanced securities” recorded on a blockchain and trading and settlement services for unique investments that may not be available through traditional brokerages.
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…
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.
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.
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