We have previously addressed the recent indictment against Nathaniel Chastain, a former executive of a major NFT marketplace, for insider trading involving NFTs. The indictment charges Chastain with one count of wire fraud and one count of money laundering. It does not allege that the NFT is a security. It does not allege violation of the insider trading laws under securities law. Since then, as we have reported, that SEC has been investigating lack of insider trading policies for NFT/crypto exchanges.
For quite some time, we have been advising that marketplaces and NFT/crypto issuers consider developing an insider trading policy. The SEC is now investigating this issue. If you do not have a policy this is a good time to do so.…
While the crypto community is rightfully focused on the Ripple case to see how the SEC will fare in court on enforcements alleging cryptocurrency offerings are a security, a lesser-known case may provide clarity first. The SEC’s suit against LBRY is scheduled for trial in September 2022.…
A recent class-action lawsuit alleges that the “Uniswap Protocol” exchange is one of the largest crypto-asset exchanges in the world, which permits the unlawful promotion, offer, and sale of crypto tokens as unregistered securities. According to the complaint, Uniswap has no barriers to entry for users looking to trade or swap crypto tokens on the exchange. It requires no verification of an individual’s identity and conducts no “know-your-customer” (KYC) process, leading to rampant fraud. The complaint further alleges that Uniswap has enriched itself and the other defendants (including its VC backers) by collecting fees for issuers on every transaction executed on the exchange that is not disclosed in a transparent manner, in violation of securities laws. Other allegations are that Uniswap offered and sold unregistered securities throughout the United States on its exchange without registering as a national securities exchange or as a broker-dealer and without there being any registration statements in effect for the tokens it was selling, all in violation of applicable law.
Continue Reading Uniswap and VC Backers Sued For Selling Unregistered Securities
The U.S. Securities and Exchange Commission (“SEC”) has announced its examination priorities for the fiscal year 2022. Among them is crypto-assets. Specifically, the SEC is targeting robo-advisers, fractionalization, and other crypto-custody arrangement practices.
Continue Reading SEC Announces 2022 Examination Priorities, Includes Crypto-Assets
The U.S. Securities and Exchange Commission (SEC) recently issued proposed amendments to the Securities Exchange Act  (the “Exchange Act”) that would significantly broaden the definition of “exchange” for purposes of regulation under the Exchange Act (“Proposed Rule”). Designed to address a “regulatory gap,” the Proposed Rule would cover “platforms for all kinds of asset classes that bring together buyers and sellers.” Under the Proposed Rule, communication protocol systems—trading systems that offer the use of non-firm trading interest and provide protocols to bring together buyers and sellers of securities—would have to register with the SEC as an exchange unless otherwise exempt. As we previously reported, this amendment, if passed, likely would have a significant impact on the decentralized finance (“defi”) industry.
Continue Reading SEC Proposed Amendments Could Significantly Impact DeFi Companies
For some time now we have cautioned companies to seek legal advice for certain business models relating to NFTs. According to a recent report, the SEC is now targeting certain NFT uses. According to the report, the SEC is probing whether NFTs are being utilized to raise money like traditional securities. The SEC has reportedly sent subpoenas related to the investigation and is particularly interested in information about fractional NFTs. Fractionalization allows multiple people to hold (and trade) a share of an asset. Each share is represented by an NFT that represents a fraction of the ownership of or revenue rights associated with the asset. In some cases, this may meet the Howey test, which is one of the primary tests the SEC uses to assess whether a digital asset is a security.
Continue Reading SEC Targets NFTs
On January 26, 2022, the SEC released a rulemaking proposal intended to enhance investor protections and cybersecurity for alternative trading systems that trade treasuries and other government securities. The 650 page proposal contains over 220 separate requests for comments (with many requests containing multiple sub-parts). The comment requests address wide-ranging issues which affect trading venues of all types. Most relevant for the blockchain industry is that the SEC proposal seeks to regulate “communication protocol systems.”…
Continue Reading Recent SEC Proposed Rulemaking Could Impact Blockchain Trading Platforms
Tokenization limits the exposure of sensitive information and makes digital transactions more secure. Whether people realize it or not, millions of Americans already use tokenization technology on a daily basis. Recent developments in blockchain systems and decentralized finance create new uses for tokenization, raising legal questions as to how existing regulatory frameworks will apply or adapt.…
The leaders of the U.S. Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and the U.S. Securities and Exchange Commission (the “Agencies”) issued a joint statement to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). This joint statement provides further clarity on some of the many laws potentially applicable to crypto currency and other digital assets and highlights the need for anyone operating in the space to obtain legal advice to understand their legal compliance obligations. According to the statement, AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC. Among those AML/CFT obligations are the requirement to establish and implement an effective anti-money laundering program (AML Program and recordkeeping and reporting requirements, including suspicious activity reporting (SAR) requirements.)…
Continue Reading Joint Statement on Digital Assets from CFTC, SEC and FinCEN – a Warning to the Crypto Industry regarding Anti-Money Laundering and Countering the Financing of Terrorism Obligations
A new bill, the Token Taxonomy Act was introduced to congress to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.
Continue Reading New Effort to Exempt Crypto Currency from Certain SEC, Tax and Other Regulatory Burdens