The SEC and a consortium of 32 states recently announced a $100 million settlement with BlockFi Lending LLC over its crypto lending product, BlockFi Interest Accounts. The SEC alleged BlockFi had violated the securities laws by failing to register its interest-bearing crypto lending product as a security, failing to register itself as an investment company,
On August 9, 2021, the SEC issued a cease-and-desist order against digital asset exchange Poloniex, Inc. for allegedly operating an unregistered exchange in violation of Section 5 of the Exchange Act in connection with its operation of a trading platform that facilitated the buying and selling of digital asset securities.
In the cease-and-desist order, the SEC alleged that Poloniex met the definition of an “exchange” because it “provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine.” The SEC also found, based on internal communications, that Poloniex decided to be “aggressive,” ultimately listing token(s) it had internally determined carried a “medium” risk of being considered securities under the Securities Act of 1933 pursuant to the test set forth by the U.S. Supreme Court in SEC v. W.J. Howey. However, the SEC did not identify what digital asset(s) it determined were securities nor why, simply stating that Poloniex facilitated trading of “digital assets that were investment contracts and therefore securities.”
Without admitting or denying the SEC’s findings, Poloniex agreed to the entry of the order and a payment of $10,388,309 in disgorgement, prejudgment interest, and a civil penalty.
Continue Reading SEC Enforcement Action Against Poloniex Signals Heightened Scrutiny for Crypto Exchanges
On April 3, 2019, staff of the Securities and Exchange Commission released (1) a framework providing principles for analyzing whether a digital asset constitutes an investment contract, and thus a security, as defined in SEC v. W.J. Howey Co. and (2) a no-action letter permitting TurnKey Jet, Inc., without satisfying registration requirements under the Securities…
On January 22, the Financial Industry Regulatory Authority (“FINRA”) released its 2019 Risk Monitoring and Examination Priorities Letter (the “Letter”). The Letter highlights material new priorities for FINRA examinations in the coming year, as well as priorities in areas of ongoing concern. The topics highlighted in this year’s Letter reflect FINRA’s increasing focus on its members’ interaction with, and adoption of, innovative financial technologies, as well as its implicit acknowledgement of the ability for such innovations to assist in regulatory compliance. The new priorities highlighted in the Letter include several related to FinTech, including online distribution platforms, use of regulatory technology (or “RegTech”), and supervision of digital asset businesses. In priority areas of ongoing concern, the Letter confirmed that FINRA will continue to focus on reviewing the adequacy of firms’ cybersecurity programs. Below we detail FINRA’s discussion of these priorities and analyze them in the context of other recent guidance and enforcement actions.
Continue Reading FINRA 2019 Examination Priorities Letter Includes Focus on FinTech and Cybersecurity
Continuing its efforts to engage with FinTech innovators and market participants in the adoption of new technologies, the Commodity Futures Trading Commission (“CFTC”) and its LabCFTC released a Primer on Smart Contracts (the “Primer”) on November 27. The Commission focused its Primer on (1) detailing the technical aspects of smart contract technology; (2) examining potential benefits and risks connected to their widespread adoption; and (3) the CFTC’s role in regulating the adoption of the technology within those markets under its jurisdiction.
Continue Reading The CFTC Releases Primer on Smart Contract Use in Financial Markets
On November 28, 2018, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) identified for the first time digital currency addresses associated with sanctioned persons. The newly sanctioned individuals, Iran-based Ali Khorashadizadeh and Mohammad Ghorbaniyan, were accused of converting digital currency payments into Iranian rial as part of a widespread ransomware scheme. Since 2015, the ransomware scheme (known as “SamSam”) has infected the data networks of corporations, hospitals, universities, and government agencies. According to OFAC’s announcement, the identified bitcoin addresses were used with over 40 digital currency exchangers to process more than 7,000 illicit transactions in bitcoins worth millions of U.S. dollars.
Continue Reading OFAC Lists Digital Currency Addresses for First Time, Releases New Guidance
On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.” The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens. These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018.
Continue Reading SEC Divisions’ Issue Public Statement on Digital Assets and ICOs, Echoing Recent Enforcement Actions
On September 27, 2018, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) filed parallel actions in federal court against an internet dealer that sold “contracts for difference” (CFD) based on securities and commodities margined with bitcoin. The actions, which were assisted by the Federal Bureau of Investigation and the Department of Justice, signal continued coordination among federal agencies to police market activity involving financial transactions in cryptocurrencies.
Continue Reading The CFTC and SEC Bring Charges Against International Securities Dealer for Bitcoin-Funded Swaps Activity
On September 26, 2018, a federal court in the District of Massachusetts found that virtual currencies are a commodity under the Commodity Exchange Act, 7 U.S.C. § 1 et seq, (“CEA”). This marks the second time that a court has accepted the Commodity Futures Trading Commission’s (“CFTC”) position and upheld the agency’s authority to regulate unleveraged and unmargined spot transactions in virtual currency under the agency’s anti-fraud and manipulation enforcement authority. Most notably, however, the reasoning behind its decision potentially expands the scope of the CFTC’s oversight of the market.
Continue Reading Second District Court Determines Virtual Currencies Are Commodities
Over the past year, the U.S Securities and Exchange Commission (“SEC”) has increasingly scrutinized initial coin offerings (“ICO”) and certain digital assets. On September 20, 2018, the SEC’s Enforcement Division co-Director, Stephanie Avakian, gave a speech in which she addressed the Division’s approach to dealing with these new forms of tradeable assets. This speech came only days after the SEC settled its first case charging an unregistered broker-dealer for facilitating the sale of digital tokens from several ICOs since the 2017 DAO Report. In her speech, Avakian provided three key insights into the Division’s enforcement strategy.
Continue Reading SEC Enforcement Division Co-Director Provides Insight Into Commission’s Approach to ICOs and Cryptocurrencies