Non-Fungible Insights: Blockchain Decrypted

On May 18, 2023, House Majority Whip Tom Emmer (R-MN) and Representative Darren Soto (D-FL) proposed the bipartisan Securities Clarities Act (the “Act”). The purpose of the Act is to “clarify and codify that an asset sold pursuant to an investment contract….including an asset in digital form…, that is not otherwise a security…does not become a security as a result of being sold or otherwise transferred pursuant to an investment contract.”

On May 30, 2023, the U.S. Securities and Exchange Commission (SEC) settled its case against a former Coinbase employee and his brother for alleged “insider trading” of digital assets. At the heart of the dispute was whether several digital assets trading on the platform were properly regarded as “securities” under U.S. law.

On May 18, 2023, Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam clarified his position on the CFTC’s authority over digital asset markets. Behnam’s comments are consistent with Securities and Exchange Commission Chair Gary Gensler’s recommendation of greater CFTC authority over cryptocurrency and pushes for increased regulation of digital asset markets generally.

On May 15, 2023, the Securities and Exchange Commission responded to Coinbase, Inc.’s request for writ of mandamus instructing the SEC to act on Coinbase’s previously filed rulemaking petition. In its response, the SEC argued that its regulatory regime is not egregiously delayed and that the SEC is not withholding any decisions already made.

On April 20, 2023, the European Parliament greenlighted the first, harmonized European Union (EU) framework governing crypto-assets, known as the Markets in Crypto-Assets Regulation (MiCA), with 517 votes in favor, 38 votes against, and 18 abstentions.

On February 23, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the “agencies”) issued their second joint statement of the year regarding crypto-asset market vulnerabilities.

In this more recent joint statement, the agencies have drawn their attention to the liquidity risks created by funding from crypto-asset-related entities, and the methods to mitigate such risks.

On February 22, 2023, the Southern District of New York denied a motion to dismiss by blockchain company Dapper Labs and its CEO Roham Gharegozlou. Dapper Labs is behind the “NBA Top Shot Moments” Non-Fungible Token collection and also controls the private Flow blockchain network, on which the NFT transactions occur via the exclusive FLOW tokens.

On February 13, 2023, Paxos Trust Company, LLC, a New York State-chartered trust company regulated by the New York State Department of Financial Services, confirmed via a statement that it received a Wells Notice from the Securities and Exchange Commission on February 3, 2023.

On February 9, 2023, the U.S. Securities and Exchange Commission announced charges against Payward Ventures, Inc. and Payward Trading Ltd. for failing “to register the offer and sale of their crypto asset staking-as-a-service program.”

On January 3, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement on crypto-asset risks to banking organizations.

On November 7, 2022, the United States District Court for the District of New Hampshire ruled that the digital asset LBRY Credits (LBC), offered to purchasers by LBRY, Inc., is an unregistered security for U.S. federal securities law purposes. This summary judgment follows a March 2021 Securities and Exchange Commission (SEC) enforcement action in which the agency claimed that LBRY’s offer and sale of LBC violated Sections 5(a) and 5(c) of the Securities Act of 1933 prohibiting unregistered offerings or sales of securities in interstate commerce. Ruling in favor of the SEC, the court determined that LBRY offered LBC as a security and rejected LBRY’s argument that it lacked “fair notice.”

On October 11, 2022, BNY Mellon, the oldest bank in the United States, launched its digital custody platform, allowing select clients to safeguard their ether and bitcoin holdings. BNY Mellon is the first large U.S. bank to custody digital assets alongside traditional investments on the same platform.

On September 22, 2022, the Commodity Futures Trading Commission filed a complaint against Ooki DAO, a decentralized autonomous organization, and its members for (i) offering to enter into and executing leveraged retail commodity transactions outside of a registered futures exchange, (ii) failing to register as a futures commission merchant, and (iii) failing to implement know-your-customer and customer identification program procedures as required of FCMs under the Bank Secrecy Act. Concurrent with the complaint, the CFTC published a settlement order against the individual founders of bZeroX, LLC for the same violations.

On October 3, 2022, the Securities and Exchange Commission (SEC) issued a cease-and-desist order against media personality Kim Kardashian for violations of Section 17(b) of the Securities Act of 1933, which makes it unlawful for any person to promote a “security” without fully disclosing the receipt and amount of compensation received for such promotion. Section 17(b) is known as the SEC’s “anti-touting rule.”

On September 8, 2022, Securities and Exchange Commission (SEC) Chair Gary Gensler expounded his thoughts on cryptocurrency tokens (“Tokens”) and cryptocurrency intermediaries (“Intermediaries”) at the Practising Law Institute’s “SEC Speaks” program.

On May 12, 2022, Florida Governor Ron DeSantis signed new legislation, CS/HB 273, defining and deregulating cryptocurrency in the state. The legislation amends Florida’s financial regulations targeting money service businesses (MSBs), creates a new definition for “virtual currency,” and ultimately eases restrictions on Florida’s crypto industry.

On April 4, 2022, Securities and Exchange Commission (SEC) Chair Gary Gensler presented his views on decentralized finance (DeFi) platforms and crypto tokens, which reiterated the active stance the SEC is prepared to take on the nascent industry.

Despite initial skepticism toward cryptocurrency technology, the Biden administration recently announced new processes to investigate, understand, and potentially further regulate the space.

On February 14, 2022, the Securities and Exchange Commission announced a first-of-its kind enforcement action against BlockFi Lending LLC, a crypto lending platform, indicating that it intends to treat such products as securities and aggressively regulate the crypto area.

On February 17, 2022, the Department of Justice announced the appointment of Eun Young Choi as the first head of the National Cryptocurrency Enforcement Team (NCET), which was established by Deputy Attorney General Lisa Monaco in October 2021.