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Texas’ gold-backed digital currency project: Law Decoded, April 3–10

While Ted Cruz and Ron DeSantis attack the idea of American CBDC, Texan lawmakers propose to create a statewide one.

The topic of central bank digital currencies is in the crossfire of United States politicians, with figures like Ron DeSantis and Ted Cruz trying to prevent them from existing. But what about a statewide digital currency? The first of its kind, a gold-backed state-based digital currency project has appeared in Texas. 

On the same day, two Texan lawmakers introduced identical bills for creating a state-based digital currency backed by gold. Each unit of the digital currency would represent a particular fraction of a troy ounce of gold held in trust, according to the bills. Once a person purchases a certain amount of digital currency, the comptroller uses that money received to buy an equivalent amount of gold. Although neither of the bills has been passed or presented for a vote, both state that the act will take effect from Sept. 1, 2023.

Meanwhile, another bill has been passed by a senate committee in Texas. The bill would largely remove incentives for miners operating under the state’s regulatory environment. Under the bill, crypto firms participating in a program intended to compensate them for load reductions on Texas’ power grid would be capped for anticipated demand of “less than 10 percent of the total load required by all loads in the program.” Certain crypto mining companies would also not receive a reduction on state taxes for participation in the program starting in September 2023.

Regulators announce $10 million settlement with Robinhood ‘for failing investors’

The California Department of Financial Protection and Innovation said that the company behind cryptocurrency and stock trading platform Robinhood will likely pay more than $10 million in penalties “for operational and technical failures that harmed main street investors.” The settlement resulted from an investigation by the North American Securities Administrators Association in conjunction with securities regulators from Alabama, Colorado, California, Delaware, New Jersey, South Dakota and Texas. The platform suffered a series of system outages in March 2020, causing users to miss out on trades while many of its services were unavailable.

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Coinbase supports new court action to remove Tornado Cash ban

The U.S. Department of the Treasury faces a renewed legal challenge aiming to overturn its decision to sanction the crypto mixer Tornado Cash. The challenge was filed by six individuals backed by the cryptocurrency exchange Coinbase. A motion for a partial summary judgment was filed on April 5 in a Texas district court, with the Coinbase-backed plaintiffs moving for the U.S. Office of Foreign Asset Control (OFAC) to settle the first two counts from its original complaint filed in September 2022. The counts claimed OFAC exceeded its statutory powers under the International Emergency Economic Powers Act and violated the free speech clause of the U.S. Constitution’s first amendment.

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Bill protecting Bitcoin mining rights passes in Arkansas

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A bill seeking to regulate Bitcoin (BTC) mining activity in Arkansas has passed in the state’s Congress. It will now move to the governor’s office for approval. Under the legislation, crypto miners will enjoy the same rights as data centers. The bill outlines that Arkansas’ government should not “impose a different requirement for a digital asset mining business that is applicable to any requirement for a data center.” Arkansas’ move follows a similar initiative in the state of Montana, where the Senate passed a bill to protect crypto miners in late March. 

US state regulators announce $10M settlement with Robinhood ‘for failing investors’

The investigation looked into complaints of Robinhood’s system outages that caused users to miss out on trades while many of its services were unavailable.

The California Department of Financial Protection and Innovation said that the company behind cryptocurrency and stock trading platform Robinhood will likely pay more than $10 million in penalties “for operational and technical failures that harmed main street investors.”

In an April 6 announcement, the DFPI said the settlement — up to $10.2 million — was the result of an investigation by the North American Securities Administrators Association in conjunction with securities regulators from Alabama, Colorado, California, Delaware, New Jersey, South Dakota and Texas. The platform suffered a series of system outages in March 2020 causing users to miss out on trades while many of its services were unavailable.

“Robinhood repeatedly failed to serve its clients, but this settlement makes clear that Robinhood must take its customer care obligations seriously and correct these deficiencies,” said NASAA president Andrew Hartnett.

Robinhood experienced significant growth at the start of the COVID-19 pandemic when many people shifted to working from home and conducting online trades through the app. However, the platform’s outages caused some affected users to file a class-action lawsuit against Robinhood. The U.S. Financial Industry Regulatory Authority, or FINRA, also penalized the firm for roughly $70 million for causing “widespread and significant harm” to thousands of users.

“There were deficiencies at Robinhood in its review and approval process for options and margin accounts, weaknesses in the firm’s monitoring and reporting tools, and insufficient customer service and escalation protocols that in some cases left Robinhood users unable to process trades even as the value of certain stocks was dropping.”

The DFPI order accuses Robinhood of “negligent dissemination of inaccurate information to customers” in regard to margin trading and risks with multi-leg option spreads, as well as failures related to services available to customers and transparency with FINRA and state regulators. As part of the settlement, Robinhood “neither admits nor denies” the regulators’ findings, which did not include evidence of “willful or fraudulent conduct.”

Related: US DOJ announces seizure of 55M Robinhood shares

The New York Department of Financial Services — which was not a part of the NASAA investigation — announced a $30 million penalty on Robinhood’s crypto business arm in August 2022 for alleged violations related to Anti-Money Laundering, cybersecurity and consumer protection laws between January and September 2019. The U.S. Securities and Exchange Commission also issued an investigative subpoena against the firm in December 2022 for its crypto listings and custody services.

Magazine: Scott Melker on defying the odds with crypto trading

BlockFi to provide over $100K in refunds to California clients

At least 111 BlockFi borrowers had continued repaying loans between Nov. 11 and Nov. 22, even though they didn’t need to, according to court documents.

Bankrupt crypto lender BlockFi has agreed to refund more than $100,000 to California customers that had continued to repay loans even after a trading halt on Nov. 10 last year. 

In a March 27 statement, California’s Department of Financial Protection and Innovation said that its investigation had discovered that at least 111 borrowers in California made roughly $103,471 in loan repayments between Nov. 11 and Nov. 22.

The financial watchdog claimed that BlockFi failed to “provide timely notification to borrowers that they could stop repaying their BlockFi loans.”

The DFPI claims that borrowers were not notified until Nov. 22 that they could stop repaying their BlockFi Loans “until further notice.”

According to documents, BlockFi requested permission from the bankruptcy court to return these payments to the borrowers in a motion filed with the court on Feb. 24.

The refunds will be able to go ahead if the motion is approved, with a hearing scheduled for April 19.

Excerpt from the DFPI agreement filed in court. Source: DFPI

Meanwhile, the DFPI said BlockFi has agreed to an ”interim suspension” of its California Financing Law (CFL) license while “the bankruptcy and revocation actions are pending.”

“If this motion is granted BlockFi agrees to direct the Servicer to timely return borrowers’ payments, including interest and late fees and all funds paid following the November 10th platform pause,” according to the DFPI documents. 

Unless otherwise ruled by the bankruptcy court, the regulator said BlockFi’s agreement to the interim suspension means it will continue to direct its agents to pause the collection of repayments for California customers on loans, interest payments and “not charge, levy, or assess any late fees associated with any payments, including at maturity.”

BlockFi has also agreed to continue not reporting to credit agencies that loans from California residents have become delinquent or defaulted on or after Nov. 11, and will not take “any action that may harm California residents’ credit scores on such loans.”

Related: BlockFi in no immediate danger, despite Silicon Valley Bank exposure: Report

According to the DFPI, Commissioner Clothilde V. Hewlett suspended BlockFi’s lending license for 30 days on Nov. 11 and moved to revoke BlockFi’s CFL license on Dec. 15,.

BlockFi halted client withdrawals and requested clients not to deposit to BlockFi wallets or Interest Accounts on Nov. 10, citing a lack of clarity around the collapse of FTX.

By Nov. 28, BlockFi filed for Chapter 11 bankruptcy for the company and its eight subsidiaries. BlockFi International filed for bankruptcy with the Supreme Court of Bermuda on the same day.

California regulator launches complaint-based crypto scam tracker

The regulator receives thousands of consumer and investor complaints about possible crypto scams each year, and it appears it’s done something with the information.

The California Department of Financial Protection and Innovation has launched a new crypto scam tracker to help traders and investors spot possible industry threats.

zDFPI launched the tracker on Feb. 16. It’s based on user complaints, with the department compiling a list of crypto-related grievances by victims who claim to have been scammed or have identified attempted scams.

The complaints listed represent descriptions of losses incurred in transactions that victims have identified as part of a fraudulent or deceptive operation. However, the DFPI stated that it had not verified any of the scams listed, but noted that it receives thousands of consumer and investor complaints each year.

The latest scams listed on the new scam tracker. Source: DFPI

“Scammers are in the shadows using the public’s interest in crypto assets to take advantage of the most vulnerable Californians,” said DFPI Commissioner Clothilde Hewlett. She added that the department was taking action to identify them:

“Through the new Crypto Scam Tracker, combined with rigorous enforcement efforts, the DFPI is committed to shining a light on these ruthless predators and protecting consumers and investors.”

The majority of the 36 complaints already listed in the tracker were social media and social engineering scams where users have been duped into taking action via scams on Facebook, WhatsApp, Instagram, TikTok and dating apps.

Four-fifths of them were what the DFPI refers to as “pig-butchering scams,” which are essentially social engineering attempts by scammers trying to establish a relationship and trust with the victim.

DFPI spokeswoman Elizabeth Smith said that “We have heard from consumers that scam alerts help them avoid similar scams.”

Related: Here’s how to quickly spot a deepfake crypto scam

Imposter websites are also one of the most commonly reported scams, according to the DFPI. “When companies or websites (fake or not) have a look- or sound-alike names, the potential confusion created for consumers is real,” it said.

The tracker also has a search function enabling users to look up potentially fraudulent websites or crypto projects in advance.

Consumer Federation of California reattempts to regulate crypto companies

Assemblymember Timothy Grayson introduced the Digital Financial Assets Law to protect Californians from financial hardship and foster responsible innovation.

The Consumer Federation of California (CFC), a nonprofit advocacy organization working for consumer rights, sponsored a bill that seeks to license and regulate the activities of cryptocurrency exchanges.

The legislation demanding regulatory oversight of crypto businesses — the Digital Financial Assets Law — was introduced by Assemblymember Timothy Grayson with the aim of protecting Californians from financial hardship and fostering responsible innovation. Grayson believes that licensure is the next natural step for the crypto industry, adding:

“And it is equally clear that until we take that step, Californians will continue to be vulnerable to prevalent and preventable financial scams.”

This marks the CFC’s second attempt to license and regulate digital assets and cryptocurrency companies. The bill (AB 39) was first introduced in 2022, but California Governor Gavin Newsom vetoed it.

If passed, the bill will become law on Jan. 1, 2025, prohibiting citizens from engaging with crypto businesses until “certain criteria are met.” AB 39 will license crypto companies under the California Department of Financial Protection and Innovation, ensuring regulatory clarity and investor protection.

“The bankruptcies and scams of the past year only bolster our collective interest in ensuring basic and foundational consumer protections in this marketplace, which has up to now looked like the Wild West in terms of ‘anything goes’ behavior by key players in the cryptocurrency industry,” added Robert Herrell, executive director of the CFC, while revealing the intent behind the move.

The CFC believes the first hearing of this bill in the Assembly will be taken up in April.

Related: California cannabis producer adopts blockchain to track its weed

While Californian politicians try to introduce crypto regulations, the California Department of Motor Vehicles (DMV) tests the digitization of car titles and title transfers via a private Tezos blockchain.

As Cointelegraph reported, the agency wants to have the shadow ledger ironed out within the next three months, according to the California DMV’s chief digital officer Ajay Gupta.

California AG issues warning-ladened guidance for public interested in buying crypto

In an effort to help consumers “avoid the hype, [and] get the facts,” Rob Bonta has created a page on crypto buying dominated by lists of scams, red flags and other unpleasantness.

With the cryptocurrency market becoming ever more complex and intimidating, California Attorney General Rob Bonta had decided to issue guidance for novice crypto buyers. The California Office of the Attorney General’s website now features a page that will help those new to crypto “avoid the hype, [and] get the facts.” 

“Don’t fall for a fantasy – Cryptocurrency, like all investments, carries significant risks, and there’s no guarantee that you’ll see large – or any – returns,” Bonta said in a statement. “Our new webpage is meant to be a resource for Californians curious about this new and volatile market.”

The new page emphasizes customer safety. It provides a two-sentence explanation of what “crypto assets” are, plus a vocabulary list, and warns:

“Even when there are no scams involved, crypto assets can be risky, especially if you don’t have enough information to make sound judgments about how you’re spending your money.”

Aside from that, the page concentrated on scams, red flags and how to “stay safe.” That information is concise but complete. It reminded the reader of the limited legal recourse available if problems arise with a cryptocurrency purchase but gave detailed instructions on how and where to file a complaint. Besides explaining what rug pull and pig butchering are, the guide reminded readers that celebrities are paid for what they say about crypto and that the wise buyer does not fall for fear of missing out.

Related: California regulators to investigate FTX crypto exchange collapse

California, which has the world’s fourth largest economy, often appears high on surveys of crypto-friendliness and has been ranked highly for its “crypto-readiness” and growing legal infrastructure. In September, Gov. Gavin Newsom vetoed a bill to create a licensing and regulatory framework for digital assets. Newsom said federal regulation needed to “come into sharper focus for digital financial assets” before states began their regulatory efforts.

California regulators to investigate FTX crypto exchange collapse

The California DFPI announced it will open up an investigation as to the “apparent failure” of FTX and says it takes this oversight very seriously.

The Department of Financial Protection and Innovation (DFPI) in the state of California announced on Nov. 10 that it will open up an investigation as to the “apparent failure” of the cryptocurrency exchange FTX. 

California regulators said in the announcement that the DFPI takes this oversight responsibility “very seriously” and that the department expects all entities offering financial services in the state to comply with local financial laws.

It also encouraged anyone in the state who has been affected by the events of the ongoing FTX saga, to call a dedicated hotline. 

The state of California is one of many governmental actors within the United States to recently speak out on the matter, despite the fact that FTX claims its U.S. branch is not involved in the incidents.

Sam Bankman-Fried, the founder of FTX, tweeted a 22-tweet thread in which he reiterated multiple times that FTX US is a different entity than the international one facing the turmoil.

However, later on Nov. 10, FTX US announced it might halt trading on the platform in the upcoming days. Currently on the U.S. website, it states “withdrawals are and will remain open.”

Related: FTX turmoil increases scrutiny of industry, something institutional investors have been waiting for

incident as a mechanism to call for more regulations on the crypto industry.

On Nov. 10, Maxine Waters, the chair of the United States House of Representatives Financial Services Committee, called for tighter industry regulations and highlighted that FTX tokens are “worthless” and its customers are in the dark.

The same day saw White House press secretary Karine Jean-Pierre make a statement saying the administration will “closely monitor” activity in the crypto space. Moreover, the “recent news” underscores the need for “prudent regulation” of cryptocurrencies.

U.S. Senators Debbie Stabenow and John Boozman reiterated their commitment to finishing and publishing an upcoming crypto bill in light of the news, also citing the incident.

While all of this was underway, FTX US resigned from the Crypto Council for Innovation.

California fraud cases highlight the need for a regulatory crackdown on crypto

Recent cases involving crypto fraud serve as a timely reminder to do your own due diligence until regulators take more action. If something sounds too good to be true, it probably is.

The California Department of Financial Protection and Innovation (DFPI) announced last month that it had issued desist and refrain orders to 11 entities for violating California securities laws. Some of the highlights included allegations that they offered unqualified securities as well as material misrepresentations and omissions to investors.

These violations should remind us that while crypto is a unique and exciting industry for the public at large, it is still an area that is rife with the potential for bad players and fraud. To date, government crypto regulation has been minimal at best, with a distinct lack of action. Whether you are a full-time professional investor or just a casual fan who wants to be involved, you need to be absolutely sure of what you are getting into before getting involved in any crypto opportunity.

California has toyed with setting up a crypto-specific business registration process for those looking to do business in the state. The proposed framework was vetoed by Governor Gavin Newsom as the resources required to establish and enforce such a framework would be prohibitive for the state. While this type of compliance infrastructure has not been employed yet, it points to concerns that regulatory authorities have related to the crypto industry.

There appears to be a pattern that new industries, especially those that garner as much international attention as crypto, are especially susceptible to fraud. One must go only as far back as cannabis legalization to find the last time California had to deal with fraudulent schemes at this scale.

Related: The feds are coming for the metaverse, from Axie Infinity to Bored Apes

It appears inevitable that California, known to be a first mover in regulation and compliance, will create some form of crypto-specific compliance infrastructure in the name of consumer protection. If history is any indication, once California releases its framework, other states will follow.

Federal and state representatives have been attempting to draft legislation to establish financial standards for crypto with little luck to date. At the federal level, Senators Cory Booker, John Thune, Debbie Stabenow and John Boozman co-sponsored a bill to empower the Commodities Futures Trading Commission (CFTC) to serve as the regulatory body for crypto, while Senators Kirsten Gillibrand and Cynthia Lummis co-sponsored a bill to establish more clear guidance on digital assets and virtual currencies. Lawmakers have even reached out to tech luminaries such as Mark Zuckerberg to weigh in on crypto fraud.

Cryptocurrencies, California, CFTC, Legislation, Law, Scams, Fraud, Bitcoin Scams
Cumulative monthly value received by scams by year. Source: Chainalysis

None of these or other similarly crypto-focused bills are expected to pass in 2022, but this level of bipartisan cooperation has been unprecedented in recent times. The collaboration should reflect just the sheer magnitude of the need for a regulatory framework. Said another way, Democrats and Republicans speaking to one another about anything should stop the presses, but the fact that they are co-sponsoring multiple bills should tell us that there is a monumental requirement for guidance.

How should one approach investing in the crypto space if the government is not going to establish controls for crypto? There are a few general points that one should consider if they are presented with a crypto investment opportunity.

Related: GameFi developers could be facing big fines and hard time

When reviewing any opportunity, do your due diligence! Do not take anyone’s word without some level of substantive support. If crypto is not an area of expertise, reach out to professionals who do have qualified experience. Make sure to utilize crypto monitoring and blockchain analysis tools, if possible, as part of the vetting process.

A common strategy of fraudsters is putting undue pressure or artificial timelines on a potential close. Slow down the process and use any and all time necessary to make an investment decision.

If it sounds too good to be true, it probably is. As overplayed as the cliché may be, it does bring up a valid point. There have been instances of schemes offering to pay initial and ongoing dividends for any new investors that are brought in and for additional dividends to be paid from any investors that those new investors bring in. If this sounds like a pyramid or multilevel marketing scheme, that’s because it is. Terms like “no risk investment” get thrown around as well. Ultimately, if no one knows where the opportunity is coming from, beware.

While crypto can be a fun and electrifying topic with many legitimate opportunities, there are bad players who will take advantage of the lack of government oversight and the excitement of overenthusiastic or undereducated investors.

Zach Gordon is a certified public accountant (CPA) and vice president of crypto accounting for Propeller Industries, serving as fractional chief financial officer and adviser to a portfolio of crypto and Web3 clients. He has been named a Forty Under 40 CPA, sits on the Digital Assets Committee for the NYSSCPA and has been working with crypto clients in a variety of capacities since 2016.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

California Gov. Newsom vetoes crypto licensing and regulatory framework

Opposing Assembly Bill 2269, Newsom recommended a “more flexible approach” that would evolve over time while considering the safety of consumers and related costs.

Adding to the existing regulatory hurdles for the crypto ecosystems, California Governor Gavin Newsom refused to sign a bill that would establish a licensing and regulatory framework for digital assets.

Assembly Bill 2269 sought to allow the issuance of operational licenses for crypto companies in California. On Sept. 1, the California State Assembly passed the bill with no opposition from the assembly floor and went on to the governor’s office for approval.

Letter of rejection from Gov. Mewsom. Source: leginfo.legislature.ca.gov

Opposing the notion, Newsom recommended a “more flexible approach” that would evolve over time while considering the safety of consumers and related costs, adding:

“It is premature to lock a licensing structure in statute without considering both this work [in-house efforts to create a transparent regulatory environment] and forthcoming federal actions.”

The governor stated that the bill, in its current form, would require loaning “tens of millions of dollars” from the state’s general fund:

“Such a significant commitment of general fund resources should be considered and accounted for in the annual budget process.”

Newsom highlighted that he is waiting for federal regulations to “come into sharper focus for digital financial assets” before working with the legislature to establish crypto licensing initiatives.

Related: Biden’s anemic crypto framework offered us nothing new

The Office of Science and Technology Policy (OSTP) submitted an analysis to the White House regarding design choices for 18 central bank digital currency (CBDC) systems for the United States.

The technical evaluation for a U.S. CBDC system highlighted the OSTP’s inclination toward building an off-ledger, hardware-protected system while considering the various trade-offs inherited by each design choice.

Law Decoded, Aug. 29–Sep. 5: Celsius is ready to give money back, but not much

Crypto lending platform is ready to return $50 million out of $210.

United States-based crypto lending platform Celsius, which collapsed and stopped the withdrawal option amid the market meltdown in June, pledged its readiness to partially return money to customers. However, there’s a catch — as the company has filed a motion with the United States Bankruptcy Court, its pledge would only apply to Custody and Withold Accounts and for custody assets worth $7,575 or less in value.

The community response to the motion has been mixed, with some creditors happy to get back at least some of the frozen funds, while some industry leaders criticized the platform’s management. BnkToTheFuture.com CEO Simon Dixon drew attention to the fact that the possible release of $50 million wouldn’t be that impressive, given the $210 million in assets Celsius still has in custody. According to the company’s filing, though, the motion is merely a “first step forward, and not the last word on, efforts to return assets to customers.”

The benevolence of this step could also be questioned in the light of a complaint, filed with the United States Bankruptcy Court for the Southern District of New York a day earlier by an ad hoc group of 64 custodial account holders. The creditors seek to recover more than $22.5 million worth of cryptocurrency assets collectively held in Celsius’ custody service and noted that Celsius’s previous refusal to honor any withdrawals contradicts the “plain language of the debtors’ terms of use.” The company has a $1.2 billion gap in its balance sheet, with most liabilities owed to its users. Celsius filed for Chapter 11 bankruptcy protection in mid-July.

California makes a massive step in its licensing guidelines

Lawmakers in the California State Assembly passed the Digital Financial Assets Law, which will require digital asset exchanges and crypto companies to have an operating license given by the state of California’s Department of Financial Protection and Innovation. Once the bill gets the signature of Governor Gavin Newsom, it will come into effect on and after Jan. 1, 2025, and effectively ban any operations outside of said license. Regulators in California have been actively keeping tabs on the crypto space. In May, Newsom signed an executive order to align the federal and state regulatory frameworks for blockchain.

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President of Paraguay vetoes crypto regulation law

Paraguay’s president, Mario Abdo Benítez, vetoed a bill that sought to recognize cryptocurrency mining as an industrial activity. He reasoned that mining’s high electricity consumption could hinder the expansion of a sustainable national industry. The law aimed to promote crypto mining through the use of surplus electricity, and the Paraguayan Senate ultimately approved the proposal on July 14, recognizing crypto mining as an industrial activity. However, as the presidential decree states, given the sharp rise of industrial investments in the country in recent years, the national industry could require the total amount of energy currently produced and available in the country.

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Argentine province now accepting crypto for taxes and fees

In another shift toward widespread crypto adoption, in Argentina, citizens from the Mendoza Province can now pay government fees and taxes using cryptocurrencies. The Mendoza Tax Administration introduced the new crypto payment service as fulfilling “the strategic objective of modernization and innovation,” giving “taxpayers different means to comply with their tax obligations.” The service officially began operation on Aug. 24, but at this stage, it will only accept stablecoins such as Tether (USDT) for tax payments.

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