cftc

Law Decoded, Jan. 9-16: Gemini, Bithumb, Nexo are fresh targets for regulation and prosecution

While the FTX saga continues to make headlines, last week brought a plethora of new troubles for crypto companies in the United States, Europe and Asia.

The United States Securities and Exchange Commission charged cryptocurrency lending firm Genesis Global Capital and crypto exchange Gemini with selling unregistered securities through Gemini’s “Earn” program.

The Commodity Futures Trading Commission started the process of getting a default judgment in its case against Ooki DAO after the decentralized autonomous organization missed the deadline to respond to the lawsuit. It also filed suit against digital artist Avraham Eisenberg and charged him with two counts of market manipulation in connection with an exploit of the decentralized finance platform, Mango Markets.

In South Korea, tax agents raided the Seoul headquarters of cryptocurrency exchange Bithumb, looking for evidence of possible tax evasion. This development comes after former Bitchumb chair Lee Jung-Hoon was acquitted of $70 million in fraud charges. In the Bulgarian capital of Sofia, the offices of crypto lending firm Nexo were raided by police. They targeted a large-scale money laundering scheme and violations of Russia’s international sanctions.

While the FTX saga continues to make headlines, last week brought a plethora of new troubles for crypto companies in the United States, Europe and Asia.

Voyager and Binance.US deal given the green light

There’s still a place for good news. Bankrupt crypto lender Voyager Digital has finally received initial court approval for its proposal to sell its assets to Binance.US for $1.02 billion. The approval comes amid a national security probe concerning Binance.US that Voyager seeks to speed up. The Voyager Official Committee of Unsecured Creditors — a body representing creditors with no security interests in Voyager — supported the transaction in its current form, noting the deal would result in greater recoveries for creditors than if Voyager liquidated its holdings itself.

New York sued by environmental group after approval of crypto mining facility

In September 2022, the Public Service Commission of New York authorized the conversion of the Fortistar North power plant into a crypto-mining site. Now it faces a lawsuit, with the Clean Air Coalition of Western New York and the Sierra Club claiming that the Fortistar plant only operated during periods of high demand for electricity, such as extreme weather conditions. However, as a crypto mining plant, the site would run 24 hours a day, generating up to 3,000% more greenhouse gas emissions.

All you need to know about the FTX from last week

As the investigation into FTX continues, the crypto exchange’s former engineering chief, Nishad Singh, followed former FTX and Alameda Research executives Gary Wang and Caroline Ellison by reportedly meeting with federal prosecutors to cut a deal.

The former president of FTX US, Brett Harrison, has lashed out at Sam Bankman-Fried for manipulating and threatening colleagues who proposed solutions to reorganize FTX US’ management structure. Despite recalling Bankman-Fried to be a “sensitive and intellectually curious person” at first, Harrison said he saw “total insecurity and intransigence” in Bankman-Fried when confronted with conflict, particularly when Harrison suggested FTX US establish separate branches for its executive, developer and legal teams.

Meanwhile, FTX was approved to sell some of its assets to aid efforts to repay creditors. Judge John Dorsey has approved the sale of four key units of FTX, including the derivatives platform LedgerX, the stock-trading platform Embed and its regional arms, FTX Japan and FTX Europe.

Ooki DAO misses lawsuit response deadline, default judgment on the cards

The commodities regulator has begun the process of getting a court ruling on the Ooki DAO case after the latter failed to respond to the lawsuit by the deadline.

The Commodity Futures Trading Commission (CFTC) has begun the process of getting a default judgment in its case against Ooki DAO after the decentralized autonomous organization (DAO) missed the deadline to respond to the lawsuit.

According to a Jan. 11 court filing, the regulator has requested the court for an “entry of default” against the DAO, stating it had missed the deadline to “answer or otherwise defend” as instructed by the summons.

If approved, the entry of default will establish Ooki DAO has failed to plead or defend itself in court and will no longer be able to answer or respond to the suit.

An “entry of default” is the first step in the process of gaining a default judgment — a ruling handed down by the court when the defendant fails to defend a lawsuit.

The lawsuit in question was filed by the CFTC on Sept. 22, accusing Ooki DAO of illegally offering “leveraged and margined” digital asset commodity transactions to retail traders along with failing to enact a way to identify customers and “engaging in activities only registered futures commission merchants (FCM) can perform.”

The lawsuit was served to the DAO through its help chat box along with a notice on its online forum.

In December, District Judge William Orrick ordered the regulator to serve Tom Bean and Kyle Kistner, the founders of a predecessor trading platform to Ooki DAO, adding the CFTC “should serve at least one identifiable Token Holder if that is possible.”

Bringing forward the lawsuit without clear regulatory guidelines had many criticize the regulator. CFTC commissioner Summer Mersinger even called the action a “regulation by enforcement” approach.

The case could set an interesting precedent for future lawsuits involving DAOs as charges and enforcement will be carried out against an organizational structure with no central body that often includes anonymous members.

In a Dec. 20 court filing, Judge Orrick said Ooki DAO “has the capacity to be sued as an unincorporated association under state law” but that does not “necessarily establish” that the DAO is an association that can be held liable under commodities regulations.

He added those questions can be addressed “later in litigation”

False alarm: DOJ did not classify MNGO as a commodity

Avi Eisenberg’s arrest on commodities fraud charges for the Mango Markets exploit raised eyebrows on crypto Twitter and required some processing to work through its intricacies.

Avraham Eisenberg was arrested in Puerto Rico on Dec. 26 on commodities fraud and manipulation charges relating to the $110 million exploit of the decentralized Mango Markets exchange. Eisenberg had self-identified as the actor behind what he called a “highly profitable trading strategy” and insisted that he had taken “legal open market actions, using the protocol as designed.”

Eisenberg’s arrest predictably lit up crypto Twitter, with some observers paying particular attention to the fact that commodities fraud charges were being pressed in a case involving a crypto coin:

“AVRAHAM EISENBERG, the defendant, willfully and knowingly, directly and indirectly, used and employed, and attempted to use and employ, in connection with a swap, a contract of sale of a commodity in interstate and foreign commerce.”

looks like the Department of Justice is calling MNGO and/or CRV commodities (and not securities)!!!! pic.twitter.com/ZklOlubR8u

— scott (@scott_lew_is) December 27, 2022

Eisenberg had manipulated the price of the exchange’s MNGO coin relative to the USDC (USDC) stablecoin and then took out loans against his collateral. For this, Eisenberg was charged with commodities fraud. In the charges against Eisenberg, U.S. Federal Bureau of Investigation special agency Brandon Racz wrote:

“I understand that virtual currencies, such as USDC, are ‘commodities’ under the Commodity Exchange Act.”

DoJ: "USDC is a Commodity"

Guy: "See! Shitcoins like Mango are a commodity, thats totally what the DoJ said."

This is why you pay lawyers folks. Do not do your own lawyer-ing at home, you will get rekt. https://t.co/N9n7k4UdzK

— Mike Stroup (@MikeStroup10) December 29, 2022

The agent’s understanding that stablecoins are commodities is only partially backed up by government policy, although it cites the McDonnell case prosecuted by the U.S. Commodities Futures Trading Commission (CFTC) as precedent. The claim that USDC is a commodity is not as controversial as claiming the same for MNGO, but may have been a conscious choice.

(4) the fact that the case doesn't characterize the relevant tokens as securities is not in any way bullish/positive and merely arises from litigation strategy–the fewer predicate issues the govt has to litigate in its case, the better

— _gabrielShapir0 (@lex_node) December 27, 2022

The legal strategy behind the DOJ’s choice of the Commodity Exchange Act (CEA) to prosecute the case seemed to be grounded in expediency. For one thing, the CEA addresses price manipulation directly.

In addition, the CFTC is often seen as taking a softer approach to crypto regulation than the SEC, although that perception is disputable.

SEC general counsel announces departure from public service

“After thirty-four years of public service, it is time for me to pursue new and different challenges and opportunities,” said Dan Berkovitz.

Dan Berkovitz, general counsel for the United States Securities and Exchange Commission, said he will be leaving the agency after more than a year.

In a Dec. 22 announcement, the SEC said Berkovitz will depart on Jan. 31. A former commissioner with the Commodity Futures Trading Commission, Berkovitz joined the agency in November 2021. At the time, he said he planned to work with SEC Chair Gary Gensler on a “regulatory agenda that will enhance investor protection.”

“After thirty-four years of public service, it is time for me to pursue new and different challenges and opportunities,” said Berkovitz.

It’s unclear whether Berkovitz intends to join the private sector after leaving the SEC. Brian Quintenz, who served as a CFTC commissioner from 2017 to 2021, joined venture capital firm Andreessen Horowitz in September 2021 as an adviser to the company’s crypto team.

Megan Barbero, the SEC‘s principal deputy general counsel, will assume Berkovitz’s position upon his departure. Gensler said her advancement comes at a “critical time” for the SEC.

During his time at the CFTC, Berkovitz said the agency’s enforcement actions in the crypto space were “aggressive,” citing a $100 million civil monetary penalty against derivatives exchange BitMEX. Many have also criticized Gensler and the SEC for the agency’s “regulation by enforcement” approach to crypto.

In 2022, the SEC specifically labeled nine tokens as “crypto asset securities” in an insider trading case involving a former manager at crypto exchange Coinbase. The agency has also announced charges against former FTX CEO Sam Bankman-Fried for allegedly defrauding customers and diverting the exchange’s funds to Alameda.

Alameda’s Caroline Ellison and FTX’s Gary Wang hit with additional fraud charges

Arrested crypto billionaire Sam Bankman-Fried’s former entourage faces additional charges by key U.S. government agencies.

The United States Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have hit former Alameda Research CEO Caroline Ellison and former FTX co-founder Gary Wang with fresh fraud charges.

The new charges from the SEC and CFTC come as the pair plead guilty to federal fraud charges filed by the U.S. Department of Justice (DOJ) earlier on Dec. 22.

SEC states that Ellison and Wang were charged for their role in the “multiyear scheme to defraud equity investors in FTX,” with the SEC also investigating whether other securities laws were violated as well.

The SEC alleges that Ellison, under the direction of former FTX CEO Sam Bankman-Fried, furthered the scheme by manipulating the price of FTX Token (FTT), which is described as a crypto security token in the document. The said manipulation was conducted by “purchasing large quantities on the open market to prop up its price,” which took effect between 2019 and 2022.

As for the CFTC’s charges, amendments were made to its Dec. 13 fraud filing against Samuel Bankman-Fried, FTX Trading and Alameda Research to now include Ellison and Wang as named defendants.

*Former FTX CEO Sam Bankman-Fried, handcuffed, on his way to airport for extradition. Source: Royal Bahamas Police*

The amended complaint now lays charges against Ellison for “fraud and material misrepresentations in connection with the sale of digital asset commodities in interstate commerce.” As for Wang, the former FTX exec has been charged with “fraud in connection with the sale of digital asset commodities in interstate commerce.”

As for the conduct involved that led to the charges, both the SEC and CFTC allege that Wang created FTX’s software code that enabled Alameda to divert customer funds from FTX, which then allowed Ellison to misappropriate those funds for Alameda’s trading activities.

Former FTX CEO Sam Bankman-Fried has also reportedly landed in the U.S. after being extradited from the Bahamas for fraud charges laid by the U.S. Government. The indictment against SBF is signed by the U.S. Attorney for the Southern District of New York, Damian Williams, and contains eight counts.

SBF is facing charges from the Justice Department, along with SEC and CFTC, for defrauding investors and lenders. Royal Bahamas police arrested the former crypto billionaire on Dec. 12, and his initial application for bail was denied in a Bahamian court.

Sam Bankman-Fried arrested and consented to the extradition — Law Decoded, Dec. 12-19.

The entrepreneur reportedly reconsidered his earlier decision to contest extradition and now would be able to appear in a United States court.

Welcome to Law Decoded, your weekly digest of all the major developments in the field of regulation.

The FTX drama escalated last week when the Royal Bahamas Police Force arrested its former CEO, Sam Bankman-Fried, at the request of the United States government. Within hours, politicians, crypto executives and influencers had all booted up their Twitter apps to comment on the arrest of the former CEO, who had to miss his testimony before the U.S. Congress. However, the text of SBF’s planned testimony was obtained by the media, wherein he blamed the inclusion of FTX.US in the Chapter 11 bankruptcy on John J. Ray III, a restructuring lawyer who assumed the role of FTX CEO after the bankruptcy filing.

The body of allegations against FTX and SBF personally is stacking up. The United States Securities and Exchange Commission (SEC) charged Bankman-Fried with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. At the same time, the Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Sam Bankman-Fried, FTX and Alameda Research, claiming violations of the Commodity Exchange Act and demanding a jury trial. A fresh indictment, signed by United States Attorney for the Southern District of New York Damian Williams, is 14 pages long and contains eight counts.

Bankman-Fried reportedly reconsidered his earlier decision to contest extradition and is expected to appear in court in the Bahamas on Dec. 19 to seek a reversal. By consenting to extradition, he would be able to appear in a United States court, where If convicted, he could get up to 115 years in jail. However, there is a “lot to play out” in the case until he gets a final sentence within the next few months or even years, legal commentators told Cointelegraph.

Senators Warren and Marshall introduce money-laundering legislation for crypto

U.S. Senators Elizabeth Warren and Roger Marshall introduced the Digital Asset Anti-Money Laundering Act of 2022. The seven-page bill would expand the classification of a money service business (MSB), prohibit financial institutions from using technology such as digital asset mixers and regulate digital asset kiosks, otherwise known as ATMs.

Money service businesses would be required to have written Anti-Money Laundering policies and to implement them. The bill would finalize reporting requirements already proposed by FinCEN and impose new requirements, including reporting transactions over $10,000 in accordance with the Bank Secrecy Act.

Canada bans crypto leverage and margin trading

The Canadian Securities Administrators (CSA), the council of Canada’s provincial and territorial securities regulators, issued an update to crypto trading platforms operating in the country. According to the statement, all crypto trading firms operating in Canada — both local and foreign ones — have to comply with newly expanded terms, which ban them from offering margin or leverage trading services to any Canadian clients. The expanded terms also require crypto exchange services providers in Canada to segregate custody assets from the platform’s proprietary business.

Nigeria set to pass bill recognizing Bitcoin and cryptocurrencies

The Nigerian government will reportedly soon pass a law that will recognize the usage of Bitcoin (BTC) and other cryptocurrencies as a means to keep up to date with global practices. If the Investments and Securities Act 2007 (Amendment) Bill is signed into law, it would allow the local Securities and Exchange Commission to “recognize cryptocurrency and other digital funds as capital for investment.”

The report comes almost 24 months after Nigeria banned crypto activity in February 2021, with the Central Bank of Nigeria (CBN) ordering local crypto exchanges and service providers to cease activity and mandating banks to shutter the accounts of any individuals or entities found to be engaging in trading activities.

Alameda had ‘unfair’ trading advantage, special access to FTX funds: CFTC filing

CFTC court filing outlines a murky relationship between FTX and Alameda Research, highlighting the latter’s unfair trading advantage and misappropriation of user funds.

Court filings continue to shed light on the dubious relationship between FTX and Alameda Research, in which the hedge fund was afforded an “unfair” trading advantage as well as unprecedented access to user holdings on the cryptocurrency exchange.

The United States Commodities Futures Trading Commission filed a complaint in the Southern District Court in New York on Dec. 1, alleging a host of irregular business dealings between Sam Bankman-Fried’s cryptocurrency exchange FTX and his trading company Alameda Research.

The complaint provides a raft of allegations detailing how the two companies and select insiders including Bankman-Fried violated the Commodity Exchange Act and various regulations. This comes after the former CEO was arrested in the Bahamas on Dec. 12 and is set to be extradited to the United States.

The CFTC highlights how Bankman-Fried owned and operated FTX.com and its associated subsidiaries as well as Alameda and its related entities, from May 2019 to their collapse in November 2022.

Alameda operated as a primary market maker on FTX.com, which provided liquidity to its cryptocurrency markets. The companies operated as a “common enterprise,” but the CFTC alleges that this was abused in a number of ways.

According to the filing, a small circle of insiders were involved in allowing FTX customers’ deposits, including fiat currency, Bitcoin (BTC) and Ether (ETH), to be “accepted, held by, and/or appropriated by Alameda” for its own use.

Furthermore, the CFTC claims that FTX executives created features in the exchange’s code that allowed “Alameda to maintain an essentially unlimited line of credit on FTX.”

Other exceptions were created that allowed Alameda to have “an unfair advantage” when trading on FTX. This included faster trading execution times as well as an exemption from the exchange’s “distinctive auto-liquidation risk management process.”

Bankman-Fried and another Alameda executive also allegedly directed the hedge fund to use FTX and user funds to trade on outside cryptocurrency exchanges and to fund a “variety of high-risk digital asset industry investments.”

In addition, Bankman-Fried and other FTX executives took out hundreds of millions of dollars in poorly-documented “loans” from Alameda. These funds were used to buy luxury real estate and property as well as to finance political donations.

Widespread misappropriation of customer funds took place while FTX Trading claimed in its terms of service that customers owned and maintained control of assets in their accounts and that these were safeguarded and segregated from FTX’s funds.

Bahamian securities regulator slams new FTX CEO over ‘misstatements’

Bahamian regulators say that they were the first to take action against SBF, and that recent actions of the current CEO hindered their investigation.

The Securities Commission of Bahamas has slammed FTX’s new CEO for his statements regarding the ongoing investigation into the bankrupt crypto exchange.

In a press release sent to Cointelegraph, the Bahaman regulator didn’t directly point to the exact statement of John J. Ray III it has issues with, but addressed recent reports that the Bahamas’ government had asked former CEO Sam Bankman-Fried to create a new multi-million token and hand over control to them.

The report also alleged Bahamas officials tried to help Bankman-Fried regain access to key computer systems of FTX. According to United States lawyers, Bahamas officials were “responsible for directing unauthorized access” to FTX systems in order to take over control of digital assets under the supervision of a U.S. court.

The securities regulator said that they were the first regulators to take strict action against the collapsed exchange and its CEO. Addressing the rumors over digital assets custody, the press release noted that the authorities secured the transfer of potentially “commingled digital assets” of FTX exchange on orders issued by the supreme court of the Bahamas. The press release read:

“The Commission holds those assets as trustee only (under Bahamian Law), and they will be ultimately distributed, to creditors and clients of FTX, wherever they may be located, in accordance with the court’s direction.”

The Bahamas regulator also slammed Ray for using “redacted email correspondence” between officials and Bankman-Fried. The release said that those redactions were designed to create a false impression of communications and that Ray was well aware of the complete scenario.

The securities regulator requested Ray and his representatives to not “obstruct the investigation,” and accused the CEO of not clearing his concerns with the commission first before airing them publically.

Bankman-Fried was arrested late on Dec. 12 by the Bahamas authorities at the request of the U.S. government. A day later, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission charged Bankman Fried with defrauding U.S. investors.

CFTC files lawsuit against Sam Bankman-Fried, FTX, and Alameda for fraud

According to the federal regulator, SBF and FTX companies “used FTX customer funds for a variety of personal expenditures” including real estate and private jets.

The United States Commodity Futures Trading Commission, or CFTC, has filed a lawsuit against Sam Bankman-Fried, FTX and Alameda Research, claiming violations of the Commodity Exchange Act and demanding a jury trial.

According to court records filed Dec. 13 in the Southern District of New York, the CFTC filed a complaint for injunctive and other equitable relief as well as civil monetary penalties against Bankman-Fried, FTX Trading, and Alameda Research. The complaint alleged that SBF personally directed FTC executives to set up features allowing Alameda to use the crypto exchange as a line of credit for its lenders.

“Contrary to [Bankman-Fried’s] representations and without disclosure to FTX customers, Alameda and FTX comingled funds and freely used FTX customer funds as if they were their own, including as capital to deploy in their own trading and investment activities,” said the CFTC. “On information and belief, Bankman-Fried, his parents, and other FTX and Alameda employees used FTX customer funds for a variety of personal expenditures, including luxury real estate purchases, private jets, documented and undocumented personal loans, and personal political donations.”

Authorities in the Bahamas arrested Bankman-Fried on Dec. 12 following criminal charges being filed in the United States — the two countries have an extradition agreement. The U.S. Securities and Exchange Commission also filed charges against SBF on Dec. 13, alleging violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

Prior to his arrest, Bankman-Fried was scheduled to testify before the House Financial Services Committee on Dec. 13 on the collapse of FTX. Leaked written testimony from the former CEO had him largely blaming others for the exchange’s downfall.

Judge orders CFTC to serve Ooki DAO founders with lawsuit

The DAO was initially served with a lawsuit via a help chat box but a federal judge said the regulator “should serve at least one identifiable Token Holder.”

A United States federal judge has ordered the Commodities Future Trading Commission (CFTC) to serve its lawsuit to the two original founders of the Ooki decentralized autonomous organization (DAO).

On Dec. 12, District Judge William Orrick ordered that the U.S. regulator serve Tom Bean and Kyle Kistner, the founders of the decentralized trading platform bZeroX which was the predecessor to Ooki DAO.

Bean and Kistner had already settled charges with the CFTC in September relating to illegal commodities offerings on bZeroX, while separate charges were laid against Ooki DAO tokenholders, which was served using a help chat box as well as a notice on its online forum.

However, when Judge Orrick later discovered Bean and Kistner were also Ooki DAO tokenholders he reconsidered how the CFTC was to serve the lawsuit.

“It seems clear in this case that Ooki DAO has actual notice of the litigation,” Judge Orrick wrote. “But to provide the best practicable notice, the CFTC should serve at least one identifiable Token Holder if that is possible.”

The CFTC’s original approach to filing the lawsuit received pushback and crypto industry participants filed amicus briefings in support of Ooki DAO, which argued the CFTC should find Ooki DAO members and serve them directly with the lawsuit.

The U.S. District Court for the Northern District of California held a hearing on Dec. 7 with the CFTC and those entities who filed amicus briefs to persuade Judge Orrick to reconsider allowing the CFTC to serve Ooki DAO through its help chat box.

“At the hearing, the CFTC asserted it knew that some of Ooki DAO’s Token Holders reside and conduct business in the United States because the two founders of Ooki DAO’s predecessor entity, bZeroX LLC, are Token Holders who reside in the United States,” Orrick wrote.

“This was new information to me,” he added. “Neither the complaint nor the CFTC’s Motion for Alternative Service mention that the former founders, [Bean and Kistner], are or have been Token Holders.”

“The CFTC is now ORDERED to serve Bean and Kistner, in their roles as Ooki DAO Token Holders,” he concluded.

On Sep. 22, the CFTC settled charges against Bean and Kistner for “illegally offering leveraged and margined retail commodity transactions in digital assets” through bZeroX.

Simultaneously, it filed its lawsuit against Ooki DAO, alleging it operated the same software as bZeroX after it was given into its control which violated “the same laws as the respondents.”

The CFTC was strongly criticized, even by its own people, for bringing the lawsuit without clear regulatory guidelines with CFTC commissioner, Summer Mersinger, calling it a “regulation by enforcement” approach.