cftc

Two more lawsuits for Coinbase: Law decoded, Aug. 1–8

Both plaintiffs claim that Coinbase made fraudulent and deceptive representations regarding the company’s business.

The Coinbase drama, which started at the end of July, continues with new developments. Last week, former Coinbase Global product manager Ishan Wahi pleaded not guilty to two counts of wire fraud conspiracy and two counts of wire fraud in a Manhattan federal court. Wahi was arrested during his attempt to board a flight from the United States to India in May and accused of insider trading.

While the Wahis are central to two separate court cases, another two lawsuits appeared last week against the San-Francisco-based crypto exchange. Legal firm Bragar Eagel & Squire revealed that it would be suing Coinbase for making deceptive claims about its business practices. Pomerantz LLP has also filed a claim against the exchange, alleging that it is entitled to compensation for any losses incurred as a result of the defendant’s violations of federal securities laws.

In both complaints, plaintiffs claim that Coinbase made fraudulent and deceptive representations regarding the company’s business, operations and compliance efforts between April 14, 2021 and July 26, 2022. Coinbase reportedly refused to disclose that it permitted U.S. citizens to trade digital assets that required Securities and Exchange Commission (SEC) registration as securities despite its knowledge and complacency.

11 individuals are charged over $300M crypto ‘pyramid scheme’

A hot season for enforcers, indeed — SEC has charged 11 individuals for their alleged role in creating t “fraudulent crypto pyramid scheme” platform Forsage. The charges were laid in a United States District Court in Illinois, with the SEC alleging that the founders and promoters of the platform used the “fraudulent crypto pyramid and Ponzi scheme” to raise more than $300 million from “millions of retail investors worldwide.”

The new crypto bill could extend CFTC’s regulatory powers

While both the Lummis-Gillibrand crypto bill and several versions of stablecoin legislation seem to be delayed until fall, United States Senate Agriculture Committee chair Debbie Stabenow and ranking member John Boozman introduced the Digital Commodities Consumer Protection Act. The bill mandated the registration of a broad spectrum of market players by the CFTC and was met with wide approval within the crypto community.

Banks are shutting down the crypto exchanges’ accounts in Portugal

Several large banks in Portugal have reportedly begun closing the accounts of cryptocurrency exchanges due to “risk management” concerns. There are at least four domestic cryptocurrency exchanges that have seen their accounts shut, including CriptoLoja, which was the first one to obtain a license to operate in the country. The closure of these accounts is seen as a blow to Portugal’s crypto-friendly approach, as authorities had previously rejected two tax proposals that might have been applied to investors making money from cryptocurrencies.

Congress will likely decide the fate of crypto jurisdiction — Lummis staffer

U.S. Congress will need to step in to decide who gets crypto regulation bragging rights if the SEC and CFTC cannot resolve the issue internally.

A United States Senator Cynthia Lummis staffer believes that United States Congress will have to step in and resolve the dispute between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regarding who regulates cryptocurrencies if the matter cannot be resolved internally.

The issue stems from 2014, when the CFTC first asserted jurisdiction over virtual currencies. This was later reaffirmed by a U.S. Federal Court ruling in 2018, which stated that the CFTC had jurisdiction to prosecute criminals over fraud cases involving virtual currencies. However, it has been the SEC that has predominantly been investigating U.S.-based crypto exchanges and crypto assets to date.

On Wednesday, Senators Debbie Stabenow of Michigan and John Boozman of Arkansas introduced the Digital Commodities Consumer Protection Act of 2022 (DCCPA). If the bill is passed into law by the U.S. legislature, the CFTC would be granted rights to regulate digital commodities.

Most notably, the DCCPA would class both Bitcoin (BTC) and Ether (ETH) as digital commodities and not securities. This is particularly significant because SEC chairman Gary Gensler recently said in an interview with U.S. business news channel CNBC that BTC is the only cryptocurrency he is comfortable with labeling as a commodity:

“Some, like Bitcoin — and that’s the only one I’m going to say because I’m not going to talk about any one of these tokens, but my predecessors and others have said they’re a commodity.”

Despite the tension, however, Lummis’ staffer thinks the DCCPA bill has less than a 50% chance of being passed this year:

“The only way either bill would pass this year is if a catastrophic black swan event, like a major U.S. exchange collapsing, could rally lawmakers.”

The news comes after the SEC has begun investigating the $20 billion crypto exchange Coinbase, but Lummis’ staffer also stated that every U.S.-based crypto exchange is under investigation in some form.

Under U.S. law, the Howey test determines whether a transaction constitutes an investment contract (security). The test states that an investment contract exists “when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

If ETH, or any crypto asset for that matter, is found to fall within this definition, then U.S.-based crypto exchanges would be illegally trading securities. The SEC recently listed nine crypto-assets as securities.

Senators Stabenow, Boozman introduce crypto bill that extends CFTC’s regulatory powers

The bill defines digital commodities and requires registration of digital commodities platforms by the CFTC, with language that needs tightening.

United States Senate Agriculture Committee chair Debbie Stabenow and ranking member John Boozman introduced the Digital Commodities Consumer Protection Act bill on Wednesday. The bill has been expected for several months. Like the Digital Commodities Exchange Act (DCEA) introduced into the House of Representatives by members of the House Agriculture Committee in April, the new bill enlarges the role of the Commodity Futures Trading Commission (CFTC). The new bill is not the companion to the DCEA, however.

According to the summary, the bill’s definition of digital commodities “includes Bitcoin and Ether and excludes certain financial instruments including securities,” which are regulated by the Securities and Exchange Commission (SEC). The bill mandates registration by the CFTC of a broad spectrum of market players, such as “digital commodity broker,” “digital commodity custodian,” “digital commodity dealer” and “digital commodity trading facility,” which are collectively understood to be “digital commodity platforms.” Digital commodity platforms could be cross-registered with the SEC under the bill.

In addition, the bill would require the registration of “associated persons of digital commodity brokers and digital commodity dealers.”

The bill was met with wide approval within the crypto community, mainly on Twitter. Blockchain Association policy head Jake Chervinsky called it “a good bill overall & confirms a growing consensus for CFTC regulation.” Coinbase chief policy office Faryar Shirzad said he was “really pleased to see the introduction” of the bill.

1) I’m really excited to see @SenStabenow and @JohnBoozman introduce a strong bill to bring customer protection and federal oversight to crypto.https://t.co/AJAWjOHgDy

— SBF (@SBF_FTX) August 3, 2022

CFTC chair Rostin Behnam released a statement saying “new legislative authority is needed to clarify ambiguities and provide a regulatory framework to the digital commodity market.”

The general accolades were not without notes of caution. Coin Center released a blog post expressing gratitude for the “careful approach to developing this legislation” but cautioned:

“We have reservations about the breadth of definitions for regulated activities and we believe there is a need for a clearer exemption of persons engaged in constitutionally protected activities such as publishing software.”

The DCEA also addressed digital commodity registration but left it up to the platforms to register with the CFTC or remain subject to state registration.

Patrick Daugherty, head of the digital assets practice at Foley & Lardner and adjunct professor of Cornell Law School, told Cointelegraph in an email, “The legislation […] does not make clear that digital assets (other than Bitcoin and Ether) are not securities and are therefore covered by the DCCPA. It is therefore open to the SEC under its current leadership to continue to assert that virtually every digital asset is a security, which would be unfortunate.”

Daugherty also observed: “It is not clear to me that decentralized exchanges are, or are not, intended to be covered by this legislation. The platforms that are covered must be operated by “persons,” but DEXes have no personnel.”

The bill enters an already crowded field, joining the DCEA and the more recent Lummis-Gillibrand Responsible Financial Innovation Act, which was introduced in June. Both bills give the CFTC a larger role in digital asset regulation. Notably, the DCEA and the present bill originate in the congressional agriculture committees, which are the bodies with supervisory powers over the CFTC.

It is known that Representative Maxine Waters, chair of the House Financial Services Committee, and Representative Patrick McHenry, the committee’s ranking member, are also working on crypto-focused legislation. Since the Financial Services Committee shares oversight of the SEC with the Senate Banking Committee, the Waters-McHenry bill is expected to be more favorable to the SEC.

The Digital Commodities Consumer Protection Act bill will undoubtedly go through revisions as it is considered in Congress. It is unlikely to come up for a vote in the current Congress due to scheduling issues.

CFTC poaches Pantera Capital’s legal counsel, citing digital asset experience

Joe Cisewski formerly provided Pantera Capital with legal and regulatory guidance relating to the firm’s funds and investment advisors.

Commodity Futures Trading Commission (CFTC) commissioner Goldsmith Romero cited Joe Cisewski’s experience in digital assets as a key reason behind onboarding him as chief of staff and senior counsel.

Announcing the move on July 26, commissioner Romero pointed to Cisewski’s 14 years of experience working across the CFTC, Securities and Exchange Commission (SEC) and crypto venture fund Pantera Capital.

“Joe’s unique combination of public and private sector experiences will serve us well as we take bold steps to ensure the resilience of our markets, protect investors and market participants,” she said, adding:

“His fluency on digital-assets and other issues will be valuable as the Technology Advisory Committee embarks on its agenda later this year.”

Prior to this new role, Cisewski most recently served as the general counsel to Pantera Capital, which claims to have 100 venture investments and $5.1 billion assets under management (AUM).

He provided the firm with legal and regulatory guidance relating to the firm’s funds and investment advisors, while also engaging with regulators over Pantera’s projects and portfolio companies.

In May, Cisewski attended a roundtable between crypto industry professionals and the CFTC in which potential regulation relating to the clearing of margin products (including crypto) without a futures commission merchant (FCM) intermediary was discussed.

In his previous stint at the CFTC, Cisewski served as the senior special Counsel and policy advisor to former commissioner Mark Wetjen, who similarly to Cisewki, left the public sector to take up a role at major crypto exchange FTX as its head of policy and regulatory strategy late last year.

CFTC and crypto

Alongside the SEC, the CFTC shares a major role in the regulation of crypto in the U.S., and its role could soon outweigh that of the SEC’s if the Responsible Financial Innovation Act tabled by crypto-friendly senators Cynthia Lummis and Kirsten Gillibrand is enacted next year.

The two senators have repeatedly said that most crypto assets would be classified as commodities, and should that hold true, it would effectively give the CFTC a broader jurisdiction over the sector than the SEC.

As previously reported, CFTC chair Rostin Behnam announced on July 25 that the regulator was expanding the scope of its fintech focused LabCFTC unit to fall under the Office of Technology Innovation (OTI).

Behnam stated that CFTC is ramping up its focus to provide “important regulatory protections” for commodities markets, including crypto.

“We are now engaged in a more proactive and comprehensive effort across the agency to regulate these markets with the tools currently available to us,” Behnam said.

CFTC poaches Pantera Capital’s legal counsel, citing digital asset experience

Joe Cisewski formerly provided Pantera Capital with legal and regulatory guidance relating to the firm’s funds and investment advisers.

Announcing the move on Tuesday, commissioner Romero pointed to Cisewski’s 14 years of experience working across the CFTC, Securities and Exchange Commission (SEC) and crypto venture fund Pantera Capital.

“His fluency on digital-assets and other issues will be valuable as the Technology Advisory Committee embarks on its agenda later this year.”

Prior to this new role, Cisewski most recently served as the general counsel to Pantera Capital, which claims to have 100 venture investments and $5.1 billion assets under management (AUM).

He provided the firm with legal and regulatory guidance relating to the firm’s funds and investment advisers, while also engaging with regulators over Pantera’s projects and portfolio companies.

In his previous stint at the CFTC, Cisewski served as the senior special Counsel and policy adviser to former commissioner Mark Wetjen, who, similarly to Cisewki, left the public sector to take up a role at major crypto exchange FTX as its head of policy and regulatory strategy late last year.

CFTC and crypto

Alongside the SEC, the CFTC shares a major role in the regulation of crypto in the United States, and its role could soon outweigh that of the SEC’s if the Responsible Financial Innovation Act tabled by crypto-friendly senators Cynthia Lummis and Kirsten Gillibrand is enacted next year.

As previously reported, CFTC chair Rostin Behnam announced on Monday that the regulator was expanding the scope of its fintech-focused LabCFTC unit to fall under the Office of Technology Innovation (OTI).

Behnam stated that CFTC is ramping up its focus to provide “important regulatory protections” for commodities markets, including crypto.

“We are now engaged in a more proactive and comprehensive effort across the agency to regulate these markets with the tools currently available to us,” Behnam said.

CFTC will remodel LabCFTC, education office to increase regulatory efficiency

CFTC chair Rostin Behnam spoke at a webinar about how the agency, even lacking broad authority, is trying to keep up with rapid developments in financial technology.

The United States Commodity Futures Trading Commission (CFTC), the regulatory agency that shares primary crypto regulatory responsibility with the Securities and Exchange Commission, will undergo restructuring to become more proactive and comprehensive, CFTC chair Rostin Behnam announced on Monday. LabCFTC, which was described as “the focal point for the CFTC’s efforts to promote responsible fintech innovation,” will become the Office of Technology Innovation (OTI) and report directly to the chairman’s office.

“We are now engaged in a more proactive and comprehensive effort across the agency to regulate these markets with the tools currently available to us,” Behnam said at a Brookings Institute webinar. “Our core policy divisions are now directly addressing how the CFTC can leverage our existing authority to bring important regulatory protections to this market.”

In addition, the commission’s Office of Customer Education and Outreach will be “realigned” within the Office of Public Affairs to better serve new retail participants in the market. The high level of retail participants distinguishes the digital assets market from other commodities, Behnam observed, citing CFTC studies:

“Trading indicative of retail participants makes up approximately 25% of long open interest in the Bitcoin futures market.”

Behnam also noted regulators’ “collective analysis paralysis” while financial technology has surged ahead. Behnam was not always as calmly resigned to working within the agency’s current authorities, which lack market surveillance and oversight abilities, as he showed himself to be today. In February, he told the Senate Committee on Agriculture, Nutrition, and Forestry, which oversees his agency, that its dependence on tips and whistleblowers to uncover illicit activity resulted i “a very, very narrow lens into what is actually happening in the market.”

Legislative proposals, such as the Lummis-Gillibrand bill and Digital Commodity Exchange Act grant the CTFC more authority over crypto markets.

The lasting agony of 3AC: Law Decoded, July 18-25

A crypto hedge fund co-founders acknowledge their mistakes, driven by bull market overconfidence.

The late spring and summer months of 2022 would be remembered not only for their extreme temperatures across the globe but also for a crushing streak of large crypto companies falling apart. Terra Lab in May, Celsius in June and now, the lasting agony of a Singapore-based crypto hedge fund Three Arrows Capital (3AC). Technically, 3AC was ordered for liquidation by a court in the British Virgin Islands on June 27, but it was last week, which has seen some further developments around the firm.

The liquidators of 3AC are brutally demanding access to the company’s Singapore headquarters due to the “virtual radio silence from the management/directors of the Company.” They believe the office may contain cold wallets or information on how to access 3AC trading accounts, which the liquidators want to access before any of them is removed or destroyed. This desire is perfectly understandable, given the sums that had been loaned to 3AC by the creditors — they appeared to be far greater than in earlier reports.

The scandal around failed hedge fund grew so big that the managing director of the Monetary Authority of Singapore (MAS) even decided to publicly disavow the company’s ties to Singapore, claiming 3AC (and TerraForm Labs as well) had “little to do” with crypto regulation in the country. At the same time, the founders of 3AC have finally resurfaced after five weeks of no known whereabouts. In an interview, Su Zhu and Kyle Davies admitted their problem with bull market overconfidence and revealed their closeness to Terra, which had crystallized in a $500 million worth of investment going to zero.

New raids in South Korea in the aftermath of Terra’s collapse

As the investigation into Terra’s collapse continues, prosecutors in South Korea have reportedly executed a search and seizure in 15 firms, including seven crypto exchanges. The list included such entities as Upbit, Bithumb, Coinone, Korbit and Gopax. Authorities reportedly obtained data related to TerraUSD Classic (USTC) (formerly UST) and Terra (LUNA) — now Luna Classic (LUNC) — transactions, in which roughly 200,000 Korean investors suffered losses following the tokens’ severe price devaluation and subsequent collapse in May.

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Senior US officials will have to disclose their NFTs ownership

The United States Office of Government Ethics (OGE) issued a legal advisory recommending various instances when senior government officials are required to disclose their investments in nonfungible tokens (NFTs). All NFT investments — both fractionalized (F-NFTs) and collectibles — worth $1,000 must be reported if “held for investment or production of income” at the end of the reporting period.

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SEC objects to XRP holders aiding Ripple defense

The case against Ripple rages on, and the U.S. Securities and Exchange Commission (SEC) wants to see certain “friends of the court” in support of Ripple be barred from providing legal aid to the defense. In its official objection filed on Tuesday but dated June 7, the regulator opposed the decision to recognize 1,746 Ripple (XRP) holders as “amici curiae” along with attorney John E. Deaton. The latter holds 3,252 affidavits signed by the token holders, essentially stating that they are victims of the SEC’s lawsuit against Ripple as a result of lost profits.

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SEC listing 9 tokens as securities in insider trading case ‘could have broad implications’ — CFTC

CFTC Commissioner Caroline Pham took issue with the SEC labeling certain crypto assets as securities in an example of “regulation by enforcement.”

Caroline Pham, one of five commissioners with the United States Commodity Futures Trading Commission, or CFTC, has expressed concerns about the possible implications of a case the U.S. Securities and Exchange Commission, or SEC, brought against a former product manager at Coinbase.

In a Thursday statement, Pham said the SEC complaint against former Coinbase product manager Ishan Wahi, his brother Nikhil Wahi and associate Sameer Ramani “could have broad implications” beyond the case, given its labeling nine tokens as “crypto asset securities” falling under regulatory body’s purview. The complaint alleged that the Wahis and Ramani engaged in insider trading by using confidential information Ishan obtained from Coinbase with regard to which tokens would be listed on the exchange, in order to make purchases in advance.

Specifically, the SEC referred to Powerledger (POWR), Kromatika (KROM), DFX Finance (DFX), Amp (AMP), Rally (RLY), Rari Governance Token (RGT), DerivaDAO (DDX), LCX, and XYO — 9 of the 25 different cryptocurrencies the trio allegedly used to reap $1.1 million in gains — as securities. Pham said the SEC’s actions constituted an example of “regulation by enforcement” rather than addressing the question of whether or not certain crypto assets are securities “through a transparent process that engages the public to develop appropriate policy with expert input.”

“Regulatory clarity comes from being out in the open, not in the dark,” Pham said. “Given the overriding public interest and the open questions on the legal statuses of various digital assets, such as certain utility tokens and DAO-related tokens, the CFTC should use all means available to fulfill its statutory mandate to vigorously enforce the law and uphold the Commodity Exchange Act.”

Read my statement on #SEC v. Wahi, regulation by enforcement & #CFTC authority #crypto #digitalassets #DAO pic.twitter.com/xbHvyshx8l

— Caroline D. Pham (@CarolineDPham) July 21, 2022

A Thursday update to an April blog post from Coinbase in response to the case hinted at similar concerns by referring to the SEC charges as an “unfortunate distraction.” The U.S. Attorney’s Office for the Southern District of New York also filed an indictment in parallel with the SEC’s case, but did not label any of the tokens involved — including Tribe (TRIBE), Alchemix (ALCX), Gala (GALA), Ethereum Name Service (ENS), POWR, and XYO — as securities.

“The DOJ did not charge securities fraud,” said the company. “No assets listed on our platform are securities.”

SEC enforcement director Gurbir Grewal said its case against the Wahis and Ramani was based on the “economic realities of an offering,” alleging some of the crypto assets used were securities. The regulator said it sought permanent injunctive relief, disgorgement and civil penalties.

The CFTC and SEC often claim overlapping jurisdictions when it comes to regulating digital assets in the United States, labeling them as either commodities or securities based on their respective agencies. In June, Senators Cynthia Lummis and Kirsten Gillibrand introduced a bill aimed at providing regulatory clarity for the space, giving the CFTC “clear authority over applicable digital asset spot markets.” However, Lummis said in a Tuesday interview that the legislation was “more likely to be deferred until next year.”

Regulators across the ocean discuss stablecoins and MiCa at joint forum

The representatives of key regulatory bodies on both sides of the Atlantic have met to exchange their experiences.

It’s not every week that regulators from both sides of the Atlantic ocean come together to discuss cryptocurrencies. But that’s what happened last week, with the European Union and United States counterparts sharing their thoughts on stablecoins, central bank digital currencies (CBDC) and the Markets in Crypto Assets (MiCA) proposal.

The representatives of the European Commission, the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and several other EU-level bodies have met with officials from the United States Department of the Treasury, Commodity Futures Trading Commission (CFTC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC) and other American colleagues to discuss the regulatory routine.

The meeting took place July 13-14 in the form of the EU–U.S. Joint Financial Regulatory Forum. Digital finance became only one out of six key topics, alongside sustainable finance and climate-related financial risks, regulatory developments in banking and insurance, Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) and other immediate issues.

Two sides discussed recent developments regarding stablecoins, and the EU delegation updated U.S. counterparts on the provisional agreement reached on the MiCA regulation. The U.S., in its turn, provided an overview of its work on crypto assets, including stablecoins.

As the official report mentions, without any specifications, the exchange also “took stock of discussions around the development of potential central bank digital currencies (CBDCs).”

On June 30, Stefan Berger, European Parliament member and rapporteur for the MiCA regulation, revealed that a “balanced” deal on the regulatory package had been struck, which has made the European Union the first continent with crypto-asset regulation. While the package dropped a de facto prohibition of the proof-of-work (PoW) mining, it still contains some controversial guidelines, especially regarding stablecoins .

On Tuesday, Senators Cynthia Lummis and Kirsten Gillibrand revealed that there is a slim chance that their long-anticipated “crypto bill” would be pushed through the Senate this year.

CFTC brings $1.7B fraud case involving Bitcoin against South African national

“The defendants misappropriated, either directly or indirectly, all of the Bitcoin they accepted from the pool participants,” said the CFTC.

The United States Commodity Futures Trading Commission, or CFTC, has taken enforcement action against a South African national in what the regulatory body called its “largest fraudulent scheme involving Bitcoin.”

In a Thursday announcement, the CFTC said it had filed a civil enforcement action in federal court for fraud and registration violations against Cornelius Johannes Steynberg. The South African national allegedly created and operated a global foreign currency commodity pool totaling more than $1.7 billion, only allowing the participants to pay using Bitcoin (BTC).

The CFTC alleged that Steynberg used the South Africa-based firm Mirror Trading International Proprietary Limited to solicit BTC from the public using social media and various websites. From May 2018 to March 2021, the regulatory body claimed that he accepted at least 29,421 BTC — valued at more than $1.7 billion at the time, but roughly $564 million at the time of publication — including from individuals in the United States.

“The defendants misappropriated, either directly or indirectly, all of the Bitcoin they accepted from the pool participants,” said the CFTC. “The CFTC seeks full restitution to defrauded investors, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction against future violations of the Commodity Exchange Act and CFTC Regulations.”

ENFORCEMENT NEWS: CFTC Charges South African Pool Operator and CEO with $1.7 Billion Fraud Involving Bitcoin. https://t.co/cvNlksPznw

— CFTC (@CFTC) June 30, 2022

The case against Steynberg is the latest in a series of enforcement actions the CFTC has taken against individuals allegedly using cryptocurrencies for illicit purposes or digital asset firms for violations of the Commodity Exchange Act. In June, the CFTC filed a lawsuit against Gemini, claiming the crypto exchange made false or misleading statements to the regulatory body in 2017. A federal court also ordered the founders of crypto derivatives exchange BitMEX to pay $30 million in penalties as part of the conclusion of a suit filed by the CFTC in October 2020.