Edition No. 22
Nexo v. the hateful eight; CFTC and OoKi Service; XRP wins latest round v. SEC; S. Korea freezes BTC linked to Do Kwon; MiCA amendments, and more. Here's what happened from 9/27/2022 - 10/03/2022.
Welcome to Around the Blockchain, the weekly letter dedicated to keeping readers like you up to date on the fast-paced world of Crypto & Law by airdropping current stories directly to your browser.
Table of Contents:
1. On the Docket (Top 5 Stories of the Week)
2. Podcasts, Videos, & Blogs (The faces, voices, and pens of Web3’s brightest contributors)
3. Voices of Women in Crypto (We need more women in Crypto - this is our small contribution: A bi-weekly segment dedicated to the women changing the space).
4. Bird Watching (Tweet, tweet!)
5. Blockchain 101 (Our weekly educational segment written by law students)
6. Motion to Compel (Meant to provoke thought and action)
7. The Public Ledger (Highlights from our weekly library of sources, built by our Feedly AI)
8. Closing Statements
On the Docket
Five things you might have missed last week:
1. Eight States File Enforcement Actions Against Crypto-Lending Platform Nexo
The (Digital) Hateful Eight:
State regulators in California, Kentucky, New York, Maryland, Oklahoma, South Carolina, Washington, and Vermont announced individual cease-and-desist orders against the crypto-lending platform Nexo.
The states allege Nexo offered customers interest-earning accounts without first registering them as securities and providing necessary disclosures. The states also allege Nexo misrepresented the accounts and suggested to investors it is a licensed and registered platform. These interest-earning accounts, known as “Earn Interest Product,” allowed investors to deposit assets with Nexo in exchange for yields as high as 36%, according to one of the filings.
Kalin Metodiev, the co-founder and managing partner of Nexo, stated his firm was “surprised” by the way in which regulators publicly took action against it for securities violations. Metodiev explained Nexo has tried to take responsibility and engaged in direct conversion with regulators like the Securities and Exchange Commission (SEC).
Additionally, in an email to The Block, Nexo co-founder Antoni Trenchev stated "[w]e have been working with US federal and state regulators and understand their urge, given the current market turmoil and bankruptcies of companies offering similar products, to fulfill their mandates of investor protection by examining past behavior of providers of earn interest products."
The announcements are notable given other crypto lenders–such as BlockFi, Voyager Digital, and Celsius Network Inc.--have been the subject of similar regulatory actions. While BlockFi resolved state and federal actions with a $100 million settlement, Voyager and Celsius have been immersed in bankruptcy, with Celsius shareholders filing last week to secure a share of the firm’s remaining assets.
By: Evan Santos
2. CFTC Serves Ooki DAO Lawsuit by Posting It on an Online Discussion Forum and Help Chat
The Commodity Futures Trading Commission (CFTC) used highly unorthodox and unconventional methods to serve a lawsuit against the pseudonymous members of Ooki DAO.
According to court documents issued by the District Court in the Northern District of California San Francisco Division, the CFTC posted the complaint and other
documentation to an online forum where DAO members discuss various governmental issues. Moreover, CFTC sent the documents through a help chat box on the DAO’s website. The CFTC is asking the court to allow using chatbots and forum posts as a proper way to deliver lawsuit documents to the defendants.
The lawsuit, announced last week, is the first to be brought against members of a DAO by the CFTC, and could have wide-ranging consequences for DAO regulation according to Coindesk. Charges were also filed and settled against a blockchain protocol, bZeroX–which the CFTC claims operated the same service before handing over the reins to Ooki DAO–and two of its founders, who settled for a $250,000 monetary penalty.
Now the pseudonymous members of Ooki DAO face their own lawsuit. The CFTC is seeking disgorgement, trading and registration bans, injunctions against further violations of the Commodities Exchange Act (CEA), and civil monetary penalties.
The CFTC’s inability to find a doxxed member of the DAO to serve the lawsuit on, however, indicates obtaining a resolution may prove more complex than in the case of bZeroX’s founders. DAO members have approximately 21 days to respond if they wish to avoid a default judgment in favor of the CFTC.
The CFTC’s novel motion for alternative service asks a federal court to authorize unorthodox methods for delivering the complaint and summons to Ooki DAO, because “by choosing to organize itself as a DAO, the Ooki DAO has structured its business in a way that has erected significant obstacles to traditional service of process.”
DeFi Defense Attorney, Carlo D’Angelo noted in a medium article, this method of service “is a stunning new development for the space because, if approved by the court, it will create legal precedent allowing regulators to claim proof of service of a legal action against every member of decentralized entity via notice to its website.”
The CFTC’s motion argues even though no DAO member has responded to the regulator's request for response, discussions of the lawsuit in the Ooki DAO Telegram chat and “at least 112 views of the CFTC’s post in the Online Forum regarding the action” are enough to indicate the DAO was properly served. A hearing on the matter is currently scheduled for November 9.
By: Evan Santos
3. Judge orders SEC to turn over Hinman documents to Ripple Labs
XRP Wins the Day
Ripple Labs scored a victory in its ongoing legal battle with the SEC as U.S. District Court Judge Analisa Torres ordered the release of documents written connected to former SEC Corporation Finance Division Director William Hinman.
During the Yahoo Finance All Markets Summit in June 2018, William Hinman asserted Ethereum (ETH) was not a security. Since the SEC initiated suit, Ripple Labs has been demanding access to Hinman’s speech documents in defense of the SEC’s claim XRP is an unregistered security. The SEC had resisted court injunctions to produce the Hinman documents, claiming they are protected by the deliberative process privilege (DPP).
The SEC was initially called upon to turn over the documents by Judge Sarah Netburn in January, who found they were not DPP protected . But the SEC objected, claiming the internal speech documents were not relevant to any claim or defense in the case. It also argued the DPP does, in fact, protect internal speech documents, as does attorney-client privilege.
However, the court sided with Ripple, agreeing the speech documents “may be used to obtain potential impeachment evidence or to impeach witnesses at trial,” including Hinman. Furthermore, Judge Torres reasserted DPP does not apply because the requested documents don’t relate to the SEC’s decision, position, or policy–only Hinman’s personal opinion.
The SEC then claimed attorney-client privilege over the documents, which was overruled by Judge Netburn in July. Judge Torres’ ruling overruled the SEC’s objections to that decision. In the latest court ruling from September 29, Judge Torres reiterated the attorney-client privilege does not apply as the document is not intended to “render or solicit legal advice.”
After consideration by the court, the SEC has been ordered to hand over the Hinman document to Ripple Labs. In addition, Ripple Labs and the SEC both filed motions for a summary judgment on September 17. The resolution of this case could have far reaching consequences and may come sooner than some anticipated.
By: Evan Santos
4. South Korea Seeks to Freeze $62 Million of Bitcoin Linked to Crypto Founder Do Kwon
Catch me if you can (continued)
This past Wednesday, South Korean authorities revealed that they had asked two cryptocurrency exchanges to freeze more than $60 million worth of bitcoin associated with Do Kwon, the creator of the company behind two now-defunct digital coins, Terra.
The Seoul Southern District Prosecutors' Office stated that they had requested OKX and KuCoin to freeze 3,313 bitcoin associated with Kwon. At the price last Wednesday, this bitcoin was worth around $62 million.
CryptoQuant's research indicates that the Luna Foundation Guard (LFG) created a digital wallet on September 15 and delivered 3,310 bitcoin to KuCoin and OKX. The Luna Foundation Guard is a non-profit organization founded by Kwon's company Terraform Labs to promote the Terra blockchain.
Since May 2022, the LFG answered on Tuesday that it had not established new wallets or moved bitcoin or other digital money. Additionally, it published its wallet address on Twitter.
A spokesperson from OKX confirmed it had received a request from the Korean authorities and that it is “cooperating with their investigation.”
“OKX denounces all illicit dealings in the sector. As this is an ongoing investigation, OKX is unable to offer any further comment at this time.”
By: Kyler Wandler
5. European AML rules could implicate DeFi, DAOs and NFTs
If you give an inch…
According to a draft report reviewed by The Block, a series of modifications written by European Parliament members for its position on the anti-money laundering (AML) and counter-terrorism funding (CTF) rules have the potential to significantly alter Europe's crypto-regulatory landscape.
The "Travel" rule, which imposed identification verification requirements on the transfer of cash using so-called unhosted wallets and previously caused a stir in the market, appears to have been removed from the draft.
However, additional revisions broaden the scope of the rule to include decentralized autonomous organizations (DAOs), decentralized finance (DeFi) protocols and their developers, as well as individuals trading NFTs. The metaverse is also targeted as a potential source of money laundering, and crypto-asset service providers may be required to comply with AML regulations when handling transactions exceeding €1000.
The provisions are the outcome of combining the suggested revisions from the parliamentary factions into compromise amendments that attempt to accommodate all the differing perspectives.
The final report on the Parliament’s position is projected for December, and technical meetings on the AML report are scheduled until then.
By: Kyler Wandler
Podcasts, Videos, and Blogs
The brightest voices & sharpest pens:
The Voices of Women in Crypto
By Nicole Fernandez Prada & Tamara Szulc
Kicking off Spooky Season, we had the chance to speak with the lovely Eliana Torres, Esq., LLM:
Eliana is an Intellectual Property Practice Group Associate, with a focus on NTFs, Metaverse and Blockchain Technology.
Eliana began her crypto journey alongside her husband. They slowly began buying NFTs and different digital assets. Initially, Eliana wanted to bring her friend who creates unique stickers into the crypto space but ended up getting more involved herself and met many like minded individuals. As an attorney, she was curious about the legal intersections between crypto and law and met Zach Lewis (Nifty) and quickly became a managing partner in the Blockchain Barristers Discord. With these meaningful friendships and connections she’s made in this space, the Web3 Lawyers brand started.
As an immigrant from Colombia, Eliana believes in helping and guiding others. It is always a struggle coming to a new place without knowing the language or the people. This mirrors the experience when entering the crypto realm. It’s blatantly scary. Even Kevin O’ Leary lost $200 dollars when he first stepped in. Naturally at first, she did not believe she could enter the crypto space with little to no experience. Through the overwhelming support from individuals in NFT twitter and discord chats she’s had the courage to involve herself more. She mentioned that she’s hustled her way into everything. With that she grew her audience and learned more about blockchain technology and spoke at NFT NYC earlier this year!
What we loved about having this chat with Eliana is how down to earth and heartwarming her character is. She’s incredibly grateful to have found this passion in intellectual property and crypto. We asked her if she ever felt that she ever needed to prove herself, and she immediately said yes. That often, even despite being a decorated attorney, she’s had individuals come up to her after speeches and talks saying “you seem to really know your stuff.” This is a reminder that biases exist. Being a woman in crypto is still a rarity, add in being an attorney, plus being Latina - even rarer.
Despite being intimidated at times, Eliana is consistently working on overcoming this, and continues to delve into twitter spaces to improve herself. As she says: "consistency creates trust, trust creates opportunity.”
Eliana’s advice to other women entering this space is to think about crypto as an industry, with a multitude of different layers. To find your tribe. These are the people that will make you feel at home and that will always be your supporters. She recommended a few groups to us that we haven’t heard/mentioned before (exciting!). Nifty Portal and LexDAO, where you can learn how to code a smart contract and interact with other attorneys that are interested in the technology behind the blockchain.
We hope this segment inspires women from all backgrounds to learn and grow within the crypto space! If you have educational links to share we’d love to show them to the public! Reach out to us via Discord or @Octopape on Twitter.
Tweet, Tweet, Tweet!
Blockchain 101 is the product of our team’s desire to reduce what has typically been a significant educational barrier of entry into the crypto space. Our goal is to create a digestible and understandable curriculum accessible to anyone - while simultaneously helping our own nascent members to expand their understanding of the fundamentals of Web3.
Around the Blockchain Glossary
By: Suryavir Dawar, Tamara Szulc
Welcome back, readers! This week, in place of another lesson we’ve decided to provide a Blockchain 101 Glossary for terminology used throughout past lessons. In the future, we will update this glossary with each lesson as we go.
Please take a look HERE and let us know what you think in the comments!
Motion To Compel
Thought-provoking questions and arguments for your consideration each week:
Runaway Terraform Founder
By Violet Flocks
In a modern web3 “he said she said” turn of events, Do Kwon claims he’s not on the run but South Korean authorities resorted to Interpol’s Red Notice request to locate and arrest.
Do Kwon, founder of Terraform Labs, is under investigation by the U.S. and South Korea after Terra’s implosion. The Terra (LUNA) network crash led to about $40 billion in losses and possibilities of fraud, tax evasion, and market manipulation by Terraform Labs are at issue. Unfortunately for the crypto community, the Terra collapse created a domino effect causing Three Arrows Capital and Celsius to go bankrupt, thus beginning the 2022 winter market.
Aside from the regulatory implications, Do Kwon’s actions present a bigger problem to the crypto community. Erratic actions by one founder can destabilize the market. Where global corporations at least have a semblance of governance, through regulations or internal boards, these things might not have happened. So who is to blame?
The Public Ledger
Highlights from the hundreds of sources gathered each week by our research AI. Always DYOR - but in case you don’t have time, here’s some of ours:
General News and Opinion
Binance launches new program to help law enforcement fight cyber crime
Solar energy tax credits are a boon to blockchain technology solutions
What is the Cryptocurrency Market for Gaming and Sports Betting
CEO of Bankrupt Crypto Lender Celsius Alex Mashinsky Resigns
Citadel Securities sues ex-employee over departure to crypto venture
Bankrupt crypto lender Voyager to sell assets to Sam Bankman-Fried's FTX for $1.4 billion
U.S. - Federal
Ripple Labs XRP Secures Victory in Ongoing Legal Battle Against SEC
Ripple Bags Crucial Win In SEC Case; XRP Soars 15% After The Decision
US Senators Introduces Bill to Add More Asset Class in 401(k) Plans
Three Possible Maneuvers SEC Can Still Use to Delay Surrendering Hinman's Documents To Ripple
OpenSea Case Signals Digital Assets Face Familiar Regulation
Treasury and Justice Department Reports Signal Tougher Enforcement and Regulation in the Digital Assets Sector
Bitcoin Could ‘Double in Price’ Under CFTC Regulation, Chairman Behnam Says
CFTC Chair on crypto regulation: there’s a ’70-year old case-law’
Crypto companies can’t avoid legal liability by forming a DAO
U.S. - State Law
New Law Allows Californians to Store Vital Records on Blockchain
California Moves Forward to Allow Vital Records to be Issued on Blockchain
Attorney General James Sues Cryptocurrency Platform for Operating Illegally and Defrauding Investors
Texas, Vermont regulators object to Celsius stablecoin sale plan
Nexo ‘surprised’ by state regulators’ actions, says co-founder
Delaware authorities suspend 23 entities linked with romance crypto scams
California wants to model crypto rules for the rest of the U.S.
BlackRock's newest ETF invests in 35 blockchain-related companies
Kazakhstan Completes First Crypto Purchase With Local Currency, Eyes Regulation
Russia agrees on draft crypto mining law in energy-rich regions
China's law enforcement busts $5M virtual currency money laundering ring
Thailand’s SEC to take legal action against Crypto exchange Bitkub and two individuals
South Korea seeks to freeze $62 million of bitcoin linked to crypto founder Do Kwon as manhunt continues
Industry Offers Cautious Welcome to EU’s Landmark Crypto Law MiCA
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Blockchain 101 Glossary
We hope you enjoyed our new glossary for Blockchain 101! Blockchain 101 is the product of our team’s desire to reduce what has typically been a significant educational barrier of entry into the crypto space. Our goal is to create a digestible and understandable curriculum accessible to anyone - while simultaneously helping our own nascent members to expand their understanding of the fundamentals of Web3.
NEW TWITTER AND WEBSITE
We are thrilled to announce the launch of our new website and twitter profile. Check them out and let us know what you think!
Quote of the Week:
“Justice in the life and conduct of the State is possible only as first it resides in the hearts and souls of the citizens.” - Plato
Ok, all done! You can go ahead and check your P/L now (Coin Market Cap)
This newsletter is written, curated, annotated, and edited by Christopher Foreman (@CryptlessInSEA), Kyler Wandler (@KylerW56), Nicole Prada (@octopape); Nick Corso (@nick_corso2); Evan Santos (@evansantos4); and Kleb (@kleb_33); with consultation and input from Jacob Robinson of the Law of Code Podcast; editing courtesy of TΞxas ₿l◎ckchain LawyΞr ; in collaboration with Ann Sofie Cloots; and support from the Blockchain Barristers Law Student Collective.
The articles and opinions in this newsletter are not legal or financial advice. For legal and financial guidance, please consult a qualified attorney or financial advisor.
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