Edition No. 23
Keeping up with the Kardashians; Celsius blunders continue; FSOC's Book Report; MiCA is here; DeFi Education Fund stands up to CFTC; and more. Here's what happened from 10/03/2022 - 10/10/2022.
Welcome to another edition of 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 and projects 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. Bird Watching (Tweet, tweet!)
4. Motion to Compel (Meant to provoke thought and action)
5. The Public Ledger (Highlights from our weekly library of sources, built by our Feedly AI)
6. Closing Statements
On the Docket
Five things you might have missed last week:
1. Kim Kardashian, charged by SEC for promoting crypto EthereumMax, reaches a $1.26M settlement
SEC Keeps Up With The Kardashians
Reality TV star Kim Kardashian paid $1.26 million to the U.S. Securities and Exchange Commission (SEC) to settle charges relating to “unlawfully touting” the EthereumMax token.
According to an SEC press release, the commission filed charges against Kardashian for failing to disclose the $250,000 payment she received for posting promotional content about EthereumMax, .
In June 2021, Kim Kardashian shared promotional content for EthereumMax to her 331 million followers on Instagram. Financial services firm Morning Consult found some 54 million US adults were aware of Kardashian’s post. Of those, roughly 10 million said they purchased EthereumMax, the consultancy reported in September 2021 according to Blockworks.
No more than two weeks later, the token’s price crashed 96%, prompting allegations it was no more than a “pump and dump” scheme.
EthereumMax (which runs on the Ethereum blockchain, but is not issued by the Ethereum Foundation) was also promoted by professional boxer Floyd Mayweather, Jr., who is a named defendant in an accompanying class action lawsuit filed against him and Kardashian. The class action follows alongside the aforementioned SEC investigation, which is “ongoing”. Kardashian is cooperating with regulators, according to the SEC’s statement.
Under the terms of the settlement agreement, Kardashian will be prohibited from promoting any “crypto asset security,” for a period of three years. She is ordered to disgorge the $250,000 proceeds of her actions, plus interest, and pay a $1 million civil penalty to the SEC, which may, at its discretion, distribute the funds to investors or transfer them to the US Treasury.
Gabriel Shapiro, general counsel at Delphi Digital Labs, said on Twitter the settlement represented a “stiff fine [and] an unusual direct rebuke from [SEC Chair] Gensler.” He noted that although the original social media post by Kardashian was labeled as an advertisement, it still ran afoul of securities law because “laws require not only disclosing that you are paid for the promotion, but the amount you are paid.”
Gurbir Grewal, director of the SEC’s Division of Enforcement, stated “the federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,”
Although the label “crypto security asset” is yet to be formally defined, it's clear the SEC means to make an example of Kardashian–and perhaps more significantly EthereumMax. Following the announcement, SEC Chair Gary Gensler posted a video to Twitter warning about the pitfalls of crypto assets. He also appeared on CNBC’s Squawk Box to discuss the matter.
“The SEC is always looking for a way to get the message out to the public, and when somebody with the kind of following that Kim Kardashian has makes a blunder like this … that’s a layup for the SEC,” said former SEC branch chief Lisa Braganca on CoinDesk TV’s “First Mover” Tuesday.
The case highlights an important lesson for crypto influencers and retail customers alike: Be wary of promoting–or trusting–financial advice you come across on social media, especially when it comes to cryptocurrency.
By: Evan Santos
2. Court Filings from Bankrupt Crypto Lender Celsius Reveal User Data And Show Top Execs Cashed Out Millions
Celsius is DeFi’s Blackeye
Embattled crypto lender Celsius revealed the names and transaction history of hundreds of thousands of customers in its Oct 5 Statement of Financial Affairs pursuant to Chapter 11 bankruptcy proceedings in the Southern District of New York.
According to Decrypt, the 14,500-page document contained highly sensitive customer information, such as names, crypto wallet IDs, transaction types and amounts, which services the customer used, and the types and quantities of tokens held
Celsius filed a motion on Aug. 3 asking the court to redact user names and addresses, citing threats of identity theft and personal safety concerns. It proposed using an “Address on File” notation instead of providing specific details.
According to Blockworks, a group representing Celsius’ unsecured creditors also joined the lender in requesting the court to protect personal information in public filings.
U.S. Trustee William Harrington, however, objected to the request, arguing that redacting names and other information would violate the principle that all bankruptcy proceedings should be “open and transparent.”
The court filing also provides more detail regarding how key executives may have pulled money out of the platform prior to its implosion.
According to the filings, Mashinsky and his wife withdrew about $12 million in cryptocurrency in May 2022. Leon withdrew about $7 million (and an additional $4 million worth of CEL denoted as “collateral”) between May 27 and May 31. Leon stepped down from Celsius on October 4, roughly a week after Mashinsky did so.
The bankruptcy court ordered Celsius to update the Unsecured Creditors Committee (UCC), which represents all customers to whom Celsius owes assets, about its financial status and cash management on a regular basis, according to another court document filed Wednesday.
Celsius must disclose its monthly budget and cash balance, spending on wages, taxes among other figures, and various performance metrics about its bitcoin mining business and any proceeds from sales of BTC mined by the firm. The firm also must obtain permission from the UCC for any “critical vendor payment” above $50,000.
The Celsius court filings are the latest development around the troubled crypto lender as its bankruptcy case heats up. Celsius is currently set to auction off its remaining assets as part of an attempt to repay investor debts.
An independent examiner appointed by the U.S. Trustee’s Office is investigating why Celsius collapsed and how it managed customer deposits.
By: Evan Santos
3. Financial Stability Oversight Council (FSOC) Publishes Crypto Report
Another agency book report:
On October 4th the US Financial Stability Oversight Council (FSOC) published its report on Digital Asset Financial Stability Risks and Regulation. The report identified two areas of risk to the financial stability of the US financial system from crypto-asset activity;
Interconnections between the crypto-asset ecosystem and the traditional financial system
Vulnerabilities primarily confined to the crypto-asset ecosystem
The report recognizes that the current risks to financial stability are low, but notes that they have the potential to grow rapidly.
On the interconnections between the crypto-asset ecosystem and the traditional financial system, the FSOC report focuses heavily on the risks of runs on stablecoins and their instability due to asset-liability mismatches.
On financial stability risk arising from within the crypto-asset ecosystem, the FSOC Report highlights the risks associated with crypto-asset prices. Crypto-asset prices are ‘largely based on speculation’ and ‘may be affected by the prevalence of fraud’, according to the report.
The FSOC report identified three gaps in the regulation of crypto-asset activities:
(1) The limited direct federal oversight of the spot market for crypto-assets that are not securities
(2) The absence of a consistent or comprehensive regulatory framework for crypto-asset firms, which creates opportunities for regulatory arbitrage
(3) The potential for crypto-trading platforms to vertically integrated services to provide retail customers direct access to markets without using intermediaries such as broker-dealers or futures commission merchants
FSOC makes several recommendations for addressing these regulatory gaps including passing legislation that provides rulemaking authority for financial regulators over the spot market for crypto-assets that are not securities. The report did not state who this regulatory body should be nor did it recommend any legislative changes to federal securities laws to account for the unique characteristics of crypto assets.
See also: jdsupra.com, mayerbrown.com, coindesk.com, ft.com
4. Markets in Crypto Assets (MiCA) Passed by EU Council
Now we wait.
The Council of the European Union has agreed on the full text of the Markets in Crypto Assets (MiCA) regulation.
The legislation has been worked on and debated over for the past two years and will establish requirements for crypto issuers to publish whitepapers, register with authorities and keep proper reservers for stablecoins.
Allowing a single framework under which companies can operate across a market of over 500 million consumers is touted as positive by the authors of the text;
“Legal certainty was one of the main reasons why we need MiCA,” said Stefan Berger, the lawmaker who negotiated the law for the European Parliament, in a written interview. “We now have a legal framework that can be relied on as an investor but also as an issuer and offeror … order is created in the Wild West of the crypto world.”
The text must now be formally agreed to by the European Parliament and is not expected to take effect until late 2024.
See also: jdsupra.com, coindesk.com
5. Second Crypto Group Objects to CFTC's Use of Chat Bot to Serve Legal Papers
The DeFi Education Fund (DEF), a Washington, D.C.-based lobbying organization focused on decentralized finance (DeFi) issues, has joined a group of crypto lawyers in arguing that the Commodity Futures Trading Commission (CFTC) should not be permitted to serve lawsuit defendants by posting on a website.
Monday, the DEF filed a motion to intervene as a friend of the court, stating that the CFTC's approach to the issue of service "may inhibit unique and inventive software development." The filing came shortly after LeXpunK Army, a collection of crypto attorneys and developers, submitted a similar motion to join the case.
The CFTC petitioned Northern District of California District Court Judge William Orrick to determine that a forum post and a website assistance chatbot submission were adequate to notify Ooki DAO and its members that they were named defendants in an ongoing enforcement action. The judge decided in favor of the CFTC on Monday, the same day that LeXpunK submitted to join the suit.
Last month, the CFTC filed a lawsuit against Ooki DAO on the grounds that it offered margined and leveraged trading products without registering as a futures commission merchant or establishing a customer identification procedure. The regulator also reached a settlement with the forerunner of the DAO, bZeroX, as well as the company's founders, Kyle Kistner and Tom Bean. BZeroX, Bean, and Kistner were accused of engaging in the same behavior as Ooki DAO; however, the CFTC settled Bean and Kistner's DAO-related allegations concurrently with the bZeroX accusations.
According to a spokesperson for DEF:
"If the CFTC is allowed to proceed in, what we view as, a misguided method of service that deprives the Ooki DAO token holders their right to due process, then it would not just result in a serious misjustice, but also will chill novel innovation and innovative forms of governance and software development in the United States."
By: Kyler Wandler
Podcasts, Videos, and Blogs
The brightest voices & sharpest pens:
Tweet, Tweet, Tweet!
Motion To Compel
Thought-provoking questions and arguments for your consideration each week:
What’s at Stake? Here’s how custody battles will shape crypto’s future:
By Nick Corso
As proof-of-stake (PoS) enters into prominence with the completion of Ethereum’s “merge”, regulators such as the SEC and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) are taking interest. FinCEN has a history of regulating digital assets by enforcement and has previously applied Bank Secrecy Act (BSA) guidelines to BTC mining. Given this history, one can assume the next discussion could involve potential BSA obligations on staking–especially for stake pool operators (SPOs).
To read the full opinion-analysis, click HERE.
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
How Binance is Training Law Enforcement Around the World to Combat Crypto Crime
It's 'easy to convince people' to buy crypto, says law professor
The Dangerous Implications Of Central Bank Digital Currencies
With Crypto Governance in CFTC Crosshairs, SushiSwap Exchange Mulls Legal Shakeup
While Others Go Free, Ross Ulbricht Faces Excessive Prison Time
With Crypto Governance in CFTC Crosshairs, SushiSwap Mulls Legal Shakeup
U.S. - Federal
DOJ objects to Celsius plans to reopen withdrawals and sell stablecoins
OpenSea employee accused of fraud wants to subpoena the NFT marketplace
CFTC can issue summons through Ooki DAO’s help chat box, says judge
Federal regulators are preparing to pass judgment on Ethereum
CFTC takes legal action against Digitex futures exchange and CEO
CFTC Chairman on US Crypto Regulation: We Have to Rely on 70-Year-Old Case Law to Determine What's a Security or Commodity
Crypto Energy Study Shrugged Off by Agencies, Irking Lawmaker
SEC Chair Gensler Says Law For Crypto Is Clear, Most Tokens are Securities
U.S. - State Law
Crypto Judgment Day: Issuing Judgments in Cryptocurrency in New York
South Carolina State Treasurer Travels To El Salvador To Learn About Bitcoin Adoption
Recordings of UW's Wyoming Blockchain Stampede, Wyoming Cybersecurity Conference Available
Nexo Heads For The Hills Just As California Unleashes A Wave Of Suits
Colorado is accepting crypto for tax payments — it could be a mess or a shining example
Are Californians About to Buy Crypto With These Relief Checks?
Stablecoins Add 'Novel Vulnerabilities' to Crypto, Financial Stability
New Law Allows Californians To Store Vital Records On Blockchain
California Takes Action Against 11 Crypto Firms Allegedly Operating Like Ponzi Schemes
US-Brazil investigation leads to disruption of transnational cryptocurrency fraud ring
Investors Wary of Board Seats at Crypto Startups Due to Legal Risks
Gucci bags, crypto & Vegas vacations: COVID relief scams land public employees in legal trouble
Partnership to Operate Malaysia's National Blockchain Infrastructure Sealed
Gofaizen & Sherle to Help Businesses Scale the New Lithuanian Cryptocurrency Regulations
Wanted crypto exec linked to $60 billion crash faces passport freeze
Namibian Central Bank: Virtual Assets 'Remain Without Legal Tender Status' but Merchants Can Still Accept Them as Payment
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