Edition No. 34

SEC Ramped Crypto Enforcement; Celsius Depositors; IRS on Crypto Donations & Losses; Update on Yuga Labs v. Ryder Ripps; and more. Cryptolaw news from 1/16/23 - 1/21/23.

Welcome back 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 Stories of the Week)

2. Podcasts, Videos, & Blogs (The faces, voices, and pens of Web3’s brightest contributors)

3. Bird Watching (Tweet, tweet!)

4. The Public Ledger

5. Closing Statements

On the Docket

Five things you might have missed last week:

1. SEC ramped up cryptocurrency enforcement in 2022, report shows

SEC Ramps Up the Crypto Crack Downs

The Securities and Exchange Commission (SEC) brought 30 cryptocurrency-related enforcement actions in 2022, a 50% increase from 2021 and the highest number since 2013, according to a Cornerstone Research report. The report revealed that the SEC brought 24 litigations and six administrative proceedings related to cryptocurrency in 2022, up from 14 litigations and six administrative proceedings in 2021. The SEC has sharpened its focus on cryptocurrency lending and trading platforms and decentralized finance platforms under the current Chairman, Gary Gensler.

Photo by Markus Spiske on Unsplash

2. Cryptocurrency Deposits Do Not Belong to Celsius Earn Account Holders

Hard Earned Lesson for Some Celsius Depositors

The United States Bankruptcy Court for the Southern District of New York has ruled that crypto customers of Celsius who deposited their cryptocurrency in interest-bearing accounts under Celsius's “Earn Program” have lost all rights and title to those assets. The decision affects around 600,000 accounts with assets valued at $4.2 billion, and will allow Celsius to liquidate certain assets to fund its administrative expenses, leaving depositors with unsecured claims. The court found that a valid and enforceable contract was formed between Celsius and its customers through customer acceptance of the terms of use, and that the provisions of the terms of use vesting title and ownership of deposited crypto assets to Celsius were valid.

The court, however, did not extend its ruling to include assets in Celsius’ non-interest-bearing accounts such as the Custody Program, Withhold Accounts, or Borrow Program.

"Customers will also not be precluded from bringing claims for breach of contract, fraud, or other theories of liability, and will retain unsecured claims against Celsius."

3. Reform to the UK Investment Manager Exemption

New Regs, Who Dis?

UK government department, His Majesty's Revenue and Customs (HMRC), introduced new regulations deeming certain crypto assets “investment transactions” subject to the UK’s Investment Manager Exemption (IME).

The regulations define “cryptoasset” as:

“a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions”.

The new regs are effective as of the 2022-2023 tax year (for non-corporate entities) and accounting periods current as of Dec. 19, 2022, and onwards (for corporate entities).

This means UK-based investment managers can now domestically trade certain crypto assets directly as opposed to only engaging in futures trading, options trading, or trading outside the UK. Additionally, the regulatory change nullifies the risk of the non-UK fund vehicle becoming subject to UK tax.

The extension of the investment transactions list applies only to the UK IME and is not extended to other UK tax legislation such as authorized investment funds, exempt unauthorized unit trusts, or investment trust companies, though regulators left the door open to this possibility in the undefined future.

Photo by James Giddins on Unsplash

4. IRS Issues CCMs on Crypto Donations and Crypto Losses

IRS Tells it Like it is... Probably Going to Be

The IRS has recently released two chief counsel memoranda addressing cryptocurrency donations and cryptocurrency tax losses. One memorandum stated that a taxpayer that donates cryptocurrency and seeks a charitable contribution deduction of more than $5,000, must obtain a qualified appraisal to qualify for the deduction. The second memorandum stated that a taxpayer that owns cryptocurrency that has substantially declined in value has not sustained a cryptocurrency loss due to worthlessness or abandonment of the cryptocurrency. These memoranda provide on the issues of crypto losses and charitable donations.

Photo by Jon Tyson on Unsplash

5. Judge Tosses First Amendment Defense in Yuga Labs v. Ryder Ripps

Judge Slaps Down anti-SLAPP motion in Yuga Labs Suit

A federal district judge in California recently denied an anti-SLAPP motion and motion to dismiss in an action filed against artist Ryder Ripps and numerous codefendants by Yuga Labs, the creator behind the iconic Bored Ape Yacht Club NFTs.

Ripps and his partners are being sued by Yuga for trademark infringement and other related claims over their use of BAYC marks in the Ryder Ripps/BAYC NFT collection (RR/BAYC). Defendants argue RR/BAYC does not constitute infringement but is rather "appropriation art" bringing attention to Yuga's use of racist and neo-Nazi imagery.

The court ruled defendants' actions were “commercial activities designed to sell infringing products” and thus not protected by the First Amendment. The court further found such use of BAYC marks were misleading and not artistically relevant.

Ripps et al have filed a notice of appeal with the Ninth Circuit on the district court’s anti-SLAPP ruling—appellate briefs are due Feb. 21, 2023. Defendants have concurrently asserted six counterclaims and seek a declaratory judgment of no copyright in the BAYC images.

Discovery is ongoing amidst vigorous litigation, including an order denying Yuga’s ex parte motion to prevent co-founders Wylie Aranow and Greg Solano from being deposed.

A jury trial is scheduled for June 27, 2023.

Photo by Sew for Christ Photography on Unsplash

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Podcasts, Videos, and Blogs

The brightest voices & sharpest pens:

1. Law of Code - Jacob sits down with Aaron Wright (@awrigh01) who is the CEO and co-founder of @TributeLabsXYZ, as well as @TheLAOOfficial, @flamingoDAO, & many more.

2. Bankless - The Bankless team discusses all the crypto news that took place in the 3rd week of January including the SEC v Gemini, Genesis’s bankruptcy, and a new 3AC Exchange!

3. Bloomberg - Bloomberg crypto blogger Emily Nicole is joined by two lawyers to discuss the legal fallout from FTX’s bankruptcy!

4. DAO Talk - DAO Talk recaps all the DAO news from the week including Bankless DAO x Coordinape governance issues, the World Economic Forum’s DAO report, and much more!

5. Unchained - Laura Shin sits down with Maria Shen, partner at Electric Capital, to unpack the venture firm’s latest Developer Report and dive deep into why developers are continuing to build despite the bear market!

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Bird Watching

Tweet, Tweet, Tweet!

1. SEC Charges Avraham Eisenberg with Manipulating Mango Markets’ “Governance Token” to Steal $116 Million of Crypto Assets.

   Mike Selig @MikeSeligEsq

   SEC taking the view that MNGO is a security. This will be a real test for the governance token model. But by bringing suit against Eisenberg rather than Mango team the SEC may get an easy win. Hopefully bad facts don’t make bad law.

   

   sec.govSEC.gov | SEC Charges Avraham Eisenberg with Manipulating Mango Markets’ “Governance Token” to Steal $116 Million of Crypto Assets

2. Federal prosecutors seized nearly $700 million in cash and assets connected to Sam Bankman-Fried, court filings from Friday show, primarily in the form of Robinhood shares. Three accounts were at Silvergate Bank and held U.S. dollars in the name of FTX Digital Markets, a Bahamian subsidiary.

Carlo⚖️.eth @DeFiDefenseLaw

Feds seize almost $700 million of FTX assets in Sam Bankman-Fried case

cnbc.comFeds seize almost $700 million of FTX assets in Sam Bankman-Fried criminal caseFederal prosecutors seized nearly $700 million in cash and assets connected to Sam Bankman-Fried, primarily in the form of Robinhood shares.

3. Federal judge ruled to dismiss a lawsuit against Ozone Networks:

   Eli🎀⚖️.eth (Eliana) @eliana_esq

   📰NFTLegal News On January 19, 2023, a federal judge ruled to dismiss a lawsuit against Ozone Networks, dba OpenSea, and Yuga Labs over stolen apes. Plaintiff owned three Ape (BAYC) NFTs that were stolen by an unknown person through a link to a fake website on OpenSea. /1

4. Judge approves Sullivan & Cromwell as Debtors' counsel for FTX.

   MetaLawMan @MetaLawMan

   As expected, the Judge approves Sullivan & Cromwell as Debtors' counsel. Judge says, on the record before him, he has no concern about S&C conflicts of interest. Any suspense about this decision was eliminated when the US Trustee switched position to favor S&C's appointment.

5. The USPTO and the U.S. Copyright Office are conducting a joint study to consider IP law and policy issues associated with NFTs.

   USPTO @uspto

   IP = Intellectual Property NFTs = Non-fungible tokens Already knew that? You might be interested in our series of events on the intersection between IP law and NFTs, co-hosted with the @CopyrightOffice. Sign up to attend - first session is on 1/24: bit.ly/3Esq6ox

   

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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

• New/Old Threats to IP in the Metaverse

• Cooperatives: An Ownership Model for Digital Networks

• Digital assets will remain in demand – despite the crypto winter

• Decentralized Autonomous Organisations: Disruption or a token effort?

• 6 Million Data Points Per Hour: Preserving Employee Communications in the Metaverse

• $4.5B Bitfinex Money-Laundering Accused Lands NY Tech Gig While Under House Arrest

• In Hunt for FTX Assets, Lawyers Locate Billions in Cash and Crypto - The New York Times

• Blockchain Technology is Subject of Law Review Symposium

• Crypto Marketing Needs to Change. Let’s Make 2023 the Year for Influencer Accountability

• NFT Regulatory Issues – a 2022 Review and 2023 Preview

• Crypto deepfakes on the rise: How to spot these impersonations and stay safe from this scam

U.S. - Federal

• Consumer Law Claims against French Crypto Asset Wallet Provider May Proceed in California Court

• The Block: Law firm Sullivan & Cromwell to face scrutiny in FTX bankruptcy hearing Friday

• The Federal Government Bailing Out Crypto’s Biggest Bank? Silvergate Taps the Federal Home Loan Bank as its Lender of Last Resort

• Political Law Playbook – January 2023 | Dentons - JDSupra

• Ripple CEO is optimistic the crypto firm will get ruling on XRP lawsuit soon, slams ‘embarrassing’ SEC

• FTX Debacle Shows Risks in Current CFTC Rulebook, Commissioner Says

• Regulatory Update and Recent SEC Actions - January 2023

• Bitzlato and its founder face enforcement actions from US authorities

• Will DAOs Be Patent Litigants? | Kramer Levin Naftalis & Franke

• The Block: American CryptoFed argues it was shut out from dialogue with the SEC

• SEC violates privacy law while investigating dubious crypto firm Green

U.S. - State Law

• New Hampshire gov releases report on blockchain following executive order

• Public Records Stonewalling About Cryptocurrency In Fairfax County Virginia Pensions

• New lawsuit challenges state's decision to turn a North Tonawanda power plant to a cryptocurrency company

• Governor’s Commission on Cryptocurrencies and Digital Assets Releases Final Report and Recommendations

• Former CEO of Crypto Platform Celsius Sued by AG James for Allegedly Defrauding Investors | Cozen O'Connor

• Louisiana Adopts Virtual Currency License

• New York faces a new legal fight over a proposed crypto-mining power plant - The Verge

• London NFT Co. Sues In Del. To Stop Alleged Cybertheft

• No To Crypto: Activists Sue New York For Approving Bitcoin Mining Operation

International

• The OSC’s Statement Of 2023-24 Priorities: A Focus On Evolving Markets and Changing Investor Attitudes

• Focus Russia's crypto mining bill stalls over objections from central bank, law enforcement

• Government will put in place a less prescriptive, more principle-based legal framework to catalyze India Techade: MoS Shri Rajeev Chandrasekhar

• Compass declines to retrieve crypto miners' equipment from Russia, gets sued

• No issue with crypto in India if laws are followed - minister

• Crypto exchange Coinbase says it will halt Japan operations

• European Law Enforcement Raid 18 Locations Related to Crypto Fraud

• One of FTX’s Biggest Victims Could Be the Bahamas’ Finance Reputation

• Bankers and Regulators Find Common Ground on Crypto at Davos

• How Are Digital Assets Regulated in the United States and Elsewhere?

• Budget 2023: Crypto industry calls for rationalized tax policy; but will the demand go unheard?Budget 2023: Crypto industry calls for rationalized tax policy; but will the demand go unheard?

NOTE: For your convenience, we have started identifying articles that require a subscription or site registration (paid or free) with ** preceding the article link, and the linked site in () after.

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Closing Statements

Around the Blockchain News announcement:

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Quote of the Week:

"The law is the public conscience." - Thomas Hobbes

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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.