Edition No. 38

SEC escalates; EC launches blockchain sandbox; Norway recovers stolen crypto; Alexey Pertsev Denied Bail; WY protects private keys; and more. Here's what happened from 2/12 - 2/18

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. Bird Watching (Tweet, tweet!)

3. The Public Ledger

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

5. Closing Statements

On the Docket

Five things you might have missed last week:

1. SEC Continues to Escalate Fight Against Crypto Industry

SEC Charges Ahead in Crypto Crusade

Recent actions by the US Securities and Exchange Commission (SEC) shows an increasingly hostile approach to the cryptocurrency industry. In addition to their settlement with crypto exchange Kraken last week shutting down their staking-as-a-service program, the SEC this week made two more moves potentially expanding their scope of enforcement over the industry even further. First, on February 15th the SEC published a proposal which would create a uniform standard for banks and other firms looking to safely store client assets. The proposal is allegedly aimed at tackling the implosion of crypto firms such as FTX that advertised that customers' crypto tokens were stored separately from company assets, but were not. Some state regulators have concerns that the SEC's proposed rule would limit their authority over state-chartered banks. The proposal also includes a series of questions about how to deal with state-chartered banks, ranging from cutting them out from the ranks of qualified custodians entirely to imposing SEC rules on them. This SEC action follows recent statements from the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency that cryptocurrency activities may not be compatible with safety and soundness standards for banks.

Further, on February 16th the SEC filed charges against Do Kwon, founder of Terraform Labs, and the company over the failed TerraUSD stablecoin. The SEC alleges that Kwon and the firm misled investors about the true extent of the collateral backing the stablecoin and deceived them into investing over $25m in Terraform Labs.  Kwon, whose whereabouts are still unknown, and who currently has a warrant out for his arrest issued by the South Korean authorities, has denied the SEC's allegations via various social media posts. The lawsuit's potential effect on stablecoin regulation in the US remains to be seen.

See Also: SEC Press Release Re: Proposed Custody Rule; SEC Press Release Re: Terraform Suit; SEC Complaint against Terraform & Kwan; JD Supra; Politico; BBC; The Defiant

Photo by David Jones on Unsplash

2. European Commission Launches Blockchain Regulatory Sandbox

EC Invites Blockchain Industry to Come Play

The European Commission has launched the European Blockchain Regulatory Sandbox to provide a space for regulatory dialogue for 20 projects per year through 2026. The sandbox will match up public and private sector projects with appropriate participating regulators for assessments and consultations. Funding for the sandbox will come from the Digital Europe Programme. Projects will be chosen by an independent panel of academic experts on a competitive basis from public and private sector use cases of "Blockchain and other Distributed Ledger Technologies." Public sector projects on the European Blockchain Services Infrastructure will also be considered among the applicants. Members of the sandbox will receive confidential legal advice and regulatory guidance while regulators will have the opportunity to acquaint themselves with new blockchain technology. Companies should be based in the European Economic Area (EEA), but companies operating in consortium with those outside of the EEA are eligible as long as the beneficiary is an EEA-based company. Projects selected will receive a written legal assessment and two virtual meetings with participating regulators. A similar sandbox program was proposed in US Representative Patrick McHenry's Financial Services Innovation bill.
See Also: siliconerepublic

Photo by Guillaume Périgois on Unsplash

3. Norway Seizes Record $5.8 Million Of Crypto Stolen By North Korea Crypto Raiders

Norway Recovers Loot From North Korean Crypto Raiders

Norwegian police have seized a record $5.8m worth of cryptocurrency stolen by North Korean hackers last year from a blockchain project connected to the crypto-based game Axie Infinity. The heist at issue was linked to the North Korean hacking group named "Lazarus." Meanwhile, US-based blockchain analytics firm, Chainalysis, called 2022 the worst year on record for cryptocurrency heists, with hackers stealing as much as $3.8bn, led by North Korean hackers. Norway's national economic crime unit, Okokrim, which seized the crypto, stated that it worked with the FBI's crypto-tracking specialists.

Photo by Mikita Karasiou on Unsplash

4. Tornado Cash Developer Alexey Pertsev Denied Bail

Justice Delayed is Justice Denied?

A Dutch court has ruled Alexey Pertsev, a developer of the privacy tool Tornado Cash, will remain in custody until his next hearing in April. Pertsev was arrested in August of last year after the United States Treasury Department's Office of Foreign Assets Control (OFAC) alleged the privacy tool had significantly aided North Korea-based hackers in laundering stolen digital assets. In denying bail, the court ruled Pertsev poses a high flight risk or could interfere with investigations were he freed. Dutch prosecutors have alleged Tornado Cash placed almost 75% of all crime-related crypto on the Ethereum blockchain.

“We had the opportunity to explain the basis for Tornado Cash and why it is not money laundering. It is our opinion that the lack of knowledge is what’s keeping him here. Of course, I’m disappointed that Pertsev won’t be released on bail. He will fight until the end to show the importance of decentralized options, software, and open-source code,”

- Keith Cheng, Attorney for Mr. Pertsev

Photo by Wesley Tingey on Unsplash

5. Wyoming Lawmakers Pass Bill to Protect Private Keys

Lawmakers in Wyoming passed a bill prohibiting anyone from being forced to disclose their digital asset private keys, except in specific circumstances when a public key is unavailable or is unable to disclose details of the digital asset, digital identity, or other interest or right. However, the new law will not bar one from being compelled “to produce, sell, transfer, convey or disclose a digital asset, digital identity or other interest or right” that a private key could provide access to. Additionally, the bill doesn’t prevent one from being compelled to “disclose information about the digital asset, digital identity or other interest or right.”

The new law is set to go into effect July 1 if approved by Wyoming Governor Mark Gordon. This legislation has been in the works since September 2019 and is a continuation of Wyoming's push to be a crypto-friendly state. The bill passed 31-0 in the Senate and 41-13 in the House of Representatives.

“No person shall be compelled to produce a private key or make a private key known to any other person in any civil, criminal, administrative, legislative or other proceedings in this state that relates to a digital asset, digital identity or other interest or right to which the private key provides access unless a public key is unavailable or unable to disclose the requisite information with respect to the digital asset, digital identity or other or right.”

- Wyoming Bill HB0086.

See Also: Text of WY Bill; Crypto.news

Photo by Cora Leach on Unsplash

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Bird Watching

Tweet, Tweet, Tweet!

1. Jason Schwart’z article on taxation of crypto.

CryptoTaxGuy.ETH ⌐◨-◨ 🦇🔊 @CryptoTaxGuyETH

My latest article discusses how last year's major US crypto enforcement might inform the IRS's approach. Just because you're paranoid doesn't mean they aren't after you.

Fried Frank @friedfrank

Partner Jason Schwartz (@CryptoTaxGuyETH) authored an article for Fried Frank Regulatory Intelligence exploring how non-tax US regulators’ approach to #digitalassets might inform the IRS’s own views. Read more here: https://t.co/Ituv1xr5Vj https://t.co/tTn6GosPWq

2. SEC settles on security claim in LBRY case.

Erik Voorhees @ErikVoorhees

This is pretty big... Digital asset itself in secondary sale is not a security, even when original sale constituted a security. "Deaton persuaded the judge that LBC’s secondary market transactions were not securities." cointelegraph.com/news/sec-settl… via @Cointelegraph

cointelegraph.comSEC settles on security claim in LBRY case; community calls it a big win for cryptoThe crypto community celebrated victory in the LBRY case that deemed the selling of LBC tokens in the secondary market doesn’t constitute a security.

3. Blockchain Association filed an amicus brief in SEC v. Wahi.

Jake Chervinsky @jchervinsky

I'm proud of the brief that @BlockchainAssn filed in SEC v. Wahi today, calling out the SEC for its improper practice of regulation by enforcement. Thanks to BA's chief in-house litigator @mtcoppel, and our counsel @ohaiom and team, for fighting to hold the SEC accountable here.

Marisa Tashman Coppel @mtcoppel

1/ Today, the @BlockchainAssn filed an amicus brief in SEC v. Wahi, an enforcement action indicating a new pattern by the agency - regulation by enforcement against third parties, who have no meaningful opportunity to defend themselves. https://t.co/oppo3sKWg0 https://t.co/4FLLtCibv2

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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

• Legal Principles of Web3 Technologies

• Crypto regulations impossible “without an act of Congress”: Blockchain Association

• Solving Failures in NFT Licensing

U.S. - Federal

• CFTC Charges California-based Vista Network and Its CEO with Fraud and Misappropriation of User Cryptocurrency

• Sam Bankman-Fried Skating on Thin Ice as Judge Threatens Jail

• New Congressional Subcommittees Foreshadow Pending Digital Asset Legislation

U.S. - State Law

• **Crypto Wallet Owner Sues In Chancery To Undo NFT Theft

• El Salvador Is Planning a 'Bitcoin Embassy' in Texas After Losing Tens of Millions on Crypto

• US regulator orders halt to minting Binance-branded tokens

International

• Australia's Crypto Service New Licensing Requirements

• UK provides legal clarity on issuance of digital securities via blockchain

• EU regulator tells banks to impose Bitcoin limits before they become law

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

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Podcasts, Videos, and Blogs

The brightest voices & sharpest pens:

1. Law of code - Jacob Robinson sits down with Michael Selig, former employee at the CFTC and current counsel at law firm Willkie Farr & Gallagher. Michael shares advice on dealing with regulators and the application of securities laws to crypto.

2. Bankless - The Bankless team discusses all the crypto news that took place in the third week of February including Bitcoin halving timelines, new SEC rules on crypto custody and SBF.

3. Bloomberg Crypto - Stacy-Marie Ishmael, Bloomberg’s managing editor for crypto, is joined by Bloomberg reporter Emily Nicole. The pair discuss stablecoin regulation and how Binance can be impacted by recent regulatory actions.

4. Unchained - ”The Chopping Block!” team is back and they’re joined by Polygon’s Chief Legal Officer Marc Boiron for a deep-dive into the SEC’s recent enforcement ramp-up.

5. DaoTalk - DAO Talk looks at the beginnings of the on-chain renaissance, and all the hottest on-chain proposals.

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Closing Statements

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Quote of the Week:

Ethics is knowing the difference between what you have a right to do and what is right to do.

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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.