Reports of FTX Group’s demise has been inescapable since news first broke of potential insolvency and misuse of customer funds. This blog post provides some background on the situation as well as some thoughts on what is likely to come next. Please see our blog post here on the enforcement storm that is
The Storm Is Here
With the collapse of FTX and Alameda so close on the heels of Celsius, one thing is clear – the regulatory and enforcement storm so many anticipated coming to crypto is now here. Unfortunately, regardless of what the facts surrounding FTX and Alameda ultimately turn out to be, incidents like this serve to reinforce the
SEC’s Insider Trading Complaint Places the Entire DeFi and Crypto Industry in a Bind
On July 21, 2022, the SEC filed insider trading charges in federal court against a former Coinbase product manager and two others for trading ahead of multiple announcements that certain crypto assets would be made available for trading on the platform.[1] The SEC alleged that the defendants traded ahead of listing announcements for at
FDIC and OCC Join President’s Working Group on Financial Markets in Calling for New Stablecoin Legislation, Oversight
On November 1, 2021, the President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint report that, among other things, calls on Congress to adopt legislation to enable federal oversight of stablecoin issuers, custodial wallet providers that hold stablecoins,
Build Back Better ‘Wash Sales’ Legislation Would Impact Currency, Commodity, Options, and Digital Asset Markets
The House Rules Committee recently released the latest version of HR 5376, the Build Back Better Act. This proposal would amend Internal Revenue Code section 1091 (“loss from wash sales of stock or securities”) to apply to a much broader range of assets, including foreign currency, commodities, and digital assets, in addition to stocks and
OFAC Issues Compliance Guidance for the Virtual Currency Industry
On October 15, 2021, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued anticipated Sanctions Compliance Guidance for the Virtual Currency Industry and updated two related Frequently Asked Questions (FAQs 559 and 646). OFAC has published industry-specific guidance for only a handful of other industries in the past two decades; the new guidance demonstrates the agency’s increasing focus on the virtual currency (VC) sector. It also clarifies US sanctions compliance practices in ways that could lay a foundation for future OFAC enforcement actions.
OFAC’s guidance was announced as part of broader US government enforcement priorities to combat ransomware, money laundering, and other financial crimes in the virtual currency sector, as noted in the Department of Justice’s recent announcement of a National Cryptocurrency Enforcement Team. The OFAC guidance was published in tandem with a Financial Crimes Enforcement Network (FinCEN) analysis of ransomware trends in suspicious activity reporting, but the guidance is directed at the VC industry in general and is not specific to ransomware. A ransomware actor who demands VC may or may not be a target of OFAC sanctions, and sanctioned actors may engage in a wide variety of VC transactions that do not involve ransomware. The recommended compliance practices in OFAC’s new guidance are focused on the full range of sanctions risks that arise from virtual currencies.
The guidance maintains OFAC’s longstanding recommendation for risk-based compliance programs, and builds on the May 2019 Framework for OFAC Compliance Commitments. The guidance also provides notable examples of compliance controls that are tailored to the unique risk and control environments of the VC sector.
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OFAC Announces Second Enforcement Action Targeting a Digital Asset Company
On February 18, 2021, the US Department of the Treasury’s Office of Foreign Assets control (OFAC) announced a $507,375 settlement with BitPay, Inc. (BitPay). This civil settlement resolved apparent violations of multiple sanctions programs related to digital currency transactions, and is the second OFAC enforcement case brought against a business in the blockchain industry. This
OFAC Announces First Ever Enforcement Action Targeting a Digital Asset Company
On December 30, 2020, the US Department of the Treasury’s Office of Foreign Assets control (OFAC) announced a $98,380 settlement with BitGo, Inc. (BitGo). This civil settlement, regarding apparent violations of multiple sanctions programs related to digital currency transactions, is the first published OFAC enforcement action against a business in the blockchain industry.
BitGo, based in Palo Alto, California, is an “institutional digital asset custody, trading, and finance” company. The apparent sanctions violations relate to 183 instances in which BitGo failed to prevent individuals and/or entities located in Crimea, Cuba, Iran, Sudan, and Syria from using its non-custodial secure digital wallet management service. All of these jurisdictions were subject to comprehensive embargoes under OFAC regulations during at least part of the time that the transactions occurred. OFAC stated that BitGo had reason to know that users in these comprehensively sanctioned jurisdictions were using its services through Internet Protocol (IP) address data collected for security purposes, and allegedly had failed to implement controls to prevent users in such jurisdictions from accessing its services. (The violations and settlement did not involve enterprise or custodial services provided by BitGo Trust Company, Inc., an affiliate of BitGo, Inc.)
According to OFAC, between approximately March 10, 2015, and December 11, 2019, BitGo processed 183 digital currency transactions totaling $9,127.79 using its hot wallet management service for users in the comprehensively sanctioned jurisdictions who had signed up for hot wallet accounts.
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FinCEN Invites Comments on Proposed Amendments to Funds Recordkeeping and Transfer Rules
On October 23, 2020, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve Board published a joint notice of proposed rulemaking inviting comments on proposed modifications to regulations implementing the Bank Secrecy Act (BSA). First, the agencies propose to lower the monetary threshold contained in the so-called “recordkeeping rule” and “travel rule” pursuant to which financial institutions are required to collect and retain information on certain funds transfers and transmittals of funds and provide such information to other financial institutions in the payment chain. Second, the proposed rule would amend the definition of “money,” as used in those rules, to clarify that it includes convertible virtual currency (CVC) and digital assets with legal tender status.
Under the current version of the recordkeeping rule, banks and nonbank financial institutions are required to collect and retain information that relates to funds transfers and transmittals of funds of $3,000 or more. The travel rule then requires banks and nonbank financial institutions to send collected information on funds transfers and transmittals of funds to other banks or nonbank financial institutions participating in the transfer or transmittal. The purpose of retaining an information trail in this manner is to help prevent money laundering and other financial crimes.
FinCEN Seeks Comments on Effectiveness of AML Programs, Presenting Rare Opportunity for FinTech and Blockchain Companies
On September 16, 2020, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published an advanced notice of proposed rulemaking (ANPRM) seeking comments on regulatory changes to enhance the effectiveness of anti-money laundering compliance programs of regulated financial institutions. As described in FinCEN’s press release, the ANPRM presents an opportunity for financial institutions to provide comments on “a wide range of questions pertaining to potential regulatory amendments under the Bank Secrecy Act (BSA).” While FinCEN has published a number of rules in recent years through formal notice and comment procedures, the rules have been fairly targeted to issues such as customer due diligence. FinCEN has also issued a number of guidance documents, including guidance applying FinCEN’s rules to certain entities in the blockchain industry, but did not accept public comments from industry at the time. Therefore, the publication of the ANPRM presents a relatively rare opportunity for regulated entities to be heard on a range of AML programmatic and compliance issues.
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