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
OFAC Designates Tornado Cash in First Action Against a Decentralized Platform
On August 8, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced the imposition of sanctions on the decentralized digital asset mixer Tornado Cash. The action marks the first time OFAC has targeted an on-chain decentralized protocol. To date, OFAC has not issued any guidance specific to decentralized finance (DeFi) as part of its broader sanctions guidance for the “virtual currency” industry, but the Tornado Cash action lays down an important marker and makes clear that OFAC will target projects or protocols engaged in illicit activity regardless of their centralized or decentralized status. (Our prior blog post on OFAC’s general virtual currency guidance is available here).
According to OFAC, Tornado Cash was “used to launder more than $7 billion worth of virtual currency since its creation in 2019,” including over $455 million stolen by the Lazarus Group, a North Korean-backed hacking group that was previously targeted by OFAC sanctions. In announcing the action, Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson explained, “Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks.”
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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
Securities Law Implications of Lummis-Gillibrand Bill
On June 7, 2022, Senator Cynthia Lummis (R-WY) and Senator Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act (RFIA), which seeks to create a complete regulatory framework for digital assets. This is the second in a series of blogs on this groundbreaking bipartisan legislation. Click here for a general overview of the bill and a summary of the tax provisions included in the RFIA.
The RFIA attempts to create a clear standard for determining which digital assets are securities and which are commodities, and draws clear jurisdictional lines between the SEC and CFTC. The SEC would retain jurisdiction over the sale of investment contracts, while the CFTC would gain jurisdiction over the digital asset spot markets. CFTC Chairman Rostin Benham quickly declared his support of the proposed division of labor, while SEC Chairman Gary Gensler has expressed concerns that the legislation may undermine existing market regulations for stock exchanges, mutual funds, and public companies.[1] The policy debate over which of the two agencies is best situated to regulate the crypto markets will likely grow louder in the wake of this proposal.
With respect to securities laws, the RFIA seeks to solve the long-standing problem of the application of the Howey test to digital assets: how long does the security label attach to a digital asset that was initially sold as an investment contract? Application of the full panoply of securities laws to every transaction in a digital asset can stifle the growth of a network and create headaches for entities seeking to comply with complex rules that don’t always fit the underlying conduct.
This update provides a summary of the securities law provisions and obligations placed upon the SEC in the RFIA.
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