Category Archives: Legal

Coinbase Warned By SEC Of Potential Securities Charges

Legal, , ,

The Securities and Exchange Commission issued crypto exchange Coinbase a Wells notice, warning the company that it identified potential violations of U.S. securities law, CNBC reported.

According to CNBC, Coinbase shares fell nearly 12% in extended trading after the news broke on Wednesday, adding to an 8.16% drop during regular trading hours.

“Based on discussions with the Staff, the Company believes these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “The potential civil action may seek injunctive relief, disgorgement, and civil penalties.”

CNBC also reported that the SEC has ramped up its enforcement of the crypto industry, bearing down on companies and projects that the regulator alleges were hawking unregistered securities. Reports first surfaced of an SEC probe into Coinbase in mid-2022.

Coinbase posted some information on its website. Here is from the TL:DR (too long, didn’t read) section:

“Today, the SEC gave Coinbase a “Wells notice” regarding an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation. We are prepared for this disappointing development. We are confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets. Rest assured, Coinbase products and services continue to operate as usual – today’s news does not require any changes to our current products or services.”

The Wall Street Journal reported that the Securities and Exchange Commission has told Coinbase Global Inc. that it plans to take enforcement action against the company, escalating its crackdown on digital-currency firms by targeting the biggest U.S. crypto exchange, Coinbase said Wednesday.

According to the Wall Street Journal, Coinbase said it received a letter from the SEC known as a Wells notice, in which regulators say they believe companies or individuals violated investor-protection laws. The notices aren’t final because the agency’s commissioners must authorize any lawsuits or enforcement settlements.

By warning Coinbase about a potential lawsuit, The Wall Street Journal reported, the SEC is setting its sights on one of the biggest names in crypto, a publicly traded company that has helped bring tens of millions of customers into the digital-currency markets since it was founded 2012.

A lawsuit would represent SEC Chair Gary Gensler’s biggest step to assert his agency’s jurisdiction over crypto. If Coinbase prevailed in a lawsuit, it would embolden the crypto industry’s claims that Mr. Gensler has overreached and that virtual currencies shouldn’t be subject to U.S. securities laws.

TechCrunch reported that in response to receiving a Wells notice from the FTC, Coinbase’s CEO Brian Armstrong struck a confident posture, tweeting that his company is “right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court.”

In a separate tweet, Armstrong wrote: “Two years ago the SEC reviewed our business in detail and approved Coinbase to go public. Our S1 clearly explained our asset listing process and included 57 references to staking. Coinbase runs a rigorous asset review process and has rejected more than 90% of assets that have applied to be listed on the platform.”

It is unclear to me exactly how this particular situation will end up. I suppose there will eventually be an announcement if something changes.

California Court Affirms Right To Treat Uber And Lyft Drivers as Contractors

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Uber Technologies Inc., Lyft Inc. and other companies scored a victory with a California court ruling that preserves their independent contractor model in the state and could boost their efforts to maintain that model elsewhere, The Wall Street Journal reported.

A state appeals court reversed a lower-court ruling that found a California ballot measure known as Proposition 22 illegal. Proposition 22, which passed in November 2020, allowed these companies to continue to treat their drivers as independent contractors.

According to the Wall Street Journal, Uber and others are in a global tug of war with regulators over whether and how to grant more benefits such as paid sick leave and health insurance to workers in the so-called gig economy, where apps distribute individual tasks to a poll of people whom companies generally regard as independent contractors.

California sued Uber and Lyft in 2020, saying they were in violation of a new state law that sought to reclassify their drivers as employees. A legal battle ensued, culminating in Proposition 22, in which Uber, Lyft, DoorDash Inc. and Instacart Inc. asked state voters to exempt them from the law. The companies spent a record amount of money for a California ballot measure, about $200 million.

The New York Times reported that the decision by three appeals court judges overturned the ruling late last year by a California Superior Court judge, who said the Proposition was “unenforceable.” It was a victory for companies like Uber, which use gig drivers to transport passengers and to deliver food, but does not pay costs that an employer would have to. Those costs can include drivers’ unemployment insurance, health insurance, and business expenses.

According to The New York Times, the appeals court ruling was not the final say. The Service Employees International Union, which, along with several drivers, filed a lawsuit challenging Proposition 22 in early 2021, is expected to appeal the decision to the California Supreme Court, which would then have several months to decide whether to hear the case.

The opponents of the proposition argued that the ballot measure was unconstitutional under several grounds. It set limits on the State Legislature’s ability to oversee workers’ compensation for gig drivers. It included a rule restricting them from collective bargaining that critics said was unrelated to the rest of the measure, and it set a seven-eights majority vote of the Legislature as a bar for passing amendments to the measure related to collective bargaining – a requirement that was considered nearly impossible to achieve.

CNBC reported that Proposition 22 created a set of criteria which determined whether ride-share drivers were employees or independent contractors. In practice, it exempted Uber and similar companies from following certain minimum wage, overtime, or workers compensation laws for hundreds of thousands of Californian rideshare drivers.

Instead, according to CNBC, the ballot measure required companies to provide compensation and healthcare “subsidies” based on “engaged” driving time, as well as the benefits, including safety training as “sexual harassment training.”

To me it sounds like Uber, Lyft, DoorDash, and Instacart are desperately trying to suppress drivers ability to form a union, (also known as “collective bargaining”). Unionization would require the large companies to provide drivers with the same types of benefits that other workers, who have unionized, would be expected to receive. It also make it harder for the big companies to fire them.

New York Attorney General Cracks Down On Unregistered Crypto Platforms

Legal, ,

New York Attorney General Letitia James sues KuCoin for allowing investors in New York to buy and sell Crypto without registering with the state. This lawsuit marks James’ eight action to rein in shadowy cryptocurrency platforms. From the press release:

New York Attorney General Letitia James continued her efforts to crack down on unregistered cryptocurrency platforms by filing a lawsuit against KuCoin for failing to register as a securities and commodities broker-dealer and falsely representing itself as an exchange.

The Office of the Attorney General (OAG) was able to buy and sell cryptocurrencies on KuCoin in New York even though the company was not registered in the state. Through this enforcement action, Attorney General James seeks to stop KuCoin from operating in New York and to block access to its website until it complies with the law. Today’s action is the latest in Attorney General James’ efforts to rein in cryptocurrency platforms.

“One by one my office is taking action against cryptocurrency companies that are brazenly disregarding our laws and putting investors at risk,” said Attorney General James. “Today’s action is the latest in our efforts to rein in shadowy cryptocurrency companies and bring order to the industry. All New Yorkers and all companies operating in New York have to follow our state’s laws and regulations. KuCoin operated in New York without registration and that is why we are taking strong action to hold them accountable and protect investors.”

KuCoin is a virtual currency trading platform that allows investors to buy and sell cryptocurrency through its website and app. On its platform KuCoin investors can buy and sell popular currencies, including ETH, LUNA and TerraUSD (UST), which are securities and commodities. This action is one of the first times a regulator is claiming in court that ETH, one of the largest cryptocurrencies available, is a security.

The petition argues that ETH, just like LUNA and UST, is a speculative asses that relies on the efforts of third-party developers in order to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST.

KuCoin also sells unregistered securities in the form of KuCoin Earn, its lending and staking product. New York law requires securities and commodities brokers to register with the state, which KuCoin failed to do. The OAG was able to create an account with KuCoin using a computer with a New York based IP address and buy and sell digital tokens, for which KuCoin charged a fee. The OAG was also able to deposit digital tokens into the KuCoin Earn product, for which KuCoin also charged a fee…

…Through her lawsuit, Attorney General James seeks a court order that stops KuCoin from misrepresenting that it is an exchange, prevents the company from operating in New York, and directs KuCoin to implement geo-blocking based on IP addresses and GPS location prevent KuCoin’s mobile app, website, and services from New York…

Reuters reported that cryptocurrency token Ether fell to its lowest in two months on Friday after the New York attorney general labeled it a security, bracketing it with assets such stocks and bonds and fueling fears of a wider regulator crackdown.

According to Reuters, KuCoin is one of the biggest cryptocurrency platforms in the United States. The world’s second-biggest cryptocurrency token was trading around $1,390, its lowest since January 10.

In my opinion, KuCoin could have prevented being sued by New York Attorney General James. Unfortunately, KuCoin apparently believed it could get away with selling cryptocurrency in New York without registering to do so. My best guess is that KuCoin will – eventually – face some penalties for making that decision.

Supreme Court To Hear Two Cases Regarding Section 230

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The Electronic Frontier Foundation (EFF) posted information titled: “Section 230 is On Trial. Here’s What You Need to Know”. The EFF wrote about two court cases that involve Section 230.

According to EFF, the Supreme Court next week will hear two cases – Gonzalez v. Google on Tuesday, Feb. 21, and Twitter v. Taamneh on Wednesday, Feb. 22 – that could dramatically affect users’ speech rights online.

Nearly everyone who speaks online relies on Section 230, a 1996 law that promotes free speech online, the EFF wrote. Because users rely on online intermediaries as vehicles for their speech, they can communicate to large audiences without needing financial resources or technical know-how to distribute their own speech. Section 230 plays a critical role in enabling online by speech by generally ensuring that those intermediaries are not legally responsible for what is said by others.

The EFF pointed out that Section 230’s reach is broad: it protects users as well as small blogs and websites, giants like Twitter and Google, and any other service that provides a forum for others to express themselves online.

Courts have repeatedly ruled that Section 230 bars lawsuits against users and services for sharing, or hosting content created by others, whether by forwarding email, hosting online reviews, or reposting photos of videos that others find objectionable. Section 230 also protects the curation of online speech, giving intermediaries the legal breathing room to decide what type of user expression they will host and to take steps to moderate content as they see fit.

Vox reported that in 2015, individuals affiliated with the terrorist group ISIS conducted a wave of violence and mass murder in Paris – killing 129 people. One of them was Nohemi Gonzalez, a 23-year-old American student who died after ISIS assailants opened fire on the café where she and her friends were eating dinner.

Vox also reported that on New Year’s Day 2017, a gunman opened fire inside a nightclub in Istanbul, killing 39 people – including a Jordanian national named Nawras Alassaf who had several American relatives. ISIS also claimed responsibility for this act of mass murder.

According to Vox, Gonzalez’s and Alassaf’s families brought federal lawsuits pinning the blame for these attacks on some very unlikely defendants. In Gonzalez vs Google, Gonzalez’s survivors claim that tech giant Google should compensate them for the loss of their loved one. In a separate suit, Twitter v. Taamneh, Alassaf’s relatives make similar claims against Google, Twitter, and Facebook.

Vox pointed out that the thrust of both of the lawsuits is that websites like Twitter, Facebook, or Google-owned YouTube are legally responsible for the two ISIS killings because ISIS was able to post recruitment videos and other content on these websites that were not immediately taken down.

In my opinion, there is no way to know for certain how the Supreme Court will decide on these cases. We are likely to have to wait a while before their decisions are posted publicly.

SEC Charges Terraform And CEO Do Kwon With Defrauding Investors

Legal,

The U.S. Securities And Exchange Commission (SEC) posted a press release titled: “SEC Charges Terraform and CEO Do Kwan with Defrauding Investors in Crypto Schemes”. From the press release (which was posted on February 16, 2023):

The Securities and Exchange Commission today charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stable coin and the crypto asset securities.

According to the SEC’s complaint, from April 2018 until the scheme’s collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an intra-connected suite of crypto asset securities, many in unregistered transactions. These included “mAssets,” security-based swaps designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA.

The complaint further alleges that Terraform and Kwon offered and sold investors other means to invest in their crypto empire, including the crypto asset security tokens MIR – or “mirror” tokens – and LUNA itself.

The SEC’s complaint alleges that Terraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value. For example, they touted and marketed UST as a “yield-bearing” stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol.

The SEC’s complaint also alleges that, while marketing the LUNA token, Terraform and Kwon repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA. Meanwhile, Terraform and Kwon also allegedly misled investors of the stability of UST. In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero.

The Wall Street Journal reported that prosecutors in South Korea have obtained an arrest warrant for Mr. Kwon and a so-called red notice for him from global law-enforcement agency Interpol, effectively putting police agencies worldwide on the lookout for him.

According to The Wall Street Journal, Mr. Kwon is the developer behind two cryptocurrencies that crashed last year, wiping out the savings of investors who put their money there. Mr. Kwon appears to be in hiding.

CNBC reported that Kwon’s current whereabout are unknown, but the Terra co-founder was recently believed to be in Serbia, according to South Korean intelligence. Kwon is wanted in South Korea for his involvement in the collapse of Terra USD.

In my opinion, it would be a good idea for investors to take a closer look at cryptocurrency before they spend a bunch of money on it. In addition, people who create cryptocurrency should be a lot more careful about how they pitch their crypto to investors.

U.S. Lawmakers Unveil Bill To Ban TikTok In The U.S.

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A new bill from a bipartisan group of lawmakers, if passed, would ban TikTok in the U.S. after years of broad concern across the Trump and Biden administrations about potential Chinese government influence on the company, CNBC reported.

TikTok, owned by Chinese company ByteDance, has raised fears in the U.S. that Chinese government officials could gain access to U.S. user data under Chinese law that could compel the company to hand over information, CNBC reported. TikTok has insisted U.S. user data is safely stored outside of China, which it says would keep it out of reach of government officials.

According to CNBC, the Committee on Foreign Investment in the U.S. is in talks with the company about how to resolve some of the data concerns, though a solution has reportedly been delayed. FBI Director Christopher Wray testified before Congress that he’s “extremely concerned” about the Chinese government’s potential influence through TikTok on U.S. users.

Senator Marco Rubio (Republican – Florida) introduced bipartisan legislation to ban TikTok from operating in the United States. U.S. Representatives Mike Gallagher (Republican – Wisconsin) and Raja Krishnamoorthi (Democrat – Illinois) included companion legislation in the U.S. House of Representatives.

The legislation is titled: “Averting the National Threat of Internet Surveillance, Oppressive Censorship and Influence, and Algorithmic Learning by the Chinese Communist Party Act (ANTI-SOCIAL CCP Act)”. The description of the legislation states that it would protect Americans by blocking and prohibiting all transactions from any social media company in, or under the influence of, China, Russia, and several other foreign countries of concern.

ArsTechnica reported that the ANTI-SOCIAL CCP Act is designed to block and prohibit all transactions by social media companies controlled or influenced by “countries of concern.” The legislation specifically names TikTok and owner ByteDance as existing as national security threats.

According to ArsTechnica, if the legislation is passed, its provisions would also extend to any social media platform controlled by other U.S. foreign adversaries, including Russia, Iran, North Korea, Cuba, and Venezuela.

Engadget reported that while the sponsors of the bill characterize the measure as bipartisan, it’s not clear the call for a TikTok ban has enough support to clinch the necessary votes and reach Biden’s desk. To some degree, Engadget wrote, the ANTI-SOCIAL CPP Act is more a signal of intent than a practical way to block TikTok.

There is no way to know, for certain, whether or not this bill will become law. Personally, I think it is a good idea to prevent lawmakers from having TikTok on their devices, especially if there are valid concerns about TikTok collecting data through its app.

New York Governor Signs Partial Cryptocurrency Mining Ban

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New York will instate a two-year moratorium on new fossil fuel-powered cryptocurrency mining operations as the state works to balance its economic development and climate goals, Politico reported.

According to Politico, Governor Kathy Hochul on Tuesday signed the controversial measure into law that would create the first-in-the-nation temporary pause on new permits for fossil fuel power plants that house proof-of-work cryptocurrency mining, which is a process used in the transaction of digital money. Hochul, who had punted on the issues for months after the Legislature passed the bill in June, was elected to a full term Nov. 8.

Upstate New York has become attractive to companies that “mine” digital currencies, including Bitcoin, because of the availability of former power plants and manufacturing sites with unused electrical infrastructure, Politico reported. But, Governor Hochul said that the moratorium is an important step to avoid increased emissions from the industry restarting old power plants as she guides the state toward ambitious climate goals.

Politico also reported that the new law will trigger a study by state Department of Environmental Conservation to study the impacts of the cryptocurrency mining industry on the environment.

The bill is narrow in scope, Politico reported, despite its groundbreaking steps. The state’s roughly dozen operations that draw power from the grid would not be affected, nor would individuals purchasing or mining for cryptocurrency or other blockchain activities. And the moratorium on new or renewed permits doesn’t apply if the company has already filed paperwork to operate in New York.

The Wall Street Journal reported that New York has become the first state to restrict cryptocurrency mining after Gov. Kathy Hochul on Tuesday signed a two-year moratorium, calling the move necessary to help protect the environment.

According to The Wall Street Journal, sustainability groups generally object to cryptocurrency mining because of its intensive energy use and resulting environmental impacts. Business groups – including cryptocurrency companies – lobbied Ms.Hochul to veto the bill, which lawmakers approved in June. The groups argued it would have an effect on the industry’s growth in the state, and said the power plants are also a source of jobs in upstate communities.

The Wall Street Journal also reported that more than 160 crypto-related bills are up for consideration this year in 37 states, according to the National Conference of State Legislatures.

The Hill reported that the restrictions came after the collapse of cryptocurrency exchange FTX, which has led to growing scrutiny of the industry.

According to The Hill, the New York law takes aim at the technology’s environmental impact, establishing a two-year moratorium on permits for fossil fuel plants used for cryptocurrency mining that requires “proof-of-work authentication.”

The law has been described as a first-of-its kind. To me, this indicates that other state governors could potentially sign a similar bill (assuming their state legislature creates one that is similar to the New York law). I suspect that the FTX situation could influence legislation that would move to prevent that sort of thing from happening again.