Category Archives: Legal

U.S. Justice Department Announced Digital Asset Coordinator Network

Legal

The U.S. Department of Justice announced significant actions regarding digital assets, including the public release of its report, pursuant to the President’s March 9 Executive Order on Ensuring Responsible Development of Digital Assets, on The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets; and the establishment of the nationwide Digital Asset Coordinator (DAC) Network, in furtherance of the department’s efforts to combat the growing threat posed by the illicit use of digital assets to the American public.

“As digital assets play a growing role in our global financial system, we must work in tandem with departments and agencies across government to prevent and disrupt the exploration of these technologies to facilitate crime and undermine our national security,” said Attorney General Merrick B. Garland. “The efforts announced today reflect the commitment of the Justice Department and our law enforcement and regulatory partners to advancing the responsible development of digital assets, protecting the public from criminal actors, and meeting the unique challenges these technologies pose.”

The White House released a FACT SHEET regarding cryptocurrency. From the Fact Sheet:

…Digital assets pose meaningful risks for consumers, investors, and businesses. Prices of this assets can be highly volatile: the current global market capitalization cryptocurrencies is approximately one-third of its November 2021 peak. Still, sellers mislead consumers about digital assets features and expected returns, and non-compliance with applicable laws and regulations remains widespread. One study found that almost a quarter of digital coin offerings had disclosure or transparency problems – like plagiarized documents or false promises of guaranteed returns. Outright fraud, scams, and theft in digital asset markets are on the rise: according to FBI statistics, reported monetary losses from digital asset scams were nearly 600 percent higher than in 2021 than the year before…

The Wall Street Journal reported that the Justice Department has tapped more than 150 federal prosecutors across the country to bolster law enforcement’s efforts to combat the rise in crime linked to the use of cryptocurrencies, such as bitcoin, officials said.

According to The Wall Street Journal, The Digital Asset Coordinators Network is intended to designate subject-matter experts in U.S. attorneys’ offices on the complex and technical and legal complications posed by cryptocurrency cases, the officials said.

Regulators, lawmakers and law-enforcement officials have said some cryptocurrency platforms afford users anonymity that helps them to launder criminal proceeds, finance terrorism, or engage in public corruption. Sanctions and other tools have been deployed with more frequency in recent months, but criminal prosecutors remain a key part of the administration’s strategy to police against bad actors, The Wall Street Journal reported.

Personally, I can see why it is necessary for the federal government to crack down on cryptocurrency, especially since it has been used in frauds, scams, and theft. It will be interesting to see how effective The Digital Asset Coordinators Network will be on cracking down on cryptocurrency.

FDIC Sent Cease and Desist Letters to Crypto Companies

Legal, ,

The Federal Deposit Insurance Corporation (FDIC) issued letters demanding five companies and their officers, directors, and employees cease and desist from making false and misleading statements about FDIC deposit insurance and take immediate corrective action to address these false or misleading claims.

Here is more information from the FDIC’s post:

Based upon evidence collected by the FDIC, each of these companies made false representations – including on their websites and social media accounts – stating or suggesting that certain crypto-related products are FDIC-insured or the stocks held in brokerage accounts are FDIC-insurance. In one case, a company offering a so-called cryptocurrency also registered a domain name that suggests affiliation with or endorsement by the FDIC. These representations are false and misleading.

The Federal Deposit Insurance Act (FDI Act) prohibits any person from representing or implying that an uninsured product is FDIC-issued or from knowingly misrepresenting the extent and manner of deposit insurance. The FDI Act further prohibits companies from implying that their products are FDIC-insured by using “FDIC” in the company’s name, advertisements, or other documents. The FDIC is authorized by the FDI Act to enforce this prohibition against any person.

The FDIC sent cease and desist letters to the following crypto-companies: Cryptonews.com, Cryptosec.info, SmartAsset.com, FTX US, and FDICCrypto.com.

The FDIC provided examples of the misinformation posted by Cryptonews:

“Coinbase is one of a few exchanges which is actually regulated and insured by FDIC”

“Coinbase is FDIC insured exchange, meaning that all the funds are kept online (remaining 2%) are protected against theft.”

“eToro’s US users will be glad to know that their cash funds up to USD 250,000 are FDIC-insured, meaning you are guaranteed to get your funds back even in the event of eToro’s failure.”

“Gemini is described as “one of the biggest regulated crypto exchanges with the FDIC insurance for USD deposits, a user-friendly platform, and zero publicly known large scale hacks”

The FDIC also wrote the following in the letter to SmartAsset:

“Among other false and misleading statements, SmartAsset published an article on its website entitled, “List of FDIC-Insured Crypto Exchanges”… “This article includes, among other statements, the claim that “[w]ith those [purportedly insured] exchanges, if you lose your money on deposit the FDIC will reimburse those losses up to the program’s cap.” The article also includes a list of cryptocurrency exchanges that it claims offer FDIC insurance.”

The FDIC also wrote the following in the letter to FDICCrypto.com:

“The FDIC demand that you cease use of the domain name www.fdiccrypto.com, as well as any similar website domain names, immediately. This demand applies to the use of the website with the domain name www.fdiccrypto.com as well as advertising or consumer-facing documenting referencing fdiccrypto. The FDIC further demands that, within fifteen (15) business days of receipt of this letter, you provide written confirmation to the undersigned that you have complied with this demand.”

CNBC reported that in a letter specifically sent to FTX US, the FDIC said it appeared that on July 20, Brett Harrison, the president of FTX.US, published a tweet stating that direct deposits from employers are stored in FDIC-insured accounts in the user’s name.

According to CNBC, Harrison tweeted on Friday that he deleted the post and didn’t mean to indicate that crypto assets stored in FTX are insured by the FDIC, but rather “USD deposits from employers were held at insured banks.”

In my opinion, it is incredibly unwise to make it sound as though the FDIC has endorsed, or will pay back losses of cryptocurrency, when it is abundantly clear that the FDIC wants no part of that. These types of shenanigans are deceitful and potentially harmful to those who engage with disingenuous crypto companies.

Dutch Detain Suspected Developer Of Crypto Mixer Tornado Cash

Legal,

Dutch Authorities said they had arrested a 29-year-old man believed to be a developer for the crypto mixing service Tornado Cash, which the United States put on its sanctions list recently, Reuters reported. According to Reuters, the U.S. sanctions followed allegations that Tornado Cash was helping conceal billions in capital flows, including for North Korean hackers.

The Dutch FIOD posted information on its website that included the following:

“On Wednesday 10 August, the FIOD arrested a 29-year-old man in Amsterdam. He is suspected of involvement in concealing criminal financial flows and facilitating money laundering through the mixing of cryptocurrencies through the decentralized Ethereum mixing service Tornado Cash. Multiple arrests are not ruled out.

“These advanced technologies, such as decentralized organizations that may facilitate in money laundering are receiving extra attention from the FIOD. Also in the cryptocurrency domain, the FIOD stands for a safe financial Netherlands and investigates with effect and impact. Today the suspect is brought before the examining judge.”

In addition, the FIOD stated that FACT (the Financial Cyber Team of the FIOD) started a criminal investigation against Tornado Cash, that is offered on the Internet by means of a decentralized autonomous organization (DAO).

The FOID also wrote:

“… FACT suspects that through Tornado Cash has been used to conceal large-scale criminal money flows, including from (online) thefts of cryptocurrencies (so-called crypto hacks and scams). These included funds stolen through hacks by a group believed to be associated with North Korea. Tornado Cash started in 2019 and according to FACT it has since achieved a turnover rate of at least seven billion dollars. Investigations showed that at least one billion dollars worth of cryptocurrencies of criminal origin passed through the mixer. It is suspected that persons behind this organization have made large-scale profits from these transactions….”

Previous to the FOID’s statement, on August 8, the U.S. Department of the Treasury posted a press release titled: “U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash”.

Here are some key points from the Press Release:

“Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Tornado Cash, which has been used to launder more than $7 billion worth of virtual currency since its creation in 2019. This includes over $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group that was sanctioned by the U.S. in 2019, in the largest known virtual currency heist to date. Tornado Cash was subsequently used to launder more than $96 million of malicious cyber actors’ funds derived from the June 24, 2022 Harmony Bridge Heist, and at least $7.8 million from the August 2. 2022. Today’s action is being taken pursuant to Executive Order (E.O.) 13694, as amended…”

Financial Times reported: The US sees mixing services as money transmitters that must comply with money laundering rules. It’s the second time this year that the US has hit a crypto mixing service for helping North Korean hackers after it imposted sanctions against blender.io in May.

According to Financial Times: Now, all property and interests belonging to Tornado Cash in the US are blocked. All transactions passing through Tornado Cash’s virtual desk are blocked too, if they involve US users or are conducted anywhere in or through the country.

It appears that whomever the Dutch authorities alleged to be involved with Tornado Cash could – potentially – be facing legal problems in not one, but two, countries.

ProtonMail Wins Appeal Over Surveillance Rules

Legal

Geneva-based Proton AG, the company behind ProtonMail and ProtonVPN, has won an appeal regarding its treatment under Swiss law governing telecommunications surveillance, a Swiss Court said Friday, Reuters reported.

On Friday, the Swiss Federal Administrative Court upheld Proton’s appeal against the Swiss Post and Telecommunications Surveillance Service (PTSS) over obligations to store data and monitor email traffic. The court confirmed that email services can’t be considered telecommunications providers in Switzerland, and therefore are not subject to data retention requirements.

Reuters also posted a quote from Proton founder and Chief Executive Andy Yen about the ruling. Andy Yen said it was an “important first step” in its campaign to advance privacy and freedom.

“We expect there to be further attempts to force tech companies to undermine privacy in both Switzerland and abroad, and we are committed to continuing to challenge this through both our encryption technology and through the courts,” Andy Yen said.

The Swiss Federal Administrative Court is the highest judicial authority in Switzerland. It rules as the final instance on all appeals against decisions of the highest cantonal courts, the Federal Criminal Court, the Federal Administrative Court and the Federal Patent Court. The court ensures that Swiss federal law is correctly applied in individual cases and the rights of citizens enshrined in the Constitution are protected.

ProtonMail’s About Page says that their founding team met at CERN and created ProtonMail, Proton Technologies AG has grown into a global leader in online security. The About Page also says: Today, we are the world’s largest secure email provider with over one million users. In addition to our headquarters in Geneva, Switzerland, and we have support centers in San Francisco, CA, and Skopje, Macedonia.

U.S. Department of Justice Unveiled Civil Cyber-Fraud Initiatives

Legal,

The U.S. Deputy Attorney of the Justice Department, Lisa Monaco, unveiled two new enforcement initiatives aimed at targeting cryptocurrencies and government contractors who fail to report cyber breaches, Reuters reported. The U.S. Department of Justice website calls it the Civil Cyber-Fraud Initiative.

The initiative will combine the Justice Department’s expertise in civil fraud enforcement, government procurement and cybersecurity to combat new and emerging cyber threats to the security of sensitive information and critical systems.

Reuters reported that Deputy Attorney of the Justice Department, Lisa Monaco, gave a virtual speech at the Aspen Cyber Summit, about the new initiative. It includes a mix of anti-money laundering and cybersecurity experts. In addition, the initiative will focus on cryptocurrency.

“Cryptocurrency exchanges want to be the banks of the future, well we need to make sure that folks can have confidence when they’re using these systems and we need to be poised to root out abuse,” Monaco said. “The point is to protect consumers.”

According to Reuters, Deputy Attorney of the Justice Department, Lisa Monaco, also announced the use of a cyber fraud initiative, which will “use civil enforcement tools to pursue companies, those who are government contractors, who receive federal funds, when they fail to follow recommended cybersecurity standards.”

Personally, I think the Civil Cyber-Fraud Initiative could be a good thing. It sounds like it will enact enforcement against companies that are aware a breach occurred – but don’t tell their customers about it. Cryptocurrency is relatively new, and should have some regulation attached to in order to prevent fraud.

Some things the Cyber-Fraud Initiative includes:

  •  Use of False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients.
  •  A False Claims Act is the government’s primary civil tool to redress false claims for federal funds and property involving government programs and operations.
  •  A whistleblower provision, which allows private parties to assist the government in identifying and pursuing fraudulent conduct and to share in any recovery and protects whistleblowers who bring these violations and failures from retaliation.

China Declares All Cryptocurrency Activities Illegal

Legal,

The People’s Bank of China has declared all digital currency activities illegal, and has vowed to crack down on the market, CNBC reported. According to CNBC, the People’s Bank of China said services offering trading, order matching, token issuance, and derivatives for virtual currencies are strictly prohibited. Overseas crypto exchanges providing services in mainland China are also illegal.

It appears that this decision affected the price of cryptocurrency, which resulted in the stocks for at least some types of cryptocurrency falling. CNBC pointed out that this comes after Beijing announced a crackdown on crypto mining earlier this year, which caused a slump in bitcoin’s processing power.

The Wall Street Journal reported that the People’s Bank of China declared all cryptocurrency-related transactions illegal to prevent the risks surrounding crypto trading and to maintain national security and social stability. According to the Wall Street Journal, the People’s Bank of China said that cryptocurrencies are issued by non monetary authorities, use encryption technologies and exist in digital form, and shouldn’t be circulated and used in the market as currencies.

I’m no expert on cryptocurrency, but it is my understanding that one of the reasons why some people like cryptocurrency is because they think the transactions are anonymous. However, the Federal Trade Commission (FTC) points out that “depending on the cryptocurrency, the information added to the blockchain can include details like the transaction amount and the sender’s and recipient’s wallet addresses”. To me, that sounds like China could potentially discover which of their people are buying or selling cryptocurrency.

I understand that a country can make rules or laws that people who live in that country are required to comply with. I’m having difficulty understanding why China’s decision to call all digital currency illegal also requires people who live in other countries to comply with China’s new rules.

The Battle Between Epic Games and Apple Continues

Legal,

Today, 9To5Mac reported a significant update to the legal battle between Apple and Epic Games – “Project Liberty”.

According to Apple, Epic Games hired PR firms in 2019 to work on a media strategy called “Project Liberty” aimed at portraying Apple “as the bad guy.” In October 2020, Judge Yvonne Rogers had concerns that Epic knew exactly what they were doing with the controversial Fortnite update, so this doesn’t come as a surprise.

Here is a quote from Apple:

Epic’s monopoly maintenance claim is premised on the notion that the antitrust laws preclude Apple from imposing conditions on the licensed use of its intellectual property, and impose on Apple a duty to deal with Epic on the terms preferred by Epic – to the detriment of other developers and consumers alike. But Apple has no obligation to license its intellectual property, aside from a limited exception not applicable here, businesses are free to choose the parties with whom they will deal, as well as the prices, terms and conditions of that dealing.

CNBC provided a summary of what Apple, and Epic, will argue in court. The case could be heard on May 3, 2021, (but the date could change due to the pandemic).

Apple will argue:

  • Its 30% commission is essentially the same as other online software stores like Google Play or stores for video game consoles and Apple’s fee has decreased over time.
  • It faces competition both for iPhones as well as other platforms to play games.
  • Its App Store policies have led to a boom in the software industry and result in greater safety and security for users.
  • The App Store is a core, integrated feature of the iPhone, and that using Apple payments for digital purchases is a key feature.

Epic will argue:

  • Apple forces consumers to bear high switching costs to stop using Apple products, locking them in.
  • As Apple has accumulated more customers and locked them in, the importance of selling software to Apple customers has grown.
  • Apple controls the only way to install software on an iPhone through the App Store.
  • Apple uses its App Review process, which manually screens individual apps, for anti-competitive purposes, removing apps for business reasons under the pretext of security.
  • Because some developers have chosen to raise iPhone software prices because of Apple’s 30% fee, it causes consumers to pay more, and Fortnite is an example.