Tag Archives: cryptocurrency

Coinbase Warned By SEC Of Potential Securities Charges

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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.

The Collapse Of SVB Affected The Cryptocurrency Companies

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The sudden collapse of Silicon Valley Bank on Friday set off panic across the technology industry. But crypto executives and investors – who have endured a year of near-constant upheaval – seized on the moment to preach and scold, The New York Times reported.

Centralized banking was to blame, the crypto advocates said. Their vision of an alternative financial system, unmoored from big banks and other gatekeepers, was better. They argued that the government regulators that recently cracked down on crypto firms had sown the seeds of the bank’s implosion.

“Fiat is fragile,” wrote the Bitcoin advocate Erik Voorhees, using a common shorthand for traditional currencies.

“We’re seeing glitches in the machine,” said Mo Sheikh, chief executive of the crypto company Aptos Labs. “This is an opportunity to take a breath and consider the practicalities of decentralization.”

And the finger-pointing went in both directions. Some tech investors argued that the crypto world’s procession of bad actors and overnight collapses had conditioned people to panic at the first sign of trouble, setting the stage of the crisis at Silicon Valley Bank. In November, FTX, the crypto exchange run by Sam Bankman-Fried, went out of business after the crypto equivalent of a bank run exposed an enormous hole in its accounts.

“People are just traumatized. They’re financially shellshocked,” said Sam Kazemian, the founder of the crypto project Frax. “As soon as you see something, you wonder if there’s a fire over there because it smells like smoke. And then you can treat it like everything is burning and get out while you still can.”

CNBC reported that the U.S. cryptocurrency firm Circle’s USD Coin lost its dollar peg and fell to a record low Saturday morning after the company revealed it has nearly 8% of its $40 billion in reserves tied up at the collapsed lender Silicon Valley Bank.

USDC is known as a stable coin, which means the value of the virtual currency is supposed to be pegged to a reference currency. USDC is designed to trade at $1, but it fell below 87 cents on Saturday, according to CoinDesk.

In a tweet Friday, Circle said it has $3.3 billion in remaining reserves at SVB. The company called for the continuity of the bank and said it will follow guidance from regulators.

THE BLOCK reported that crypto lender BlockFi has $227 million in “unprotected” funds in Silicon Valley Bank, according to a bankruptcy document, and may be in violation of U.S. bankruptcy law.

That $227 million is also not insured by the Federal Deposit Insurance Corporation since it is in a money market mutual fund, the U.S. Trustee overseeing BlockFi’s Chapter 11 bankruptcy case said in the filing. The standard deposit insurance amount is $250,000 per depositor, per insured bank for each account ownership category, according to the FDIC’s website.

THE BLOCK also reported that Circle, the crypto payments firm behind stablecoin USDC, confirmed late Friday evening that $3.3 billion of the cash backing its coin remain left with Silicon Valley Bank.

Circle, which had early tweeted that Silicon Valley Bank was among its six banking partners managing about 25% of the total reserves of USDC, was criticized by Crypto Twitter for not being more transparent about its exposure to the popular tech banker. In the wake of the original tweet, USDC de-pegged from $1, falling around 2% on certain decentralized finance platforms.

In my opinion, the collapse of SVB appears to have hit several cryptocurrency companies really hard. This was not something that occurred in the 2008 bank collapse, because cryptocurrency did not exist back then.

New York Attorney General Cracks Down On Unregistered Crypto Platforms

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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.

SEC Charges Terraform And CEO Do Kwon With Defrauding Investors

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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.

New York Governor Signs Partial Cryptocurrency Mining Ban

Legal

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.

U.S. Department of Treasury Took Actions Against Bittrex

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The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) announced settlements for over $24 million and $29 million, respectively, with Bittrex, Inc. (Bittrex), a virtual currency exchange based in Bellevue, Washington. This is OFAC’s largest virtual currency enforcement action to date.

It also represents the first parallel enforcement actions by FinCEN and OFAC in this space. Investigations by OFAC and FinCEN found apparent violations of multiple sanctions programs and willful violations of the Bank Secrecy Act’s (BSA’s) anti-money laundering (AML) and suspicious activity report (SAR) reporting requirements. These enforcement actions emphasize to the virtual currency industry the importance of implementing appropriate risk-based sanctions compliance controls and meeting obligations under the BSA. The failure to take action can result in violations of OFAC and FinCEN regulations and expose exchanges and others in the virtual currency industry to potential abuse by illicit actors.

“When virtual currency firms fail to implement effective sanctions compliance controls, including screening customers located in sanctioned jurisdictions, they can become a vehicle for illicit actors that threaten U.S. national security,” said OFAC Director Andrea Gacki. “Virtual currency exchanges operating worldwide should understand both who – and where – their customers are. OFAC will continue to hold accountable firms, in the virtual currency industry and elsewhere, whose failure to implement appropriate controls leads to sanctions violations.”

“For years, Bittrex’s AML program and SAR reporting failures unnecessarily exposed the U.S. financial system to threat actors,” said FinCEN Acting Director Himamauli Das. “Bittrex’s failures created exposure to high-risk counterparts including sanctioned jurisdictions, darknet markets, and ransomware attackers.Virtual asset service providers are on notice that they must implement robust risk-based compliance programs and meet their BSA reporting requirements. FinCEN will not hesitate to act when it identifies willful violations of the BSA.”

The press release states that Bittrex has agreed to remit $24,280,829.20 to OFAC to settle its potential civil liability for 116,421 apparent violations of multiple program sanctions. As a result of deficiencies related to Bittrex’s sanctions compliance procedures, Bittrex failed to prevent persons apparently located in the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using its platform to engage in approximately $263,451,600.13 worth or virtual currency related transactions between March 2014 and December 2017.

The press release also stated that Bittrex has agreed remit $29,280,829.20 for its willful violation of the BSA’s AML program and SAR requirements. FinCEN will credit the payment of $24,280,829.20 as part of Bittrex’s agreement to settle its potential liability with OFAC. FinCEN’s investigation found that, from February 2014 through December 2018, Bittrex failed to maintain an effective AML program. This included deploying inadequate and ineffective transaction monitoring on its platform resulting in significant exposure to illicit finance. Further, Bittrex failed to file any SARs between February 2014 and May 2017, a period of over three years.

To me, it sounds like Bittrex either intentionally chose not to do the things that would have prevented them from having to settle with both OFAC and FinCEN, or the company hoped that it wouldn’t be noticed by the U.S. Department of Treasury. Either way, it is clear that Bittrex is going to be paying a very large amount of money due to their inadequate actions.

U.S. Justice Department Announced Digital Asset Coordinator Network

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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.