May Updates On Crypto Enforcement and Regulatory Guidance

In May, we saw a slower month for cryptographic enforcement actions by state and federal regulators. Check out our March 2022 Cryptocurrency Enforcement Blog here, where we talk about regulatory guidance and the jurisdiction of federal and state agencies to enforce these issues.

Federal and state updates

Securities and Enforcement Commission (SEC)

On May 3, the SEC announced “the allocation of an additional 20 positions to the unit responsible for protecting investors in the crypto markets and cyber threats.” As a result, the Crypto Assets and Cyber ​​Unit of the Application Division will be expanded to “50 dedicated posts”. The Crypto Assets and Cyber ​​Unit has filed enforcement actions in connection with securities law violations and for failing to maintain “proper cybersecurity controls,” including negligence. outreach practices and cyber incidents. The expansion demonstrates the SEC’s intention to increase enforcement efforts, which we will look at closely.

Department of Finance

On May 10, Treasury Secretary Janet Yellen presented the annual report of the Financial Stability Board (FSOC) to the Senate Banking Committee on the need for sound legislation on stable currencies (previously discussed the report of the Work of the President (PWG) on stable currencies here and here). Secretary Yellen cites the results of the PWG report as a reason to conclude that “current statutory and regulatory frameworks do not provide consistent and comprehensive standards for stable currency risks as a new type of payment product and urges Congress to enact legislation to ensure that stable currencies and such agreements have a federal prudential framework. “

Commodity Futures Trading Commission (CFTC)

On May 19, the CFTC accused several people of fraudulently soliciting at least $ 44 million in interest on a stake in a so-called “income fund” that invests in digital assets and other instruments. The enforcement action also accuses the defendants of operating an illegal commodity group and not registering as a commodity group operator. The complaint alleges that since at least January 2021, defendants have requested more than $ 44 million from at least 170 participants to buy, hold and trade digital assets, commodities, derivatives, swaps, and commodity futures contracts. The complaint also alleges that, instead of investing the funds of the grouped participants as advertised, the defendants misappropriated the participants ‘funds by distributing them to other participants, transferring some of the participants’ funds to other accounts under their control and for their own. profit, and transferring funds to a foreign cryptocurrency exchange. . None of these funds were returned to the pool.

On May 19, CFTC President Rostin Behnam publicly commented that the CFTC will add resources and step up its efforts to address cryptocurrency manipulation and fraud cases. He stated:[h]Limits on the loss of tens of millions of dollars in digital assets due to protocol exploits, phishing attacks, damaging vulnerable people, and other fraudulent and manipulative schemes have become all too common. This statement is a clear signal of the actions the CFTC is likely to take.

Financial Crime Control Network (FinCEN)

On May 19, Alessio Evangelista, Associate Director of FinCEN’s Implementation and Compliance Division, presented at the Chainalaysis Links Conference on the topic of “Intersection of Cryptocurrencies and National Security”. Evangelista stated that crypto-companies “have the same obligations as all other financial institutions to ensure that their new offerings can take advantage of innovations while protecting consumers, reducing cybercrime, combating illicit financial activity and ensuring that their platforms do not they are used to harm our national security. ”He also stressed that the agency believes that innovation is linked to regulation, rather than being at odds with each other.

Evangelista also claimed that virtual asset service providers (VASPs) ignore red flags and continue to do business with troubled companies too often. He urged these VASPs to be proactive with regulatory compliance and to avoid having “paper programs” or compliance regimes that exist on paper but are not implemented, either by mistake or by design. Here, FinCEN will continue to prioritize cases in which it identifies “significant defaults and threats” to the financial system and in which it finds “intentional disregard for regulatory requirements.”

Coin Intervention Office

On May 24, Acting Comptroller Michael Hsu commented at the 2022 DC Blockchain Summit on the “deep” vulnerabilities of cryptocurrency in light of recent market volatility and other events in the cryptocurrency economy. Hsu stressed the vulnerabilities arising from the new blockchains that drive operations. In particular, the cryptographic ecosystem has become increasingly fragmented, which presents interoperability problems. Bridges between chains, while offering a solution to these problems, are very prone to being hacked.

Hsu also stressed that the interconnection of the cryptographic ecosystem presents real risks of contagion, as evidenced by the recent collapse of a popular algorithmic stable currency, which has caused other stable currencies to decline in value. In addition, Hsu cited the lack of clear standards for ownership and custody of digital assets as a risky situation for consumers. Hsu believes that these standards are underdeveloped given the size, scope and ambitions of the industry. For example, the largest centralized exchange in the United States recently revealed that its users would run the risk of becoming unsecured creditors if the exchange went bankrupt.

Hsu also noted that despite the volatility and loss of market capitalization following the recent collapse of the stablecoin, there was no stress on traditional banking and finance due to cryptocurrency exposure, a result that he attributes, at least in part, to intentional compliance. Federal banks emphasize consumer safety, soundness, and protection. Hsu found that this is the result of the OCC’s “careful and cautious” approach to banks seeking to join the crypto economy, referenced in Interpretative Letter 1179 published last year (we discussed this letter earlier in a blog post here).

State of California

According to a recent executive order signed by Gov. Gavin Newsom on May 4, California is urging all state agencies to work with the federal government in creating regulations for digital assets. The executive order explains the importance of this action in recognition of the fact that “California is the global hub for innovation in emerging technologies for the unparalleled concentration of the state of research and development, human capital and risk, creativity and entrepreneurship.”

According to the executive order, the state has seven priorities: (1) to create a transparent and consistent business environment for blockchain companies; (2) work simultaneously and cooperatively with President Biden’s strategy and efforts to identify responsible regulation; (3) to gather feedback from a wide range of stakeholders for potential blockchain applications and projects; (4) participate in a public process and exercise statutory authority to develop a comprehensive regulatory approach to crypto; (5) participate in and promote regulatory clarity by advancing the processes outlined in the federal executive order; (6) explore opportunities to implement blockchain technologies to address public and emerging service needs; and (7), identify opportunities to create a research and workforce environment to drive innovation in blockchain technology.

Execution actions

The Department of Justice

On May 13, the Justice Department began its first criminal trial for the alleged use of cryptocurrency to evade financial sanctions. Magistrate Judge Zia M. Faruqui explained in a 9-page ruling that “the reputation of cryptocurrency for providing anonymity to users” is a “myth,” stating that virtual currencies such as bitcoin, Ethereum or Tether are subject to state sanctions laws. United though they are outside the traditional financial system. Judge Faruqui explained that “OFAC’s recent guidance has confirmed that” sanctions enforcement obligations apply equally to transactions involving virtual currencies and those involving traditional fiat currencies. ” prosecute individuals and entities for non-compliance with OFAC regulations, including virtual currency. “


The crypto-regulatory and application landscape remains a complicated mosaic. There are many legal considerations that include NFT, crypto, and other Web3 technologies. What is not murky, however, is the clear stance of US regulators that, despite the novelty of technology and asset class, basic principles still apply: registered or unregistered, developers, protocols, projects and platforms do not they can disappoint retail investors; they cannot help or encourage money laundering; and they cannot violate sanctions.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 158

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