Gibson Dunn Digital Assets Recent Updates – May 2024

June 3, 2024

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We are pleased to provide you with the May 2024 edition of Gibson Dunn’s digital assets regular update. This update covers recent legal news regarding all types of digital assets, including cryptocurrencies, stablecoins, CBDCs, and NFTs, as well as other blockchain and Web3 technologies. Thank you for your interest.

ENFORCEMENT ACTIONS

UNITED STATES

• Uniswap Labs Calls SEC’s Legal Case “Weak and Wrong”
  On May 21, Uniswap Labs responded to the SEC’s Wells notice issued against the firm. The SEC issues a Wells notice if, after the SEC’s Staff concludes an investigation, the Staff intends to recommend to the Commission that charges be brought. The Wells notice provides a prospective respondent the chance to present defenses concerning the investigation and to influence the Staff’s recommendation and the Commission’s view of the matter. Uniswap Labs called the SEC’s legal case “weak and wrong” and stated that the SEC’s “aggressive theories” are an attempt to stretch the SEC’s reach beyond its jurisdiction. Uniswap Labs argued that the SEC “should embrace open-source technology that improves outdated commercial and financial systems, instead of attempting to litigate it out of existence.” On April 10, the SEC issued a Wells notice against Uniswap Labs, in which the SEC alleged that Uniswap DEX acted as Uniswap Labs’ unregistered securities exchange and unregistered securities broker-dealer. Uniswap Labs’ filing says that “the SEC arguments rest on the false assumption that just about ‘all’ tokens are securities (which the SEC then refuses to register).” The Block; CoinDesk; Wells Response.
• Two Arrested over Novel Scheme that attacked Ethereum Blockchain and Stole $25 Million in Cryptocurrency
  On May 23, DOJ unsealed an indictment charging that two brothers attacked the Ethereum blockchain using a novel scheme that allegedly leveraged transaction integrity protocols to fraudulently obtain approximately $25 million worth of cryptocurrency within approximately 12 seconds. The prosecutors said the two defendants developed a scheme, dubbed the “Exploit,” through which they manipulated and tampered with the process and protocols that validate and add transactions to the Ethereum blockchain. In doing so, the DOJ alleged, they fraudulently gained access to and modified pending private transactions to obtain victims’ cryptocurrency. Press Release.
• Federal Judge Dismisses Suit and Sanctions SEC Over Bad-Faith Conduct
  On May 28, a federal judge dismissed the SEC’s lawsuit against crypto group Debt Box and ordered the SEC to pay over $1.8 million in attorney and receivership fees. The ruling follows a March decision finding the SEC engaged in bad-faith conduct over a temporary restraining order to freeze Debt Box’s assets. Law360; Order.
• FTC Executive Receives 7.5-Year Prison Sentence
  On May 28, a Manhattan federal judge imposed a 7.5-year prison sentence on crypto-finance expert and former FTX executive Ryan Salame for duping a bank to authorize $1.5 billion of illegal transfers and making fraudulent campaign contributions for the exchange’s convicted founder Sam Bankman-Fried. Law360.
• BTC-e Operator Pleaded Guilty to Money Laundering Conspiracy
  On May 3, one of the operators of the defunct crypto exchange BTC-e, Alexander Vinnik, pleaded guilty to conspiracy to commit money laundering from 2011 to 2017. The DOJ alleged that BTC-e acted as “one of the primary ways by which cyber criminals around the world transferred, laundered, and stored the criminal proceeds of their illegal activities” before it was shut down by law enforcement in or around July 2017. Allegedly, operating as an unlicensed money service business, the now defunct exchange reportedly processed over $9 billion-worth of transactions and served over one million users worldwide, including numerous customers in the United States. According to the DOJ, Vinnik operated BTC-e with the intent to promote these unlawful activities and was responsible for over $121 million in losses. Vinnik was first arrested in 2017, but faced a lengthy extradition process in which he spent time in Greece and France before being sent to the U.S. Press Release; CoinDesk.
• Former Cred Executives Indicted on Wire Faud Conspiracy and Related Crimes
  On May 3, a federal grand jury charged the former CEO, CFO, and CCO of Cred, LLC with wire fraud conspiracy and related crimes in connection with their purported roles in an alleged scheme to defraud customers and investors that caused losses of customer cryptocurrency assets with a market value that may have exceeded $780 million. Per the DOJ, through Cred’s lending program, called “CredEarn,” the defendants “lured” customers to make investments with promises of significant returns on cryptocurrency investments but failed to disclose that “virtually all the assets to pay the yield were generated by a single company whose business was to make unsecured micro-loans to Chinese gamers.” Cred filed for bankruptcy in November 2020, estimating its liabilities to be between $100 million and $500 million at the time. Press Release; CoinDesk.

INTERNATIONAL

• Hong Kong Regulator Says Worldcoin Operations Must Cease
  On May 22, Hong Kong’s Privacy Commissioner for Personal Data (PCPD) “served an enforcement notice on Worldcoin Foundation, directing it to cease all operations of the Worldcoin project in Hong Kong in scanning and collecting iris and face images of members of the public using iris scanning devices.” The cryptocurrency project, which has received scrutiny from regulators globally, also was suspended in Kenya last year due to privacy concerns. CoinDesk; Cointelegraph; Reuters.

REGULATION AND LEGISLATION

UNITED STATES

• U.S. House Approves Crypto Bill FIT21 to Provide Regulatory Clarification for Digital Assets
  On May 22, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21), which was the first time that a significant crypto bill had cleared a chamber of Congress. The bill aims to provide regulatory clarity for digital assets. The legislation, which was largely driven by House Republicans, “would establish a regime to regulate the U.S. crypto markets, setting consumer protections, installing the Commodity Futures Trading Commission (CFTC) as a leading regulator of digital assets and the watchdog of the non-securities spot markets and it would more clearly define what makes a crypto token a security or a commodity.” While some crypto enthusiasts have backed the bill, the SEC warned that this bill could create new financial risks. Reuters; CoinDesk.
• SEC Approves Eight Spot Ether ETFs from Leading Financial Firms
  On May 23, the U.S. Securities and Exchange Commission (SEC) approved eight spot Ether exchange-traded funds (ETFs) from prominent financial firms. This move marks a significant regulatory milestone, demonstrating increased institutional acceptance and regulatory clarity for Ether-based financial products. The ETFs still need their S-1 registration statements to be finalized before trading can start. Further legislative clarity is still needed to define the regulatory jurisdiction between the SEC and CFTC over digital assets. The Block; Cointelegraph.
• House Passes Bill to Block Fed-Issued Digital Dollar
  The U.S.House of Representatives passed the CBDC Anti-Surveillance Act which would bar the Federal Reserve from issuing a so-called central bank digital currency, a state-issued dollar on the blockchain. Republicans argue that the measure is necessary to protect consumer privacy and express concern regarding the tokens’ traceability on the blockchain, which could be used by the government to track citizen purchases and limit or control their behavior. Law360.
• United States CFTC Proposes to Ban Political Event Contracts
  On May 10, the U.S. Commodity Futures Trading Commission (CFTC) proposed a formal rejection of events contracts that bet on the outcome of political activity. Three of the five commissioners approved this proposed rule, as they saw these contracts as “contrary to the public interest.” Prediction platforms allow users to buy contracts on the outcomes of actual events, including elections and policy developments. These platforms have been particularly popular in crypto circles. Contracts on political contests, awards contests, and the outcomes of games would be banned for U.S. regulated companies under the proposal. CoinDesk; The Block.

INTERNATIONAL

• UK Regulators Identified Crypto as One of the Biggest Money Laundering Risks in 2022-2023
  In its annual supervision report on anti-money laundering and counter-terrorist financing (AML/CTF), the UK Treasury Department identified crypto firms, alongside retail banking, wholesale banking and wealth management as posing the greatest risk of being exploited for money laundering between 2022 and 2023. The conclusion from the report came from the risk assessments conducted by UK’s financial regulator, Financial Conduct Authority, on 238 firms. UK Treasury Report; CoinDesk.
• In Taiwan, Proposed Anti-Money Laundering (AML) Changes Could Lead to Jail Time for Non-Compliance
  On May 9, Taiwanese authorities announced that they sought to criminalize cryptocurrency firms that fail to abide by anti-money laundering (AML) rules. The Ministry of Justice’s proposed amendments to existing AML laws require domestic and overseas crypto firms seeking to operate in Taiwan to register for AML compliance. The penalty for failure to comply would be up to two years in prison. Currently, authorities can only impose administrative penalties on non-compliant crypto firms, but these new amendments would criminalize non-compliance. These proposed AML changes were to be sent to Taiwan’s national parliament for review. The Block.
• Nigeria Reforms National Blockchain Policy Steering Committee
  On May 21, Nigeria’s National Information Technology Development Agency (NITDA) announced that they were restructuring the National Blockchain Policy Steering Committee (NBPSC) in hopes of reassessing blockchain policy in Nigeria. The NBPSC was made up of members from government agencies, institutions, the private sector, academia, and the blockchain industry. The director-general of NITDA believed that the NBPSC’s reform would bring together “a fresh wave of experienced professionals and leading minds.” According to the NITDA, this reform is an effort would help “incorporate new emerging technologies and economic realities” in Nigeria. Cointelegraph.
• Ramp Network, Crypto Infrastructure Firm, Secures Ireland Registration
  On May 23, Ramp Network, a U.K.-based crypto infrastructure firm, secured Virtual Asset Service Provider (VASP) registration in Ireland and plans to establish its European headquarters there. This registration will enable users to exchange fiat for over 100…