June Enforcement Blog – Fin Tech

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Federal agencies aggressively pursued enforcement actions in June. At the same time, state and federal regulators have continued to recognize the importance of blockchain industry regulation by introducing significant policy proposals, including proposals that impact cryptocurrency miners, 401k plans, etc.

Enforcement measures

The Department of Justice has filed wire fraud (based on an insider trading theory) and money laundering charges against an employee of an NFT market. The DOJ alleges that the defendant misused confidential NFT information allegedly listed on the homepage of a prominent NFT marketplace for his own personal gain. According to the charges, the employee purchased NFTs that he knew would be listed on the market’s homepage and sold them in accordance with the increased demand resulting from that listing. “After an NFT has been presented on [the] homepage, the price that buyers were willing to pay for this NFT, and for other NFTs made by the same NFT creator, generally increased significantly. The DOJ charges avoid the complicated and unresolved issue of whether NFTs are securities. Rather, the wire fraud charges arise from the employee’s alleged misuse of confidential information.

The DOJ reaffirmed its commitment to ensuring that individuals do not abuse the novelty of blockchain technology to commit long-established crimes. “NFTs may be new, but this type of criminal scheme is not. As alleged, [employee] betrayed
[marketplace] using his confidential business information to make money. Today’s charges demonstrate this Office’s commitment to eradicating insider trading – whether it occurs in the stock market or on blockchain.”

Additionally, the Commodities Futures Trading Commission accused a major cryptocurrency exchange of making false and/or misleading statements in connection with the self-certification of a bitcoin futures product. According to the CFTC complaint, the exchange made false or misleading statements “concerning, among other things, facts relevant to understanding whether the proposed Bitcoin futures contract would be readily susceptible to manipulation.” The CFTC intends to send a strong message that it will preserve the integrity of the market surveillance process. “Making false or misleading statements to the CFTC in connection with a futures product certification undermines the CFTC’s work to ensure the financial integrity of all transactions subject to the CEA, protect market participants, deter and prevent price manipulation and promote responsible innovation and fair competition.

State and federal regulations

The Biden administration continued its study of the cryptocurrency industry in response to President Biden’s executive order in March 2022. Bloomberg Law reported that the White House Office of Science and Technology Policy is preparing its report on the environmentally friendly solutions for cryptocurrency mining, which is due out in August. The move toward responsible cryptocurrency mining aligns with a New York law, Senate Bill S6486D, signed into law in June, which imposed a moratorium on cryptocurrency mining operations that use a proof-of-work authentication method, which includes two popular cryptocurrencies, Bitcoin and Ethereum.

Additionally, California Governor Gavin Newsom issued Executive Order N-9-22 (Executive Order) on May 4, 2022 to foster responsible innovation, strengthen California’s innovation economy, and protect consumers. In June, the California Department of Financial Protection and Innovation (“CDPFI”) issued a press release in response to the order which identified Governor Newsom’s goal “to create a transparent regulatory and business environment for web3 companies that harmonizes federal and California approaches, balances consumer benefits and risks, and incorporates California values ​​such as fairness, inclusivity and environmental protection.” The DFPI invites comments from stakeholders and has formulated several topics and questions on which it invites comments as part of its planned regulations.

Conclusion

The landscape of crypto-regulation and enforcement remains a convoluted patchwork. There are many legal considerations regarding NFTs, cryptography, and other Web3 technologies. What isn’t murky, however, is the clear position of U.S. regulators that despite the newness of the technology and the asset class, the basics still apply: registered or not, developers, protocols, projects and platforms cannot defraud retail investors; they cannot aid and abet money laundering; and they cannot violate the sanctions. Stay tuned for next month’s episode of the crypto roundup.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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