CryptoLink is a compilation of news stories published by
outside organizations. Akin aggregates these stories, but the
information contained in them does not necessarily represent the
beliefs or opinions of the firm. Akin’s August CryptoLink
update includes developments from August and September of
2023.
A government shutdown has been temporarily avoided in
Washington, with a reprieve that gives Congress until the middle of
November to negotiate some resolution on spending for the fiscal
year. With the Speaker’s chair now vacant, and temporarily
filled by House Financial Services Committee Chairman Patrick
McHenry, the opportunities for meaningful non-spending legislation
to make its way across the House floor before Thanksgiving are few.
Still, in spite of the distractions, committees have been and will
continue to do their work. Several recent hearings and markups have
focued on digital assets policy and legislation. The Senate Banking
Committee held an oversight hearing of the Securities and Exchange
Commission (SEC), where SEC Chair Gary Gensler in his testimony
called on the Committee to fund efforts to regulate the crypto
sector, justifying this budget request as necessary to combat
“daunting” levels of crypto fraud. Gensler’s
hostility towards crypto faced little resistance from Committee
Democrats—Chair Sherrod Brown (D-OH) in his opening testimony
stated: “We only need to look to events in the crypto markets
in the past year to see what happens when markets lack transparency
and conflicts go unchecked,” and that “bad actors keep
flocking to crypto.” By contrast, the Republican majority at
the House Financial Services Committee continue to prioritize
legislating on crypto issues. The Committee held a hearing on
restricting the Federal Reserve’s ability to issue a Central
Bank Digital Currency (CBDC) and held a subsequent markup, during
which a bill that would prevent the issuance of a CBDC without
explicit authorization from Congress was passed out of Committee
along party lines. It is fair to say that both committees and both
Chairman are currently positioning themselves for an end of year
deal on financial services policy, where Chairman McHenry’s top
priorities remain his bipartisan market structure and stablecoin
bills.
Meanwhile, at the Federal Reserve Bank of Philadelphia’s
seventh annual Fintech Conference, several senior Fed officials,
including Vice Chair of Supervision Michael Barr and Board Governor
Michelle Bowman, offered their views on crypto regulation. Barr
expressed deep concern about stablecoins, among other things,
saying “Stablecoins are a form of money, and the ultimate
source of credibility in money is the central bank. If
non-federally regulated stablecoins were to become a widespread
means of payment and store of value, they could pose significant
risks to financial stability, monetary policy, and the U.S.
payments system.” Bowman, for her part, expressed concern that
both private instruments such as stablecoins and potential future
public instruments like CBDCs could threaten consumer privacy,
postulating that consumer protection in crypto should take
precedence over innovation.
New developments in the case against former FTX founder and CEO
Sam Bankman-Fried arise daily, with opening statements in the trial
kicking off on October 4, 2023. The Bankman-Fried trial will be one
of the first major trials involving the crypto industry and will
set the standard for future criminal crypto cases. Meanwhile, the
SEC continues to bring enforcement actions against companies for
unregistered offerings of non-fungible tokens (NFTs), as seen in
the SEC’s second announced NFT settlement in SEC v. Stoner
Cats, LLC (SC2). As in the SEC’s enforcement action last month
against Impact Theory, these two recent NFT settlements indicate
that the SEC continues to take the position that NFTs, even those
that appear similar to collectibles, are securities. However, in a
notable setback for the SEC, U.S. District Judge Analisa Torres
denied the SEC’s motion for interlocutory appeal in the
SEC’s ongoing litigation against Ripple Labs, Inc, with the
matter now proceeding to trial scheduled for April 2024. Meanwhile,
the Commodity Futures Trading Commission (CFTC) remains focused on
decentralized finance (DeFi), as illustrated by the three orders
issued against three DeFi protocols for offering illegal digital
assets derivatives trading. We anticipate that the DeFi space will
be a focus for the CFTC.
In this issue
- Spotlight on Coinbase
- Spotlight on Binance
- Key Developments
- Key Recent Enforcement Actions
- Akin Alerts and Podcast Episodes
Spotlight on FTX
Former FTX Executive Ryan Salame Pleads Guilty to Criminal
Conspiracy Charges
On September 5, 2023, the U.S. Attorney’s Office for the
Southern District of New York (SDNY) accepted former FTX executive
Ryan Salame’s guilty plea to one count of conspiracy to defraud
the United States and willfully violate the Federal Election
Campaign Act and one count of conspiracy to operate an unlicensed
money transmitting business. Ryan Salame was the co-CEO of
FTX’s Bahamian subsidiary. Prosecutors accused Salame and
others of using FTX customers’ funds to donate to political
candidates supporting crypto-friendly legislation.
The letter from SDNY accepting the guilty plea can be found here.
FTX Founder’s Parents Face Suit to Recover Millions
Obtained Fraudulently
On September 18, 2023, a complaint was filed before the U.S.
Bankruptcy Court for the District of Delaware against Allan Joseph
Bankman and Barbara Fried, the parents of FTX founder Samuel
Bankman-Fried, by the debtors in the ongoing FTX Chapter 11
proceedings. The complaint “seeks to recover millions of
dollars in fraudulently transferred and misappropriated funds”
and states that “Bankman and Fried exploited their access and
influence within the FTX enterprise to enrich themselves, directly
and indirectly, by millions of dollars, and knowingly at the
expense of the debtors.”
The complaint can be found here.
FTX Brings Proceedings Against Former Employees of Hong Kong
Affiliate
On September 21, 2023, FTX Trading Ltd. and West Realm Shires
Services, Inc. (together, FTX) filed a complaint
(before the U.S. Bankruptcy Court for the District of Delaware) for
avoidance and recovery of transfers against four former employees
of FTX’s Hong Kong affiliate company Salameda Ltd. (Michael
Burgess, Huy y Xuan “Kevin” Nguyen, Jing Yu
“Darren” Wong, Matthew Burgess, Lesley Burgess), 3Twelve
Ventures Ltd. and BDK Consulting Ltd. (together, the
Defendants). According to the complaint, following
their departures from Salameda, the four employees pursued various
business ventures, which included trading cryptocurrencies on the
FTX.com and FTX US exchanges and collectively withdrawing digital
assets valued at approximately $157.3 million (including through
leveraging their connections to FTX personnel to ensure they would
be prioritized over other customers). The adversary proceedings
seeks to recover for the benefit of the plaintiff’s creditors
those assets preferentially or fraudulently transferred to the
Defendant’s prior to FTX filing for Chapter 11 relief.
The complaint can be found here.
U.S. Court Upholds Bankman-Fried’s Pre-Trial Detention
On September 21, 2023, the United States Court of Appeals for
the 2nd Circuit upheld the District Court’s pre-trial detention
of Samuel Bankman-Fried and denied the motion for release pending
trial. The District Court found, and the Court of Appeals agreed,
that pretrial detention was appropriate because “there was
probable cause to believe that the Defendant-Appellant attempted to
tamper with two witnesses … and specifically that he acted with
unlawful intent to influence those witnesses.” The Court of
Appeals further rejected Bankman-Fried’s contention that the
District Court failed to consider a less restrictive alternative to
detention.
Subsequently, on September 25, 2023, attorneys representing
Bankman-Fried submitted a letter to the U.S. District Court for the
Southern District of New York requesting the temporary release of
Bankman-Fried for his upcoming trial because it is “necessary
for preparation of [his] defense.” The letter stated that it
is “exceedingly difficult as a practical matter to adequately
prepare for trial with the restrictions on access currently in
place,” including because the case “is highly technical
and complex, and we need our client to help us understand the facts
and explain many of the issues. He alone knows the facts which are
also critical in preparing his defense.”
The U.S. Court of Appeals order can be found here and the letter from Bankman-Fried’s
counsel can be found here.
U.S. District Judge Grants Government’s Motion in
Bankman-Fried Trial
On September 26, 2023, U.S. District Judge Lewis A. Kaplan
granted the government’s motion in part in the upcoming trial
against Bankman-Fried, including ordering that evidence of
Bankman-Fried’s campaign finance scheme would be admissible in
the upcoming trial, despite the prosecution withdrawing the
campaign finance charge. Judge Kaplan stated that “[e]vidence
of defendant’s alleged illegal campaign finance scheme is
direct evidence of the charged offenses” and concerns about
the effect on the jury could be resolved through appropriate jury
instruction. Bankman-Fried awaits trial on two substantive counts
of wire fraud and fire conspiracy counts alleging conspiracy to
commit wire fraud, securities fraud, commodities fraud and money
laundering. The trial began on October 3, 2023.
The memorandum and order can be found here.
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