June Enforcement Action Blog
Federal agencies aggressively pursued enforcement actions in June. At the same time, state and federal regulators continued to recognize the importance of blockchain industry regulation by putting forth significant policy proposals, including proposals that impact cryptocurrency miners, 401k plans, and more.
The Department of Justice brought charges of wire fraud (on an insider trading theory), and money laundering against an employee of an NFT marketplace. The DOJ asserts that the defendant abused confidential information regarding NFTs that would be listed on a leading NFT marketplace’s homepage for his own personal gain. According to the charges, the employee purchased NFTs that he knew would be listed on the marketplace’s homepage, and sold them in accordance with the increased demand resulting from that listing. “After an NFT was featured on [the] homepage, the price buyers were willing to pay for that NFT, and for other NFTs made by the same NFT creator, typically increased substantially.” The DOJ’s charges avoid the complicated and unresolved question of whether NFTs are securities. Rather, the wire fraud charges result from the employee’s alleged abuse of confidential information.
The DOJ reaffirmed its commitment to ensure that individuals do not abuse the novelty of blockchain technology to commit long-recognized crimes. “NFTs might be new, but this type of criminal scheme is not. As alleged, [employee] betrayed [marketplace] by using its confidential business information to make money for himself. Today’s charges demonstrate the commitment of this Office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”
Additionally, the Commodities Futures Trading Commission charged a leading cryptocurrency exchange with making false and/or misleading statements in connection with the self-certification of a bitcoin futures product. According to the CFTC’s complaint, the exchange made false or misleading statements “with respect to, 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 safeguard the integrity of the market oversight 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 Regulation
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 regarding environmentally responsible solutions to cryptocurrency mining, which is expected to be released in August. The move toward responsible cryptocurrency mining aligns with a New York law, Senate Bill S6486D, enacted in June, which placed a moratorium on cryptocurrency mining operations that utilize 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, bolster 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 which harmonizes federal and California approaches, balances the benefits and risks to consumers, and incorporates California values such as equity, inclusivity, and environmental protection.” The DFPI is seeking comment from stakeholders, and has formulated several topics and questions upon which it invites comment as part of its intended rulemaking.
The crypto-regulatory and enforcement landscape remains a convoluted patchwork. There are many legal considerations involving NFTs, crypto, and other Web3 technologies. What is not murky, however, is the clear stance by U.S. regulators that, notwithstanding the novelty of the technology and asset class, basic principles 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 sanctions.