SEC And DOJ Carry Out Enforcement Action Against Safemoon; Today’s Hearing

enforcement action

The Securities and Exchange Commission (SEC) has filed another enforcement action against a cryptocurrency company – this time it’s Safemoon and accused it of “perpetrating a massive fraudulent scheme through the unregistered sale of the crypto asset security, SafeMoon” and adding that the executive team “withdrew crypto assets worth more than $200 million.”   See the SEC’s press release.

SEC Crypto Assets and Cyber Unit Enforcement Chief David Hirsch projects skepticism about DeFi, in general, in the announcement, too: “Decentralized finance claims to deliver transparency and predictable outcomes, but unregistered offerings lack the disclosures and accountability that the law demands, and they attract scammers…”

In a Department of Justice press release, the DoJ announced the arrest of the CEO and CTO of SafeMoon, and said it’s still seeking Safemoon’s creator Kyle Nagy.  U.S. Attorney Breon Peace said about the fraud, “…the defendants deliberately misled investors and diverted millions of dollars to fuel their greedy scheme and enrich themselves by purchasing a custom Porsche sports car, other luxury vehicles and real estate.” Read more in CoinDesk.

what you should know: The Safemoon X account, with 1.2 million followers, gives no indication of the lawsuit. But, many commenting on the company’s Halloween tweet – it’s final tweet? – apparently did see it coming.

AML legislation momentum

Yesterday, momentum may be slowed, for now, for Anti-Money Laundering (AML) legislation on digital assets in the Senate as other priorities take over. Politico reports, “After a hearing last week ‘on crypto’s involvement, we’re looking at that — [and] we’re looking at potentially more sanctions on non-state actors, and we’re looking at Iran and Russia,’ [Senate Banking Chair Sherrod Brown (D, OH)] said when asked about legislative developments. He said he didn’t yet know when the next hearing on the topic would be.” Read it.

what you should know: The dichotomy present between Senate Banking Democrats such as Brown and Senator Elizabeth Warren (D, MA) at last week’s hearing on terrorist financing was noticeable. The Democratic Senators questions and statements suggested they wanted to hear that crypto was an important driver in terrorist financing – whereas the witnesses, stressed crypto’s small role and the importance of strong sanctions. Meanwhile, hearing comments by Sen. Warren on non-custodial wallets have become a meme on X this week (1, 2).

crypto whistleblowers

According to the latest, annual whistleblower report from the Commodity Futures Trading Commission (CFTC), crypto is delivering more whistleblowers than any other areas in the CFTC’s remit. According to a statement by Commissioner Christy Goldsmith Romero (D), “The majority of the tips received this year involved crypto—an area that continues to have pervasive fraud and other illegality. (…) With the rise of crypto, more retail customers have come under the CFTC’s jurisdiction, making even more critical the efforts of the CFTC’s Whistleblower Program and the Office of Customer Education and Outreach.” Read the Commissioner’s statement.

The report provides specifics: “The volume of tips relating to both crypto/digital asset schemes and romance scams continued to be high. These schemes generally start with a text from a ‘wrong number’ or through social media contacts and result in the victim losing large sums of money to his/her romantic interest.” See the CFTC’s annual whistleblower report (PDF).

And, read a summary on The Block.

what you should know: The implications of the prolific use of whistleblowers by the regulator should send shivers down the collective spine of fraudsters as they work with partners, co-founders, etc. who are also looking to make a quick buck.

Oregon and UCC

In an op-ed in the Portland Business Journal, lawyers Danny Newman and Michael Fletcher at law firm Tonkin Torp explain that Oregon has yet to adopt Uniform Commercial Code (UCC) provisions for  crypto assets transaction and the uncertainty may hurt the state especially when it comes to bankruptcy cases but there are larger implications.  Newman and Fletcher argue, “To promote business development and innovation with crypto assets, Oregon should join these other states and adopt the model UCC provisions for digital assets. (…) The Oregon legislature should take up consideration of the model UCC crypto provisions to bring certainty to this emerging area of commercial activity.” Read more.

what you should know: States think about innovation, too!- not just reigning in digital assets. Learn more on the UCC changes and its impact from law firm Orrick and a piece written in October ’22 here.

PayPal offshore

A global strategy in digital assets continues to expand for payments firm PayPal as the company successfully registered (see “PayPal UK Limited“) this week in the United Kingdom as a crypto service provider. Decrypt reports, “PayPal’s registration comes a few months after the firm temporarily paused crypto purchases for British customers, citing “new regulatory requirements.” Read more.

what you should know: Global companies such as PayPal are going to create crypto businesses where jurisdictions with well-defined regulations exist.

SEC pushback continues

It may not have been digital assets, but after Tuesday’s GAO announcement sharply critical of the Securities and Exchange Commission’s (SEC) SAB 121 maneuvers with digital assets, a new Congressional letter on Tuesday reinforced the increasing pressure on the SEC’s Democratic majority led by its Chair Gary Gensler.

Participants in the letter are from across the partisan divide: from Reps. Wylie Nickel (D, NC) and Sean Casten (D, IL) to Reps. Brian Steil (R, WI) and Byron Donalds (R, FL). The lawmakers’ concern was rulemaking – specifically “Prohibition Against Conflicts of Interest in Certain Securitizations” (see fact sheet) which the lawmakers said was hard on “working families [who] are already enduring both a credit crunch and a housing crisis, and this proposed rule may make it even harder for our constituents to make ends meet.”

See the letter.

what you should know: Rep. Casten and Rep. Donalds on the same letter – write it down!

today’s hearing

Today’s House Financial Services Capital Markets Subcommittee Hearing titled, “Examining the SEC’s Agenda: Unintended Consequences for U.S. Capital Markets and Investors,” will commence at 10 a.m. ET in the Rayburn House Office Building. See live video, memo and hearing page here. Rep. Ann Wagner (R, MO) is Chair.

Witness and former SEC Director Dalia Blass doesn’t hold back in criticism of the SEC in her prepared testimony (PDF): “…I am concerned with the breadth, pace, and scope of the SEC’s current rulemaking agenda. Many of these significant rulemakings are not being conducted in response to a legislative mandate from Congress, nor has the Commission demonstrated any market failure or regulatory failure in support of their breadth and scope.”

Witness list (click name for testimony where available):

    • S.P. Kothari, Professor, MIT Sloan School of Management
    • Dalia Blass, Partner, Sullivan & Cromwell
    • Tom Quaadman, EVP, U.S. Chamber of Commerce
    • Ken Bentsen, President and CEO, SIFMA
    • Amy Borrus, Executive Director, Council of Institutional Investors

what you should know: And, as we pointed out last week before the hearing was postponed due to House Speaker drama, Blass’s presence along with Securities Industry and Financial Markets Association (SIFMA) CEO Ken Bentsen is notable. Blass collided with SIFMA when she was at the SEC and when the idea of a Bitcoin ETF was starting to take shape in the industry. The SEC wanted the industry to slow down. See Blass’s letter to SIFMA in 2018.

thinking Coinbase wins

On the Thinking Crypto podcast this week, host Tony Edwards asks Digital Chamber of Commerce executive Cody Carbone a relevant “what if” question given the SEC’s recent losses (1, 2) in the court and elsewhere. What if Coinbase wins against SEC?

Carbone said, “If Coinbase is going to be successful with their motion to dismiss and they’re going to move on from the SEC’s enforcement action, you’re going to get a lot of questions in DC. We already saw them after the Ripple case where there were House Democrats who were sitting on the sidelines for the last few years saying, ‘All right, Gary Gensler, you say that you’re going to regulate the entire industry. You say you have authority. We will believe you until the courts tell us you don’t have that authority.’ … When that XRP case happened was the first time that I saw members of Congress reach out to us saying, ‘We have questions. What’s going on here?’ If Coinbase is granted a motion to dismiss and it is another – and I would say massive loss for the SEC – those questions are only going to intensify.”

Hear the podcast.

what you should know: U.S. District Judge Katherine Failla, who presides over the Coinbase case, is the same Judge who dismissed the lawsuit against the Uniswap protocol and its executives.

still more tips

HSBC Takes Stab at Using Blockchain to Modernize London’s Antiquated Gold Market – Bloomberg

How does the New York Department of Financial Services (NYDFS) regulate stablecoins? – Bluechip on X

US traders can now trade regulated leveraged crypto futures through Coinbase Financial Markets – Coinbase

Tether Q3 Attestation Reveals Highest Percentage of Cash & Cash Equivalent Reserves, Over $330M Reduction in Secured Loans and Maintains $72.6B exposure in US T-Bills – Tether

Binance to Shut Down Ruble Payment Partnership – The Wall Street Journal