US Regulation by Enforcement takes a Non Fungible Turn
Under the announced settlement deal, Impact Theory will pay
Interestingly, the
The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder's Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts
Impact Theory is alleged to have told buyers that it was "trying to build the next
The news appears to be having a serious ripple effect in the NFT world.
Commissioners
We understand why the Commission was concerned about this NFT sale. Even through we believe strongly that adults should be able to spend their money as they choose, we share our colleagues' worry about the type of hype that entices people.
But that:
This legitimate concern, however, is not a sufficient basis to pull the matter into our jurisdiction.
The dissenting statement refers to companies that sell watches, paintings or collectibles and make vague promises about the increase in value, which are not subject to similar enforcement by the
This dissent shows the difficulty some factions of the
- Non-fungible tokens are not an easy-to-characterize asset class, particularly because they can give the owner a wide array of rights to digital or physical assets. People are experimenting with a lot of different uses of NFTs. Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty. Are there useful ways for the Commission to categorize NFTs for purposes of thinking about whether and how the securities laws apply to offers and sales?
- If the Commission were to craft guidance for NFT creators seeking to understand potential intersections with the securities laws, what questions would be helpful for us to address?
-
How should recent legislative efforts to construct a framework for crypto inform
SEC thinking about the application of securities laws to NFTs? - Is a securities law regime best suited to ensure that NFT purchasers obtain the information they need before buying an NFT? What type of information do these purchasers want? Might other regulatory frameworks be more appropriate?
-
If a securities law regime is best, how could
SEC registration requirements be tailored to reflect the unique nature of NFTs? Would compliance with any requirements be prohibitively costly? If so, what alternative approaches would be more workable, but still achieve the Commission's objectives of protecting investors and the integrity of the marketplace? - Does this action indicate that the Commission generally views previous NFT offerings as securities offerings? If so, will the Commission provide specific guidance to those issuers describing what they need to do to come into compliance?
- What, if any, restrictions should apply to secondary market sales of NFTs that the issuer sold as the object of an investment contract?
- This settlement includes an undertaking by the issuer to destroy NFTs in its possession. What precedent does this set for future cases in which the NFTs at issue represent unique pieces of digital art or music?
- The settlement includes an undertaking to "[r]evise the smart contract(s) or any other programming code(s) or computer protocol(s) underlying the KeyNFTs to eliminate any royalty." Given that one of the promising features of NFTs is the ability to reward creators with royalties every time an NFT they created is sold, what precedent does this set for future cases?
On that last point, the dissenting Commissioners might need to get up to speed on the issues around royalty enforcement (i.e. it's not occurring on a number of platforms). Many had considered NFTs to be, from a regulatory perspective, a far safer space than token sales, but the
Grayscale wins Bitcoin ETF appeal against
Grayscale Investments, a major player in the cryptocurrency market and owner of 3.4% of all mined bitcoin (worth around
However, the Court was critical of those concerns, finding that the
The Court emphasised that similar cases must be treated similarly as a foundation principle of administrative law and that:
the Commission failed to provide the necessary "reasonable and coherent explanation" for its inconsistent treatment of similar products.
The
The Court, however, found that the
Australian businesses have been keenly observing the regulatory developments in
The Grayscale case could serve as a reminder of the importance of regulators to work to properly understand blockchain and crypto-assets, and move away from past narratives of "fraud and scams" which increasingly are shown to be inaccurate. A movement to fit for purpose regulations would help avoid the risk of further litigation of this kind.
Touchdown! NZ recommends new approach to digital assets
The
The Recommendations
The Report's recommendations provide a comprehensive framework to enable
This cautious approach aims to address problems as they arise rather than pre-emptively stifling innovation with overly strict rules. On the other hand, there is a clear focus on consumer protection with proposals to resource regulatory bodies like the
Some of the key recommendations from the Report are discussed below and include:
- Recommendation 1: that the government of
New Zealand adopt policy settings to encourage developments in digital assets and blockchain. - Recommendation 2: the Government and regulators create coherent and consistent guidance on the treatment of digital assets under current law.
- Recommendation 4: that a best practice code or guidance with minimum standards is developed for the custody of digital assets.
- Recommendation 8: that there is no primary regulator for digital assets, as digital assets cover a spectrum of use cases.
- Recommendation 9-11: that there be enhanced coordination across Government to tackle policy challenges and foster the development of the industry.
- Recommendations 18, 20-21: that steps be taken to address AML/CTF concerns and ensure access to banking services for organizations dealing in digital assets.
-
Recommendation 22: that the
Reserve Bank of New Zealand continue with design work on its Central Bank Digital Currency.
The Overwhelming Message
In a measured response to the rapidly evolving digital assets landscape,
The Report suggests that creating a robust regulatory system may constrain future growth in the fast-changing industry, and instead there is room for consistent and informative guidance from government agencies about how existing policy applies to digital assets and associated technology.
Is "Cryptocurrency" the right term?
The Report relevantly questions whether "cryptocurrencies" is the correct term, and instead opts to refer to many of the products discussed as "digital assets" as they do not share the same characteristics as "currencies".
This part of the Report speaks to the wider importance of increasing education and technical knowledge with respect to digital assets, not least among policy makers, but by all relevant professions.
Time for a Sandbox
The Report encourages the establishment of a regulatory sandbox for digital assets and related services. The proposal would allow innovators to test new products and services, and regulators to maintain visibility and consider policy options. The ultimate goal is to use these real-world tests to develop evidence-based, adaptive regulatory frameworks that can manage the opportunities and risks posed by rapidly advancing technologies.
The Report raises potential challenges and uncertainties that come with implementing a sandbox policy. These include defining the post-sandbox regulatory requirements and the limited scope and time for testing innovations, which may inhibit large scale testing. This notwithstanding, the Report mentions the success of similar initiatives in other countries, like the
The report recommends that
Immigration
Token Mapping
The Report refers to the Token Mapping Consultation Paper released by the Australian Treasury in February as "comprehensive" and notes that
Conclusion
If adopted by Government, the Report's recommendations would position
US indicts Tornado Cash Duo
Following a
- conspiracy to commit money laundering,
- conspiracy to commit sanctions violations, and
- conspiracy to operate an unlicensed money transmitting business.
The US prosecutors that brought charges include the US Attorney's office for the
arise from the defendants' alleged creation, operation, and promotion of
and alleged that the cryptocurrency mixer:
facilitated more than
Operation of the Cryptocurrency Mixer
Storm and Semenov are alleged to have liability including because they were involved in
created the core features of the Tornado Cash service, paid for critical infrastructure to operate the Tornado Cash service, promoted the Tornado Cash service, and made millions of dollars in profits from operating the Tornado Cash service.
The prosecutors alleged that the founders knowledge of
North Korean Cybercrime Involvement
The indictment further claims that the Tornado Cash service played a pivotal role in laundering hundreds of millions of dollars in hacking proceeds for the
The Future of Cryptocurrency and DAO Enforcement
The indictment of Storm and Semenov marks a significant step in the legal battle against cryptocurrency-related crime but also is being cast as a similar prosecution to the battle in the 1990s over exporting of encryption algorithms, which led to a T-Shirt being sold which could, in theory, lead to the wearer being prosecuted (no one actually went to jail):
A new shirt is now available for sale with the Tornado Cash code, highlighting that the code can be deployed and
This case has been attacked as criminalisation of computer code, and highlights the determination of US law enforcement agencies to seek to prosecute those who exploit cryptocurrencies for illegal activities and demonstrates the increasing cooperation between domestic and international agencies in pursuing criminals who use digital assets for financial gain.
Storm was arrested on 23 August in
This case also sheds light on US prosecutors' views on potential legal liabilities of developers and operators for automated software and Decentralised Autonomous Organizations (i.e. DAOs), particularly as it impacts those who create interfaces for smart contract in blockchain systems.
Ripple Effect: SEC Appeal of Torres Decision Does not Dispute XRP is not a security under US law
In a significant development to the ongoing Ripple case, Judge
The
An important aspect of note in the appeal is that the
is not in and of itself a "contract, transaction[,] or scheme"
The
the
The appeal of
Ripple wrote to
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