NFT Endorsements Scrutinized; Bank Crypto Guidance Issued; DOJ, CFTC and SEC Bring Crypto Enforcement Actions; Research Finds Crypto Insider Trading

In this issue:

NFTs Expand on Social Media, Celebrity NFT Endorsements Scrutinized

According to reports, one of the world’s largest social media platforms recently expanded its NFT (non-fungible token) initiative, allowing users in more than 100 countries to connect wallets and display and promote their digital collectibles. The platform now reportedly supports Coinbase, Dapper, MetaMask, Rainbow and Trust Wallets along with the Ethereum, Polygon and Flow blockchains.

While social media platforms expand user access to NFTs, consumer watchdog Truth in Advertising (TINA) has reportedly sounded the alarm about the celebrities who promote them. According to its recent blog post, TINA has issued warning letters to more than a dozen celebrities, putting them on notice for potentially promoting digital assets without including proper disclosures as required by both the Federal Trade Commission and the Securities and Exchange Commission. (For more on the TINA letters, you can read our sister blog post here.)

For more information, please refer to the following links:

Federal Reserve Addresses Crypto; Senator Inquires About Bank-Crypto Relations

This week, the Federal Reserve Board (Board) issued a supervisory letter identifying actions that Board-supervised banks should take when engaging in crypto-asset-related activities, according to a recent press release. The supervisory letter highlights potential risks associated with crypto-related ventures, including concerns about consumer protection, financial stability and technological security. Among other guidance, the letter provides that “prior to engaging in any crypto-asset-related activity, a supervised banking organization must ensure such activity is legally permissible and determine whether any filings are required under applicable federal or state laws.” The letter further advises that supervised banks should have in place appropriate risk management systems and controls in order to conduct such activities safely and soundly, and that they must notify their lead supervisory point of contact at the Board in advance of engaging in any crypto-asset-related activity, or if already engaged, they must provide such notification promptly.

Also this week, Sen. Pat Toomey, a member of the U.S. Senate Banking Committee, issued a letter to the Federal Deposit Insurance Corporation (FDIC) seeking information about alleged obstruction of bank relations with crypto companies, according to a recent press release. Among other points raised in the letter, the FDIC is alleged to have delivered letters to regional offices requesting that banks refrain from expanding relationships with crypto companies, without providing a legal explanation for the request. Toomey also refers in his letter to whistleblower reports suggesting that the FDIC may be abusing its powers in an effort to deter banks from providing credit to crypto-related businesses. The senator has requested from the FDIC responses and documents addressing his inquiry by Aug. 30, 2022.

For more information, please refer to the following links:

DOJ, CFTC and SEC Crypto Enforcement Targets Tax Evasion, Fraud and ICOs

In a press release published this week, the U.S. Department of Justice (DOJ) announced that a California federal court authorized service of a John Doe summons on SFOX, a U.S. cryptocurrency prime dealer, earlier this week. According to the press release, the summons seeks information related to U.S. taxpayers who conducted at least $20,000 in cryptocurrency transactions through SFOX between 2016 and 2021. In a statement regarding the summons, IRS Commissioner Chuck Rettig urged taxpayers to “come into compliance with their filing and reporting responsibilities and avoid compromising themselves in schemes that may ultimately go badly for them.”

In another recent press release, the Commodity Futures Trading Commission (CFTC) announced an enforcement action against an Ohio man, Rathnakishore Giri, and his companies in connection with an alleged cryptocurrency Ponzi scheme. The CFTC alleged that Giri fraudulently solicited more than $12 million in fiat and cryptocurrency from investors and misappropriated customer funds intended for digital asset trading. In a statement regarding the alleged scheme, CFTC Commissioner Kristin N. Johnson said, “Recent attraction to digital assets and cryptocurrency market firms proclaiming high yields or promising instant wealth, but obscuring deceptive schemes that borrow from long-prohibited behavior, is deeply concerning. While there are many benefits to responsible innovation, customers must remain vigilant.”

In a third enforcement action this week, the U.S. Securities and Exchange Commission (SEC) announced charges against a blockchain startup, Dragonchain, its founder and two related entities in connection with the alleged sale of unregistered securities. According to the SEC, Dragonchain raised more than $16.5 million through the sale of its native token (DRGN), which the SEC characterized as “unregistered crypto asset securities.” In its complaint filed this week, the SEC accused Dragonchain of failing to register DRGN as a security and creating “an information vacuum such that it could sell DRGNs into a market that possessed only the information Dragonchain chose to share about DRGNs.”

For more information, please refer to the following links:

US and Foreign Law Enforcement Target Cryptocurrency Money Laundering

This week, the U.S. Department of Justice (DOJ) announced the extradition of suspected cryptocurrency money launderer Denis Mihaqlovic Dubnikov from the Netherlands. The DOJ alleges that Dubnikov and his co-conspirators laundered $70 million in ransom payments extorted from victims of Ryuk ransomware attacks throughout the U.S. and abroad. According to the DOJ, Dubnikov is alleged to have laundered more than $400,000 in ransom payments from Ryuk attacks in July 2019 alone.

In related news, Dutch authorities recently announced the arrest of a tech developer allegedly involved with Tornado Cash, the cryptocurrency mixing service that was recently sanctioned bv the U.S. Department of the Treasury’s Office of Foreign Assets Control. In a statement regarding the arrest, Dutch authorities allege that the man is “suspected of involvement in concealing criminal financial flows and facilitating money laundering” through Tornado Cash.

For more information, please refer to the following links:

DeFi Stablecoin Hacked; Research Finds Evidence of Crypto Insider Trading

According to reports, a Polkadot-based decentralized finance (DeFi) platform’s native stable coin was depegged on Sunday after it dove 99 percent when hackers exploited a bug in a new liquidity pool to mint almost 1.3 billion tokens, sinking the coin’s value. A liquidity pool is a digital stack of cryptocurrency locked up in a smart contract, which creates liquidity for faster transactions on decentralized exchanges and DeFi protocols. In this case, the platform’s developers believe the bug exploited by the hacker was caused by a misconfiguration of a new liquidity pool that recently went live. A wallet believed to belong to the attacker still contains approximately 1.27 billion of the stablecoin, but on-chain investigators have pointed out that the attacker who minted the fraudulent coins was not alone in taking advantage of the bug, with several other users stealing thousands of dollars of coins from the liquidity pool.

Australian researchers recently released an analysis of insider trading in the cryptocurrency markets. The recently released paper finds evidence of systematic insider trading in the industry, where individual traders use private information to buy coins prior to exchange listing announcements. The report estimates that insider trading occurs in 10-25 percent of cryptocurrency listings and that insiders have earned at least $1.5 million in trading profits. The report also identifies cases from major exchanges that have yet to be prosecuted.

For more information, please refer to the following links: