Swiss Banks Launch Crypto Offerings; GAO Addresses SEC Crypto Bulletin; UK and Hong Kong Publish Crypto Guidance; DOJ and SEC Enforcement Continues | BakerHostetler

Swiss Banks Launch Tokenization Pilot, Crypto Custody and Trading Services

By Robert A. Musiala Jr.

A recent press release announced a pilot by “SIX, the Swiss National Bank (SNB) and six commercial banks” that seeks “to test, in a live production environment, the settlement of primary and secondary market transactions” in “tokenized central bank money for financial institutions (referred to as wholesale central bank digital currency or wCBDC).” According to the press release, the pilot will “see the orchestration of a real Swiss Franc wCBDC settling digital securities transactions” and “builds on the findings of earlier … phases by the BIS Innovation Hub, the Swiss National Bank (SNB) and the financial infrastructure operator SIX.”

In another development from Switzerland, according to recent reports, one of the country’s largest cantonal banks, St. Galler Kantonalbank (SGKB), announced that it has launched bitcoin and ether custody and trading services for a select group of clients. SGKB is reportedly working with another Swiss bank, SEBA Bank, to provide the new offering. And in a final notable item, according to recent reports, the European affiliate of BitGo, a cryptocurrency custody provider, has been granted a cryptocurrency custody license by the German Federal Financial Supervisory Authority (BaFin).

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GAO Finds SEC Bulletin Addressing Crypto Must Be Submitted to Congress

By Robert A. Musiala Jr.

On Oct. 31, the U.S. Government Accountability Office (GAO) published a decision finding that the requirements of the Congressional Review Act (CRA) applied to U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 121 (Bulletin), and therefore the Bulletin must be submitted to Congress. The SEC issued the Bulletin on March 31, 2022. On April 11, 2022, the Bulletin was published in the Federal Register and became effective. According to the GAO decision, “The Bulletin provides interpretive guidance regarding how covered entities should account for and disclose their custodial obligations to safeguard crypto-assets held for their platform users.” On Aug. 2, 2022, the GAO received a congressional request from Sen. Cynthia M. Lummis for a decision regarding whether the Bulletin was subject to the CRA.

The CRA requires that before a rule can take effect, an agency must submit a report on the rule to both the House of Representatives and the Senate as well as the Comptroller General, and provides procedures for congressional review such that Congress may disapprove of rules. The CRA adopts the definition of “rule” under the Administrative Procedure Act (APA) but excludes certain categories of rules from coverage. In its decision, the GAO concluded that the Bulletin is a rule for purposes of the CRA because it meets the APA definition of a rule, and no exceptions apply. Accordingly, the GAO found that the Bulletin was subject to the CRA’s submission requirement.

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SEC Commissioner Criticizes LBRY Litigation; Advocacy Group Addresses NFTs

By Robert A. Musiala Jr.

On Oct. 27, U.S. Securities and Exchange (SEC) Commissioner Hester M. Peirce published a statement criticizing and dissenting against the SEC’s recent enforcement action and litigation against LBRY Inc. (LBRY). According to the Commissioner’s statement, “after losing in federal district court on the question of whether the sale of LBRY tokens was an unregistered securities offering, LBRY announced that it will not move forward with an appeal of the decision. Instead, the company will shut down, and its assets will be placed in receivership and used to satisfy its debts, including the civil money penalty owed to the Commission.” The Commissioner’s statement went on to question whether investors and the market are better off “now after the Commission’s litigation contributed to the demise of a company that had built a functioning blockchain with a real-world application running on top of it[.]” According to the Commissioner’s statement, the LBRY case “illustrates the arbitrariness and real-life consequences of the Commission’s misguided enforcement-driven approach to crypto.” Among other comments, the Commissioner urged people “who have suggestions about how the Commission can right its course on crypto and innovation more broadly, to send them my way.”

In related news, a major U.S. blockchain and digital assets advocacy group recently published a letter to Commissioner Peirce and Commissioner Mark T. Uyeda in response to a separate dissenting statement in which the SEC Commissioners criticized the SEC’s first enforcement action in the non-fungible token (NFT) sector. The paper provides detailed answers to the nine enumerated questions posed by the Commissioners in their dissenting statement. According to the letter, the advocacy group’s answers to the Commissioners’ nine questions reflect “input from a range of our members involved in the NFT space.”

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United Kingdom and Hong Kong Publish New Crypto Guidance

By Robert A. Musiala Jr.

The United Kingdom’s HM Treasury recently published an Update on Plans for the Regulation of Fiat-backed Stablecoins. Among other things, the guidance discusses how HM Treasury intends to regulate fiat-backed stablecoins “within the remit of the Bank of England, Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR), which altogether will aim to minimise potential for customer harm and mitigate the conduct, prudential, and financial stability risks arising from those stablecoins, particularly when used for payments.”

In another set of recent guidance from the UK, the FCA published its Finalised non-handbook guidance on Cryptoasset Financial Promotions. According to an FCA press release, the new rules “are designed to give people a better understanding of what they are investing in, and the risks involved.”

And in Hong Kong, the Hong Kong Securities and Futures Commission (SFC) recently published a Circular on intermediaries engaging in tokenised securities-related activities. According to the SFC, the new guidance “will help to clarify regulatory expectations for intermediaries engaged in [tokenized securities] activities, thereby providing regulatory certainty to support continued innovation with appropriate safeguards from an investor protection perspective.”

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DOJ and SEC Target Crypto Fraud Scheme; Congress Voices Crypto Risks

By Keith R. Murphy

According to a recent press release by the U.S. Department of Justice (DOJ), multiple federal agencies including the DOJ, cooperated to investigate and bring charges against three individuals alleging conspiracy to commit securities fraud, conspiracy to commit wire fraud and money laundering conspiracy in connection with their roles in defrauding investors in SafeMoon (SFM), a decentralized finance digital asset issued by their company of the same name. As noted in the release, despite contrary representations to investors, the defendants purportedly retained access to the SFM liquidity pools, using that access to misappropriate millions of dollars’ worth of the SFM tokens for their personal benefit. The defendants also publicly denied they personally held or traded SFM; however, they allegedly repeatedly purchased and sold SFM for their own benefit, including at the height of SFM’s market price, generating millions of dollars in profits, according to the release. The defendants purportedly hid movement of the fraudulent proceeds through many “private un-hosted crypto wallet addresses, complex transaction routing, and pseudonymous centralized exchange accounts.”

In a parallel action, the U.S. Securities and Exchange Commission (SEC) also filed a complaint against the company and the same three individuals for perpetrating a massive fraud scheme. As quoted in an SEC press release, “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 like Kyle Nagy, who use these vulnerabilities to enrich themselves at the expense of others,” according to the Chief of the SEC Enforcement Division’s Crypto Assets and Cyber Unit.

In another recent development, a member of the Senate Banking Committee and the Chair of the Subcommittee on Digital Assets of the House Financial Services Committee jointly issued a letter to U.S. Attorney General Merrick Garland urging him and the DOJ to evaluate the extent to which two well-known, unregulated cryptocurrency exchange platforms and intermediaries, Binance and Tether, may be providing material support and resources to support terrorism through violations of various sanctions laws as well as of the Bank Secrecy Act. Among other things, the letter alleges that the two platforms are enabling violations of sanctions laws and failing to conduct adequate customer screenings, allowing Hamas and other groups to facilitate terrorism.

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