CryptoLink is a compilation of news stories published by outside organizations. Akin aggregates these stories, but the information contained in them does not necessarily represent the beliefs or opinions of the firm. Akin's August CryptoLink update includes developments from August and September of 2023.

A government shutdown has been temporarily avoided in Washington, with a reprieve that gives Congress until the middle of November to negotiate some resolution on spending for the fiscal year. With the Speaker's chair now vacant, and temporarily filled by House Financial Services Committee Chairman Patrick McHenry, the opportunities for meaningful non-spending legislation to make its way across the House floor before Thanksgiving are few. Still, in spite of the distractions, committees have been and will continue to do their work. Several recent hearings and markups have focued on digital assets policy and legislation. The Senate Banking Committee held an oversight hearing of the Securities and Exchange Commission (SEC), where SEC Chair Gary Gensler in his testimony called on the Committee to fund efforts to regulate the crypto sector, justifying this budget request as necessary to combat "daunting" levels of crypto fraud. Gensler's hostility towards crypto faced little resistance from Committee Democrats—Chair Sherrod Brown (D-OH) in his opening testimony stated: "We only need to look to events in the crypto markets in the past year to see what happens when markets lack transparency and conflicts go unchecked," and that "bad actors keep flocking to crypto." By contrast, the Republican majority at the House Financial Services Committee continue to prioritize legislating on crypto issues. The Committee held a hearing on restricting the Federal Reserve's ability to issue a Central Bank Digital Currency (CBDC) and held a subsequent markup, during which a bill that would prevent the issuance of a CBDC without explicit authorization from Congress was passed out of Committee along party lines. It is fair to say that both committees and both Chairman are currently positioning themselves for an end of year deal on financial services policy, where Chairman McHenry's top priorities remain his bipartisan market structure and stablecoin bills.

Meanwhile, at the Federal Reserve Bank of Philadelphia's seventh annual Fintech Conference, several senior Fed officials, including Vice Chair of Supervision Michael Barr and Board Governor Michelle Bowman, offered their views on crypto regulation. Barr expressed deep concern about stablecoins, among other things, saying "Stablecoins are a form of money, and the ultimate source of credibility in money is the central bank. If non-federally regulated stablecoins were to become a widespread means of payment and store of value, they could pose significant risks to financial stability, monetary policy, and the U.S. payments system." Bowman, for her part, expressed concern that both private instruments such as stablecoins and potential future public instruments like CBDCs could threaten consumer privacy, postulating that consumer protection in crypto should take precedence over innovation.

New developments in the case against former FTX founder and CEO Sam Bankman-Fried arise daily, with opening statements in the trial kicking off on October 4, 2023. The Bankman-Fried trial will be one of the first major trials involving the crypto industry and will set the standard for future criminal crypto cases. Meanwhile, the SEC continues to bring enforcement actions against companies for unregistered offerings of non-fungible tokens (NFTs), as seen in the SEC's second announced NFT settlement in SEC v. Stoner Cats, LLC (SC2). As in the SEC's enforcement action last month against Impact Theory, these two recent NFT settlements indicate that the SEC continues to take the position that NFTs, even those that appear similar to collectibles, are securities. However, in a notable setback for the SEC, U.S. District Judge Analisa Torres denied the SEC's motion for interlocutory appeal in the SEC's ongoing litigation against Ripple Labs, Inc, with the matter now proceeding to trial scheduled for April 2024. Meanwhile, the Commodity Futures Trading Commission (CFTC) remains focused on decentralized finance (DeFi), as illustrated by the three orders issued against three DeFi protocols for offering illegal digital assets derivatives trading. We anticipate that the DeFi space will be a focus for the CFTC.

In this issue

  • Spotlight on Coinbase
  • Spotlight on Binance
  • Key Developments
  • Key Recent Enforcement Actions
  • Akin Alerts and Podcast Episodes

Spotlight on FTX

Former FTX Executive Ryan Salame Pleads Guilty to Criminal Conspiracy Charges

On September 5, 2023, the U.S. Attorney's Office for the Southern District of New York (SDNY) accepted former FTX executive Ryan Salame's guilty plea to one count of conspiracy to defraud the United States and willfully violate the Federal Election Campaign Act and one count of conspiracy to operate an unlicensed money transmitting business. Ryan Salame was the co-CEO of FTX's Bahamian subsidiary. Prosecutors accused Salame and others of using FTX customers' funds to donate to political candidates supporting crypto-friendly legislation.

The letter from SDNY accepting the guilty plea can be found here.

FTX Founder's Parents Face Suit to Recover Millions Obtained Fraudulently

On September 18, 2023, a complaint was filed before the U.S. Bankruptcy Court for the District of Delaware against Allan Joseph Bankman and Barbara Fried, the parents of FTX founder Samuel Bankman-Fried, by the debtors in the ongoing FTX Chapter 11 proceedings. The complaint "seeks to recover millions of dollars in fraudulently transferred and misappropriated funds" and states that "Bankman and Fried exploited their access and influence within the FTX enterprise to enrich themselves, directly and indirectly, by millions of dollars, and knowingly at the expense of the debtors."

The complaint can be found here.

FTX Brings Proceedings Against Former Employees of Hong Kong Affiliate

On September 21, 2023, FTX Trading Ltd. and West Realm Shires Services, Inc. (together, FTX) filed a complaint (before the U.S. Bankruptcy Court for the District of Delaware) for avoidance and recovery of transfers against four former employees of FTX's Hong Kong affiliate company Salameda Ltd. (Michael Burgess, Huy y Xuan "Kevin" Nguyen, Jing Yu "Darren" Wong, Matthew Burgess, Lesley Burgess), 3Twelve Ventures Ltd. and BDK Consulting Ltd. (together, the Defendants). According to the complaint, following their departures from Salameda, the four employees pursued various business ventures, which included trading cryptocurrencies on the FTX.com and FTX US exchanges and collectively withdrawing digital assets valued at approximately $157.3 million (including through leveraging their connections to FTX personnel to ensure they would be prioritized over other customers). The adversary proceedings seeks to recover for the benefit of the plaintiff's creditors those assets preferentially or fraudulently transferred to the Defendant's prior to FTX filing for Chapter 11 relief.

The complaint can be found here.

U.S. Court Upholds Bankman-Fried's Pre-Trial Detention

On September 21, 2023, the United States Court of Appeals for the 2nd Circuit upheld the District Court's pre-trial detention of Samuel Bankman-Fried and denied the motion for release pending trial. The District Court found, and the Court of Appeals agreed, that pretrial detention was appropriate because "there was probable cause to believe that the Defendant-Appellant attempted to tamper with two witnesses ... and specifically that he acted with unlawful intent to influence those witnesses." The Court of Appeals further rejected Bankman-Fried's contention that the District Court failed to consider a less restrictive alternative to detention.

Subsequently, on September 25, 2023, attorneys representing Bankman-Fried submitted a letter to the U.S. District Court for the Southern District of New York requesting the temporary release of Bankman-Fried for his upcoming trial because it is "necessary for preparation of [his] defense." The letter stated that it is "exceedingly difficult as a practical matter to adequately prepare for trial with the restrictions on access currently in place," including because the case "is highly technical and complex, and we need our client to help us understand the facts and explain many of the issues. He alone knows the facts which are also critical in preparing his defense."

The U.S. Court of Appeals order can be found here and the letter from Bankman-Fried's counsel can be found here.

U.S. District Judge Grants Government's Motion in Bankman-Fried Trial

On September 26, 2023, U.S. District Judge Lewis A. Kaplan granted the government's motion in part in the upcoming trial against Bankman-Fried, including ordering that evidence of Bankman-Fried's campaign finance scheme would be admissible in the upcoming trial, despite the prosecution withdrawing the campaign finance charge. Judge Kaplan stated that "[e]vidence of defendant's alleged illegal campaign finance scheme is direct evidence of the charged offenses" and concerns about the effect on the jury could be resolved through appropriate jury instruction. Bankman-Fried awaits trial on two substantive counts of wire fraud and fire conspiracy counts alleging conspiracy to commit wire fraud, securities fraud, commodities fraud and money laundering. The trial began on October 3, 2023.

The memorandum and order can be found here.

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