On October 3, 2022, the Financial Stability Oversight Council (“FSOC” or “Council”) released a report outlining the risks posed by digital assets to the financial stability of the United States. The FSOC is charged broadly with identifying emerging threats to financial stability, and is comprised of the heads of each major federal financial regulator, chaired by the Secretary of the Treasury. The FSOC’s initial position in 2015 was that digital assets generally do not pose a significant financial stability risk due to limited use and a lack of ties to the traditional financial system. President Biden asked the FSOC to reconsider their position in his “Executive Order on Ensuring Responsible Development of Digital Assets.”Continue Reading FSOC Issues Digital Asset Report
The SEC instituted settlement proceedings against Kim Kardashian on Monday, alleging that the reality television star and entrepreneur violated the SEC’s anti-touting statute when she failed to disclose compensation that she received in exchange for an Instagram post endorsing cryptocurrency tokens. The promotion, which Kardashian posted to her Instagram account on June 13, 2021, encouraged her 225 million followers to visit a website operated by EthereumMax, an online company that offers and sells digital “Emax tokens.” Kardashian’s Instagram post included an “#AD” hashtag, but failed to disclose that she received $250,000 from EthereumMax in exchange for the promotion.
The SEC’s cease-and-desist order alleges that Kardashian’s post violated Section 17(b) of the Securities Act of 1933. Section 17(b) prohibits individuals from promoting securities in exchange for compensation without fully disclosing the receipt and amount of the compensation. This anti-touting provision imposes strict liability for any failure to disclose a compensated promotion of a security. The SEC’s recent enforcement of Section 17(b) against individuals promoting cryptocurrency is consistent with its position that most crypto tokens and coins offered for sale may be classified as securities, and may be subject to federal securities laws. It is noteworthy that the SEC did not allege Ms. Kardashian made any material misstatements or omissions in promoting Emax, and no showing of fraud is required when the agency brings a Section 17(b) claim.
As part of her settlement of the SEC’s claim, Kardashian has agreed to pay $250,000 in disgorgement of the payment she received for the Instagram post, plus a $1,000,000 civil penalty, and over $10,000 in interest. Notably, Kardashian is not the first celebrity to end up in hot water with the SEC after testing out the “crypto influencer” market. Several other high-profile individuals have found themselves subject to similar proceedings, including Floyd Mayweather, DJ Khaled, and Steven Seagal. In each action, the SEC alleged that the celebrities failed to disclose fully the compensation that they received in exchange for their endorsements of cryptocurrency, and each of them was required to forfeit any compensation that they received, plus a hefty civil penalty. These recent actions should serve as a cautionary reminder for celebrities and noncelebrities alike who may be approached about endorsing cryptocurrency (or any other security) that any endorsement they make may be subject to federal securities laws.
Following up on President Biden’s recent executive order on digital assets, the US Treasury Department recently announced the publication of three reports on digital assets. The reports address issues relating to The Future of Money and Payments; Implications for Consumers, Investors, and Businesses; and an Action Plan to Address Illicit Financing Risks of Digital Assets.Continue Reading Treasury Releases Three Reports on Digital Assets
In recent months, members of Congress have introduced a wide variety of bills seeking to create a new federal regulatory regime for digital assets. NASAA, which is an umbrella organization for state and provincial securities regulators in the US, Canada and Mexico, recently submitted a letter to Congress critical of one such bill that lays out a series of arguments more broadly against federal action.Continue Reading State Securities Regulators Oppose Federal Digital Asset Bill
From IRS rulings that “virtual currency” is taxed as “property” to an SEC lawsuit claiming that digital assets are “securities” under federal law, meteoric growth of the largely unregulated crypto industry has raised numerous questions about whether crypto-related risks are covered by insurance. In the latest example of the intersection of crypto and insurance, a California federal court recently held that cryptocurrency stolen from a Coinbase account did not constitute a covered loss under a homeowner’s insurance policy. The fundamental issue was whether the stolen crypto met the policy’s requirement for “direct physical loss to property” and, more specifically, whether the losses were “physical” in nature. The court ruled against coverage, reasoning that lost control of cryptocurrency is not a direct physical loss as a matter of California law.Continue Reading California Holds Stolen Cryptocurrency Does Not Qualify as “Physical” Loss Under Homeowners’ Policy
On August 10, 2022, 3-2 majorities of the SEC and CFTC voted to propose amendments to Form PF reporting for certain investment advisers to private investment funds. Among the many proposed amendments to the form, the proposed rules would for the first time require covered investment advisers to report on certain digital asset investments.Continue Reading SEC and CFTC Propose Digital Asset Reporting on Form PF
Non-fungible tokens (NFTs) are creating new economic opportunities in old, familiar spaces. To capitalize on the current popularity of NFTs, some retailers are turning to the timeless art of nostalgia: reworking old media or products into an NFT collection to advertise a brand in an online space or bring new attention (and customers) to a vintage product.Continue Reading NFTs: For Many Retailers, the “N” Stands for Nostalgia
In a series of parallel actions announced on July 21, 2022, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) initiated criminal and civil charges against three defendants in the first cryptocurrency insider trading case.Continue Reading Government Brings First Cryptocurrency Insider Trading Charges
LCX AG, a cryptocurrency exchange based in Liechtenstein, recently lost nearly $8 million in digital assets from a cyberattack. The perpetrator’s identity was unknown. Through the public ledger, LCX found the blockchain address that received the stolen assets, and quickly filed a complaint in New York to freeze certain of those assets. Without any other way to contact the perpetrator, the court permitted LCX to serve the wallet address with an NFT containing a hyperlink to the required legal notice documents. This may be the first example of service-by-NFT.Continue Reading You’ve Been Served… By NFT?
In a June 9, 2022 letter to the Directors of the US Patent and Trademark Office (USPTO) and US Copyright Office, Senators Thom Tillis (R-NC) and Patrick Leahy (D-VT) requested that the agencies jointly undertake a study of intellectual property (IP) rights considerations with respect to non-fungible tokens (NFT or NFTs).Continue Reading Senators Dive Into the World of NFTs, Asking US Patent and Copyright Offices to Consider Questions Regarding Related IP Rights