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September 18, 2023 – Gibson DunnÔÇÖs Digital Assets Regular Update

Introduction

In this edition of Gibson Dunn’s digital assets regular update, we will cover recent legal news related to various types of digital assets, including cryptocurrencies, stablecoins, Central Bank Digital Currencies (CBDCs), and Non-Fungible Tokens (NFTs). Additionally, we will discuss other blockchain and Web3 technologies, providing you with a comprehensive overview of the current legal landscape in the digital asset space.

Enforcement Actions

United States Feds Charge Tornado Cash Developers Facilitated $1 Billion in Money Laundering

Recently, on August 23, the Manhattan U.S. Attorney’s Office filed charges in the Southern District of New York against two developers of Tornado Cash, Roman Storm and Roman Semenov. Tornado Cash is a cryptocurrency application that allows users to obscure the source of assets transferred through it. Prosecutors allege that more than $1 billion was laundered through Tornado Cash, including hundreds of millions by North Korea’s Lazarus Group. The charges include conspiracy to engage in money laundering, conspiracy to violate U.S. sanctions targeting North Korea, and conspiracy to operate an unlicensed money transmitting business.

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SEC Brings First Enforcement Actions Alleging NFTs Are Securities

On August 28, the U.S. Securities and Exchange Commission (SEC) brought enforcement actions against Impact Theory, LLC, a media company, over its sales of NFTs. The SEC concluded that Impact Theory’s KeyNFTs were investment contracts, primarily due to the company’s marketing statements promising substantial value and appreciation. As part of a settlement, Impact Theory was ordered to disgorge over $5 million.

Weeks later, on September 13, the SEC issued another order, this time against Stoner Cats 2 LLC (SC2), alleging an unregistered securities offering through the sale of profile-picture NFTs. SC2 raised approximately $8 million from the sale of these NFTs to finance the production of an animated web series. SC2 agreed to pay a $1 million fine and destroy all remaining NFTs in its possession.

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CFTC Charges DeFi Platforms Over Crypto Derivatives

On September 7, the Commodity Futures Trading Commission (CFTC) filed charges against three decentralized finance (DeFi) trading platformsÔÇöOpyn, Inc., ZeroEx (0x), Inc., and Deridex, Inc.ÔÇöfor offering digital asset derivatives trading. The CFTC ordered the companies to pay civil penalties and cease violating the Commodity Exchange Act (CEA) and CFTC regulations.

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LBRY to Appeal Ruling That It Violated U.S. Securities Law

LBRY, a crypto file-sharing protocol, filed a notice of appeal on September 7 regarding a federal court’s decision that it violated U.S. securities laws by failing to register the sale of its native tokens (LBC) with the SEC. LBRY was ordered to pay a civil penalty and was barred from participating in unregistered crypto securities offerings in the future.

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Former FTX Executive Ryan Salame Pleads Guilty Ahead of Bankman-Fried Trial

Ryan Salame, a former top executive at FTX, pleaded guilty on September 7 to charges of operating an unlicensed money transmitting business and making unlawful political contributions. Salame faces potential prison time and financial penalties. This plea comes shortly before the trial of Sam Bankman-Fried, the co-founder of FTX.

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Former OpenSea Head of Product Receives Three-Month Prison Sentence for NFT Insider Trading

Nate Chastain, the former Head of Product at OpenSea, was sentenced to three months in prison for insider trading involving NFTs. Chastain profited from trading NFTs that he knew would be featured on the OpenSea homepage. The judge imposed a shorter sentence due to Chastain’s limited profits, along with community service, a fine, and forfeiture of cryptocurrency assets.

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Regulation and Legislation

United States Treasury and IRS Propose Tax-Reporting Rules for Crypto Industry

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently released proposed regulations governing tax-reporting requirements for the crypto industry. These regulations would expand the definition of “broker” to include various entities operating in the crypto space. Starting from January 1, 2025, these entities would be subject to similar tax reporting rules as brokers for securities and financial instruments.

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FASB Announces New Bitcoin Accounting Rules

The Financial Accounting Standards Board (FASB) announced forthcoming accounting rules that would require companies holding or investing in cryptocurrencies to report their holdings at fair value. This change would allow companies to immediately recognize gains and losses in cryptocurrencies, similar to other financial assets. The accounting rules will be mandatory for all companies, public and private, for fiscal years beginning after December 15, 2024.

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International

UK Crypto Firms Can Apply for Extra Time to Comply with New Restrictions on Crypto Promotions

The UK’s Financial Conduct Authority (FCA) announced that crypto firms in the UK may get an additional three months to implement new restrictions on crypto promotions. These rules aim to make the marketing of cryptoasset products clearer and more accurate. The FCA intends to take enforcement action against overseas or unregulated firms that unlawfully market to UK consumers starting October 8.

Travel Rule Regulation Goes into Force in the UK for Crypto Asset Firms

On September 1, the Travel Rule regulation, which requires crypto asset firms to collect and transfer customer information during transactions, went into force in the UK. This regulation aims to enhance anti-money laundering efforts and strengthen the regulatory framework for crypto assets.

How AI legalese decoder Can Help: AI legalese decoder can assist legal professionals in monitoring and understanding international regulations related to cryptocurrencies. By utilizing its real-time monitoring capabilities, AI legalese decoder can provide legal professionals with updates on regulatory developments in various jurisdictions, enabling them to ensure compliance and stay ahead of regulatory changes.

Conclusion

In this edition of Gibson Dunn’s digital assets regular update, we discussed various enforcement actions, regulatory developments, and legislative changes related to digital assets. We also demonstrated how AI legalese decoder can aid legal professionals in analyzing and understanding complex legal content.

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