Regulation
A hot week in July could transform the future of US crypto regulation
WASHINGTON, DC – SEPTEMBER 15: Securities and Exchange Commission (SEC) Chairman Gary Gensler testifies… [+] before the Senate Banking, Housing and Urban Affairs Committee (Photo by Kevin Dietsch/Getty Images)
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Over the past year, we’ve seen an awkward dance of U.S. government involvement in cryptocurrencies. However, during a hot week in July, we saw all three branches engage in significant and potentially transformative steps that could have a lasting impact on the future of crypto policymaking in America.
The judiciary believes that not all tokens are securities
First, on Thursday, July 13, the judiciary entered the fray when the U.S. District Court for the Southern District of New York granted partial summary judgment in favor of Ripple, in its dispute with the SEC, finding that the company had not violated safety rules. Take action by selling your XRP
XRP
token on public exchanges.
What does this decision mean for the future of cryptocurrency regulation in the United States? Attorney Kayvan B. Sadeghi of Jenner & Block told me, “The Ripple decision will have far-reaching effects on the SEC’s crypto enforcement agenda for the foreseeable future. The court clearly rejected a fundamental principle of the SEC’s efforts to regulate crypto secondary markets. The SEC cannot simply treat tokens as securities.
Regardless of the partial nature of the gain in which the Court held that sales of XRP constituted securities transactions when the sale was accompanied by specific promises linking the future performance of the token to the seller’s actions under a contract of investment, the Court’s decision could potentially begin the process of clarifying a question that has plagued crypto in the United States for years: how to define certain digital assets and which financial regulator, if any, will have jurisdiction. For Sadeghi, an expert on legal issues in the field of cryptography, this decision could send the matter back to the legislative branch.
“I hope this decision will help everyone understand that the best way forward is responsible legislation tailored to this asset class,” Mr. Sadeghi added.
Legislature Releases New Crypto Oversight Bill
Last week, the courts weren’t the only one exploring the question of who can regulate the crypto space. On Wednesday July 12, Senators Cynthia Lummis, Republican of Wyoming, and Kristen Gillibrand, Democrat of New York, relaunched cryptocurrency legislation this would hand primary oversight of digital assets to the Commodity Futures Trading Commission.
Interestingly, the bill, much like the district court’s decision in the Ripple case, generally states that assets that do not give an investor a clear financial interest in a company should not be considered securities, even though they “benefit from entrepreneurial and managerial efforts that determine value.” actives. » The bill therefore places the oversight of most cryptographic tokens under the jurisdiction of the CFTC.
While the bill requires that customer assets be fully segregated, stablecoins be issued only by regulated financial institutions, and, for the first time, addresses decentralized finance, the hallmark of the bill is its attempt to separate the regulatory obligations of the CFTC and the SEC.
In addition to the Lummis/Gillibrand bill, there also appears to be progress on stablecoin legislation from the House Financial Services Committee. As Ron Hammond, director of government relations at the Blockchain Association, told me: “Nearly 6 years after the first bipartisan crypto bill was introduced in Congress, it appears that the House Financial Services Committee House of Representatives is poised to advance comprehensive legislation on stablecoins and market structure. Mr. Hammond emphasized the bipartisan nature of the work and stressed the importance of moving things from the executive branch to the legislative branch: “Congress understands that regulation by enforcement and a patchwork of court decisions cannot replace a clear legislative framework. ” he added.
Executive Branch Focuses on Criminal Abuse of NFTs and DeFi
While executive action in crypto is primarily associated with a litany of enforcement actions – including the SEC’s case against Ripple – we have also seen law enforcement continue to pursue criminals seeking to use cryptocurrencies to launder illicit proceeds. Last week, the United States Attorney’s Office for the Southern District of New York filed key charges against illicit actors who attacked and abused the cryptocurrency ecosystem.
First, on Monday, July 10, the U.S. Attorney’s Office and the FBI announcement the indictment of a Moroccan man for stealing more than $450,000 worth of crypto and NFTs by spoofing the OpenSea NFT marketplace. According to the indictment, the spoofed website was deliberately designed to resemble OpenSea’s legitimate login page in order to trick unsuspecting victims into believing they were interfacing with the real OpenSea. However, when victims entered their login credentials or other private information on the spoofed site, their credentials were automatically sent to an email account controlled by the defendant, allowing the defendant to steal cryptocurrencies and NFTs. A New York victim unwittingly provided the accused with access to 39 NFTs, including a valuable “Bored Ape Yacht Club” NFT.
The next day, Tuesday, July 11, the U.S. Attorney’s Office, along with Homeland Security Investigations and the IRS criminal investigation, announcement the indictment and arrest of a skilled security engineer in the first criminal case involving an attack on a smart contract operated by a decentralized exchange. The hacker exploited a vulnerability in one of the exchange’s smart contracts, stealing approximately $9 million.
The case is unique in several respects. First, this is the first criminal prosecution for a DeFi hack. Second, it is rare to make an arrest in this type of cyberattack, given that many cybercriminals reside in rogue states like Russia or North Korea, as opposed to New York, where the arrest has took place in this case.
Finally, the case stands out for the sophistication of the attack, the laundering and the response of law enforcement. The defendant allegedly exploited the smart contract associated with the exchange by providing false data to make it appear that he had provided a significant volume of liquidity to the exchange, which he had not actually done. As a result, the defendant fraudulently received substantial fees from the target. Additionally, after discovering how to exploit the exchange’s smart contract, the defendant allegedly used funds from “flash loans” to make a series of deposits on the exchange, generating additional fraudulent fees. The defendant then created another fraudulent account on the exchange and subsequently manipulated the smart contract so that he could quickly withdraw the main funds from the exchange. The defendant then laundered the funds through channels, via mixers, privacy coins, and other concealment techniques.
However, law enforcement was able to use blockchain intelligence to track and trace accumulated funds to a warrant allowing authorities to obtain off-chain information such as web searches – the defendant searched “can I cross the border with crypto”, “how to prevent the federal government to seize assets” and “buy citizenship”; and he visited a website called “16 Countries Where Your Investments Can Buy Citizenship.” – linking him to the crime.
Although each of these cases would have been significant on its own, their combination is extraordinary. The cases involve emerging technologies – DeFi and NFT – and demonstrate US law enforcement’s commitment to ensuring illicit actors do not take advantage of the cryptocurrency space. The cases also show a clear evolution of Bitcoin
BTC
to a more diverse and complex ecosystem of illicit actors attack DeFi and move funds across blockchains.
But more importantly, perhaps these cases, and the continued efforts of law enforcement and regulators to go after the illicit underbelly of the crypto ecosystem, foreshadow a future in which legislation – like Lummis/Gillibrand and stablecoins – and court rulings like Ripple are combining to build a legal framework as the DOJ, Treasury and others focus on illicit actors seeking to undermine this new financial system.
As we face years of appeals in the Ripple case and seemingly endless debates and discussions about Lummis/Gillibrand, stablecoins and beyond, there is no doubt that a hot week in July , during which each branch of the US government addressed key questions surrounding cryptocurrencies, could have a lasting impact on an ever-changing space.