What You Need to Know: Blockchain & Fintech Risks
Building the governance, risk, and compliance bridge between finance and blockchain
Guidance and developments overweigh enforcement this month. Please reach out with questions: understanding evolving standards is increasingly needed to navigate risks.
The Enforcement Environment
The promotion of tokens/shilling increases securities law risks. In both SEC vs. Balina and SEC vs. Kardashian, the promoters failed to disclose they received compensation for promoting the tokens.
- Requirements: In 2019, the FTC, which makes rules around truth and transparency in advertising, published simple guidance for social media influencers & required disclosure of payments. Though the SEC has its own rules for this issue, they largely parallel the FTC’s. SEC Chair Gary Gensler posted a video to highlight its position.
- Reminder: Many regulatory cases are paired with class action lawsuits. The Kardashian settlement may impact the pending class action suit too.
Are you Decentralized Enough?
The CFTC settled with bZeroX, LLC and its founders for allegedly acting as an unregistered futures commission merchant (FCM) and failing to adopt a customer identification program as part of a BSA compliance program required of FCMs. Simultaneously, the CFTC charges the successor entity to bZeroX, Ooki DAO, for violating the same laws.
The CFTC found:
- Registration – Defendants failed to register as an FCM
- Commodities – “Virtual currencies such as ETH, DAI, and others traded on the Ooki Protocol are ‘commodities’ under the Act.”
- DAO was not decentralized – “The acts, omissions, and failures of the members of the Ooki DAO unincorporated association (i.e., the Ooki Token holders who voted their Ooki Tokens to govern the Ooki DAO by, for example, directing the operation of the Ooki Protocol), as well as of those authorized to work on behalf of the Ooki DAO, were done within the scope of their office, employment, or agency with the Ooki DAO.”
The dissenting statement by Commissioner Summer Merginger is an important read.
“While I do not condone individuals or entities blatantly violating the CEA or our rules, we cannot arbitrarily decide who is accountable for those violations based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing”.
Developments & Guidance
FBI Vulnerability Warning
- FBI issues public service announcements concerning the increase of risks in DeFi platforms.
- The House Committee on Oversight and Reform has requested info from 4 Federal agencies and 5 crypto exchanges on their actions and mechanisms to combat fraud.
- New EU Directive – The European Union has formally approved the Markets in Crypto-assets (MiCA) directive. (Europe.eu)
The European Union released its 8th package of sanctions against Russia, which include a ban on “all crypto-asset wallets, accounts, and custody services, irrespective of the amount of the wallet.” (Europa.eu)
- Binance, the world’s largest cryptocurrency exchange, was hacked. Binance reports mitigated losses of under $100M.
- International Securities law watchdog ISOCO (International Organization of Security Commissions) is working to create ‘common standards’ for crypto.
- UNCTAB issues regulatory responses to curb cryptocurrencies in developing countries to address sovereign security & economic interests.
Find here a list of DeFi references in the Biden Executive Order reports.