Joseph Facciponti: Turning to the next segment of our presentation today, I'm going to turn it over to Katherine Cooper, who is a shareholder at Murphy & McGonigle. She advises clients regarding legal and regulatory issues related to the sale and trading of securities, commodities, derivatives, and digital assets. Catherine also represents clients in investigations, civil enforcement proceedings, and criminal prosecutions arising out of their securities, commodities, derivatives, and digital asset dealings. Prior to her role at Murphy & McGonigle, she served as chief regulatory officer for NYSC Life U.S., a futures exchange she helped launch for the New York Stock Exchange, and a senior trial attorney at the Commodities Futures Trading Commission. So, Catherine, what do you see is the most important recent federal enforcement actions and prosecutions involving digital assets. And Catherine you may be on mute.
Katherine Cooper: Thanks, Joe. Can you hear me now?
Joseph Facciponti: Yes, I can.
Katherine Cooper: Right. Okay. Um, so at the federal level, we have three main civil regulators who have been involved in the regulation and enforcement actions brought against fintech, uh, market participants, the SEC, the CFTC, and the Financial Crimes Enforcement Network. You know, a bureau of the U.S. Treasury Department and the Department of Justice has been closely involved with all three of those regulators where there's criminal activity associated with perhaps other, uh, civil regulatory issues. Um, to say that the previous administration was schizophrenic in its approach to digital tokens would be an understatement. Um, and we'll get into why I say that as we go through these most important actions. So, uh, at the FCC, it has asserted that some digital tokens are securities, and because they are securities then, they have both regulatory authority over whether the securities are properly registered or exempt from registration under the 33 Act and for fraud under Section 10b of the 34 Act as well as 10b-5. They assert that tokens are, some tokens at least, are securities on the grounds that by applying what's been known as the Howey Test, which comes from a 1946 Supreme Court decision that found investments in orange groves in Florida were actually securities. The Howey Test requires that there be an investment of money and a common enterprise with a reasonable expectation of profit based on the entrepreneurial efforts of others. So Jake Layton, the former chair of the SEC, has said that he did not see any initial coin offering that was not a securities offering. So what is an initial coin offering or an I C O or an ICO? In an ICO, entrepreneurs who have developed a new digital token sell the token for fiat currency or other digital currencies, digital tokens. In many cases, the digital token or related infrastructure is not fully developed at the time of the ICO. The SEC has brought a number of enforcement actions based on this theory. So far, the courts have been receptive to the SEC's analysis that ICO's satisfy the Howey Test. There have been two recent substantive on the merits rulings in favor of the SEC. Um, so that's there on the next page, shows, we go there. Um, uh, in SEC v. Telegram in May of 2020 the Southern District of New York granted the SEC's motion for a preliminary injunction concluding that the SEC had shown a substantial likelihood of success in proving that the 2018 sale of$1.7 billion of interest in future Gram tokens that were sold 175 high net worth or institutional buyers was actually a securities offering and which was, which, which was required to be registered under Section 5 of the 33 Act and was not exempt from any uh, was not exempt from the registration requirement. Um, in SEC v. Kik, um, on September 20th, 30th rather of last year, the court granted the SEC's motion for summary judgment ruling that Kik's private sale in the public sale of its tokens, which were called Kin was the sale of an unregistered security under the Howey Test and the Reg D exemption for the private sale failed because the private sale was integrated with the public sale. Um, to go back to the previous slide. Uh, this seems, this success that the SEC has had seems to have emboldened it. Uh, and so just the day before, um, Jake Clayton left as chair of the SEC, the SEC sued Ripple Labs, alleging that from 2013 to present, Ripple had sold$14.6 billion of XRP, I'm sorry, 14 billion XRP tokens, which was their Cryptocurrency or digital token for consideration worth 1.38 billion. Um, the, the complaint, the, Ripple has fired back, uh, arguing that the complaint mischaracterizes misunderstands or ignores the economic realities of XRP, including that the XRP leger is entirely open source, decentralized, and operates on an enormous scale outside of Ripple's control. That XRP is and long has been, a digital asset with fully functional ecosystem, and utility as a bridge currency and other types of currency uses, and that XRP's price is not and has not been determined by Ripple's activities. Rather, it has fairly correlated to the price of other cryptocurrencies or digital tokens such as Bitcoin. Um, so it will be very interesting to see how this case progress, progresses. Um, it will be a considerable, um, battle for both parties. Um, I mentioned in the, in the slides, uh, SEC v. NAC, which is the case that Lionel André will be speaking later, and I have in, in the Northern District of California on a motion, we, our motion to dismiss was denied in that case on fairly procedural grounds. So, um, another speaking order, uh, settlement that the SEC has achieved within the Unikrn case. Um, there they asserted that the, uh, Unikrn sale of UKG tokens between June and October 2017 constituted the unlawful sale of an, of an unregistered security. They imposed a civil monetary fine of$6.1 million and Unikrn was required to disable the UKG tokens blockchain. So, on the one hand, you know, the SEC has, um, a definite responsibility for investor protection, but it's, it's other goal, policy goal is to provide for the formation of capital and the creation of value. So one can wonder whether this aggressive enforcement action in cases such as Kik, Telegram, and Unikrn, where there's no allegations of fraud, whether that has actually protected any investors. Instead, it has destroyed significant value. And Hester Teer-, Purse rather, dissented in the Unikrn case, noting that with no allegations of fraud, the customer's UKG tokens used on Unikrn's platforms would become worthless and the$6.1 million CMP would put Unikrn out of business. So, while there has been fraud in the iPhone markets, some have been quite successful. The IOTA token raised $600 million, and today, IOTA tokens have an outstanding value of$4.2 billion. Chainlink raised$32 million by the sale of Chainlink tokens, but now they're worth$9.6 billion. Uh, as Gary Gensler is coming to be the chair of the SEC. Um, and he just got a hearing day for his nomination, which is March 2nd. Uh, he's coming out as the former chair of the CFTC. But since then he's been a professor at MIT Sloan and the senior adviser to MIT Digital Currency Lab. So it'll be interesting to see whether Chairman Gensler will take the SEC in a different direction. Um, moving on to the CFTC, uh, the CFTC's principal jurisdiction is over the trading of futures, options, and swaps on commodities. Historically, its jurisdiction over the cash market for commodities was limited to manipulation. Bob Tranq added an additional two slivers of jurisdiction fraud in the cash market and certain leverage commodity transactions sold to retail investors. So the first three cases that we have on our slides here are examples of the, of the CFTC exercising its jurisdiction over fraud in the cash market for commodities. So that's, um, the CFTC v. Spence, uh, CFTC v. Venture Capital and the same for CFTC v. Thompson, and you'll see that there are parallel criminal actions in the Spence and Thompson cases. Spence was pretty much a BoG standard Ponzi scheme, uh, involved court investments in Bitcoin and Ether. Venture Capital was a fraudulent solicitation and misappropriation of customer funds, um, same of CFTC v. Thompson. The 4th CFTC case in parallel- DOJ prosecution represents the CFTC's other sliver of jurisdiction over the retail or over cash market for commodities. There Bitmax offered U.S. residents the sale of various digital tokens sold on margins, sometimes margins as high as 100 to 1 without being a registered futures exchange in the United States and without having other relevant, other relevant registrations. The DOJ action focused on a slew of anti-money laundering issues. Uh, the CFTC complaint did as well, but, uh, the DOJ's was focused on a slew of AML issues, and so the third regulator that I mentioned is FinCEN, the Financial Crimes Enforcement Network. So on - if we can go to page 14, um, FinCEN has been active, um, perhaps not as active as the SEC and CFTC. But in the Larry Dean Harmon case, FinCEN fined Harmon$60 million for, from 2014 to 2019, offering Bitcoin tumbler and mixing services to obscure the progeny of the Bitcoin and conducting dark web transactions that facilitated the sale of illicit narcotics, guns, stolen credit card information, and deplorably child exploitation materials. Harmon is also a defendent in a related criminal action. Um, to go to regulatory developments, I think this most clearly shows the schizophrenia of the previous administration's approach to digital tokens. On December 18th, the outgoing administration proposed a stringent rule that would impose very burdensome record keeping and verification requirements for, uh, market participants using digital tokens. After significant pushback from the industry and a bipartisan, uh, set of congressmen and women, uh, they have reopened that comment period. Um, during the former administration, the OCC was one sort of bright spot, one welcoming regulator for the use of digital tokens. On July 22nd, 2020, the OCC allowed national banks to custody digital tokens, and January 4th, it allowed national banks to operate verification nodes on blockchains. On January 13th, of this year, it conditionally approved the conversion of Anchorage to become the first digital, uh, national bank. So, where the Biden administration will go with this, one good sign is on leverage test. In 2021, the OCC conditionally approved, uh, it's second digital bank Protego Trust Company becomes Protego Trust Bank, N.A. So, to go back to the, um, to the schizophrenia, you see these harsh enforcement actions taken by the SEC, the CFTC to some extent, and DOJ, although arguably that was appropriate given the fraud and other wrongdoing involved there. Um, it's, you know, and you can probably credit to Brian Brooks, the acting head of the OCC who is the former general counsel of Coinbase. Uh, some of the more progressive and open and welcoming approaches by the OCC. So, with Gary Gensler coming and possibly Chris Brummer coming to chair the CFTC, he's Georgetown law professor who's written about digital assets, digital tokens, we could see a more welcoming approach to, uh, the regulation of digital assets and digital tokens during the Biden administration.
Joseph Facciponti: Great. Thank you, Katherine. Um, and for everybody listening, who wants CLE credit, the second code is Bitcoin. Um, now put that into the comments as well.