The last few weeks have seen a significant ramp-up of federal bank regulators’ focus on cryptocurrency companies and their disclosures regarding FDIC deposit insurance, signaling a potential spike in enforcement actions targeted at the crypto sector. Continue Reading FDIC Issues Cease and Desist Letters to Companies for Crypto-Related Representations About Deposit Insurance
On August 1, 2022, Robinhood Crypto LLC (“RHC”) entered into a Consent Order with the New York Department of Financial Services (“DFS”) based on “serious deficiencies” related to anti-money laundering (“AML”), cybersecurity, and virtual currency that were identified in DFS’s examination of RHC covering the period from January to September 2019. Continue Reading DFS Enters Consent Order with Robinhood Crypto for Deficiencies in AML, Cybersecurity, and Virtual Currency Compliance
This month, the sponsors of the Uniform Commercial Code (“UCC”) approved wide-ranging amendments to the UCC (the “2022 UCC Amendments”) to provide workable rules for emerging technologies, such as distributed ledger technology and virtual currency. Continue Reading UCC Digital Asset Amendments Finalized
On November 8, 2021, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) designated a virtual currency exchange, Chatex, and its infrastructure support providers on the list of Specially Designated Nationals and Blocked Persons (SDN List) for their role in facilitating financial transactions for ransomware actors.[i] The Financial Crimes Enforcement Network (FinCEN) also released an updated advisory on ransomware and the use of the financial system to facilitate ransomware payments.[ii] These actions were taken in furtherance of a coordinated “whole-of-government” effort to disrupt criminal ransomware actors and the virtual currency exchanges used to launder ransom payments around the world. Continue Reading OFAC Ramps up Targeting of Ransomware-linked Actors and FinCEN Updates Ransomware Advisory
On October 15, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued “Sanctions Compliance Guidance for the Virtual Currency Industry” (the “Guidance”). The Guidance follows recent guidance and advisory letters directed to the virtual currency industry relating to the risk of facilitating ransomware payments and is OFAC’s most comprehensive virtual currency-specific advisory to date. In particular, the Guidance directly addresses some simpler interpretive questions, discusses sanctions compliance programs and “best practices,” and provides hints about OFAC’s enforcement priorities going forward. Continue Reading OFAC Issues Sanctions Guidance to Virtual Currency Industry
On September 21, 2021, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC): (i) issued an updated advisory on potential sanctions risks for facilitating ransomware payments; and (ii) designated SUEX OTC, S.R.O. (SUEX), a virtual currency exchange, on the list of Specially Designated Nationals and Blocked Persons (SDN List) for its role in facilitating financial transactions for ransomware actors. These actions demonstrate the U.S. government’s increasing focus on virtual currencies as a key means of facilitating ransomware payments and related money laundering, as well as OFAC’s commitment to combating ransomware attacks and other malicious cyber activities. Continue Reading OFAC Updates Ransomware Advisory and Sanctions Virtual Currency Exchange
On August 9, 2021, the SEC issued a cease-and-desist order against digital asset exchange Poloniex, Inc. for allegedly operating an unregistered exchange in violation of Section 5 of the Exchange Act in connection with its operation of a trading platform that facilitated the buying and selling of digital asset securities.
In the cease-and-desist order, the SEC alleged that Poloniex met the definition of an “exchange” because it “provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine.” The SEC also found, based on internal communications, that Poloniex decided to be “aggressive,” ultimately listing token(s) it had internally determined carried a “medium” risk of being considered securities under the Securities Act of 1933 pursuant to the test set forth by the U.S. Supreme Court in SEC v. W.J. Howey. However, the SEC did not identify what digital asset(s) it determined were securities nor why, simply stating that Poloniex facilitated trading of “digital assets that were investment contracts and therefore securities.”
Without admitting or denying the SEC’s findings, Poloniex agreed to the entry of the order and a payment of $10,388,309 in disgorgement, prejudgment interest, and a civil penalty. Continue Reading SEC Enforcement Action Against Poloniex Signals Heightened Scrutiny for Crypto Exchanges
While large financial institutions have traditionally been hesitant to enter new areas of financial products, particularly virtual assets, many more banks and companies have expressed interest in virtual currencies as cryptocurrency has become increasingly mainstream. Given the use of such services by terrorist groups, it is important for banks and other financial institutions to consider evolving dynamics in this area. On the one hand, one of the widely described benefits of virtual currency is the transparency and public nature of transactions since they are typically recorded in a publicly accessible blockchain, which could facilitate policing and enforcement against illicit activity. At the same time, the relevant legal framework for combating terrorist funding creates potential areas of liability, including, in particular under the Anti-Terrorism Act (“ATA”) and the Justice Against Sponsors of Terrorism Act (“JASTA”). These considerations are important for companies and banks that provide services related to virtual currency, but also are relevant to any company that could be the target of ransomware attacks since attackers may be sanctioned entities or have ties to terrorism and as a matter of practice demand that the ransom payment be made in virtual currency.
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On February 18, 2021, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) announced a $507,375 settlement with BitPay, Inc. (BitPay), a payment processor for merchants accepting digital currency as payment for goods and services, for 2,102 apparent violations of multiple sanctions programs between 2013 and 2018. The settlement highlights that financial service providers facilitating digital currency transactions must not only establish sanctions compliance programs to screen their own customers but also must monitor third-party non-customer transaction information. Continue Reading OFAC Settles with Digital Currency Payment Processor for Sanctions Violations
On March 3, 2021, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”)—formerly the Office of Compliance Inspections and Examinations—released its 2021 Examination Priorities (“2021 Priorities”). The 2021 Priorities generally retain perennial risk areas as the Division’s core focus, but do include several new and emerging risk areas reflecting broader policy shifts under new SEC leadership.
The 2021 Priorities include: retail investors; information security and operational resilience; financial technology (“Fintech”), including digital assets; anti-money laundering; transition from the London Inter‑Bank Offered Rate (“LIBOR”); several areas covering registered investment advisers and investment companies; market infrastructure; and oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies. Although not formal priorities, the Division will also focus on climate-related risks and environmental, social and governance (“ESG”) matters in light of recent market developments and broader attention in these areas. Continue Reading Turning the Page: Highlights of the SEC’s Division of Examination’s 2021 Priorities