Category: Cryptocurrency Law

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Bored Ape Yacht Club Crypto News Cryptocurrency Law NFTs

Bored Ape Creators ‘Yuga Labs’ Hit With Class-Action Lawsuit Alleging Inflated Values

Yuga Labs, creators of the Bored Ape Yacht Club NFT collection and ApeCoin, are facing a class-action lawsuit brought by international law firm Scott+Scott for allegedly falsely promoting Bored Ape NFTs and ApeCoin as securities with guaranteed returns, but which actually plummeted in value over the past three months.

Case Hinges on Whether NFTs Are Deemed Securities

The proposed class-action lawsuit claims that Yuga Labs used celebrity promoters and endorsements to “inflate the price” of BAYC NFTs and the ApeCoin token. The suit also alleges that Yuga Labs promoted growth prospects and potential massive returns on investments to “unsuspecting investors”. The suit claims:

After selling off millions of dollars of fraudulently promoted NFTs, Yuga Labs launched the ApeCoin to further fleece investors.

Scott+Scott class-action lawsuit

It adds: “Once it was revealed that the touted growth was entirely dependent on continued promotion (as opposed to actual utility or underlying technology), retail investors were left with tokens that had lost over 87 percent [of their value] from the inflated price [peak] on April 28, 2022.”

While no official complaint has been filed in a US federal court, Scott+Scott is currently seeking impacted investors who suffered losses on BAYC NFTs and ApeCoin between April and June this year.

The key to the success of this suit is whether or not the court decides if NFTs are securities, in which case Yuga Labs would have failed to make the necessary disclosure and registration obligations that come with offering securities. Thus far, the Securities and Exchange Commission (SEC) has refrained from labelling any NFT as a security as it would likely bring the broader art market under its purview.

BAYC Hit with Repeated Blows

The legal threat could not come at a worse time for Yuga Labs, given its recent troubles. In April, BAYC’s Instagram account was compromised to the tune of US$2.8 million in an NFT phishing scam.

In the following month, BAYC committed what could be described as a “minting fail” where over US$157 million in ETH was burned as part of the launch of its “Otherside” metaverse.

Then in June, Yuga Labs confirmed that its Discord servers had been “briefly exploited”, leading to the loss of NFTs valued at over 200 ETH (about US$357,000).

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Coinbase Crypto News Cryptocurrency Law Regulation

US Regulator Lists 9 Tokens as Unregistered Securities

In a groundbreaking insider trading case against a former Coinbase employee, US regulator the Securities and Exchange Commission (SEC) has identified nine tokens in its complaint to be unlicensed securities:

More Bad Press for Coinbase

The case was announced as insider charges were brought against a former Coinbase product manager, his brother, and his friend for allegedly trading numerous crypto assets on multiple occasions, prior to making them available for public trading.

Coinbase CEO Brian Armstrong took to Twitter saying that the company had received information earlier in the year about possible frontrunning and “immediately launched an investigation”:

As a result of our investigation we identified three suspects and provided this information to law enforcement. One person was a Coinbase employee who we terminated. Today, the DOJ has criminally charged this former employee and the two other individuals for this abusive conduct.

Brian Armstrong, CEO, Coinbase

Unregistered Securities Claim, Again

Earlier this year, Coinbase became the subject of a class-action lawsuit for selling 79 crypto assets alleged to be unregistered securities, and unfortunately for them, another claim appears likely.

This case, emanating from the SEC, alleges that those accused were frontrunning the public listing of as many as 25 digital assets, with nine being described as unlicensed securities. Consequently, they profited to the tune of some US$1.1 million.

Specifically, the claim referred to Powerledger (POWR), Kromatika (KROM), DFX Finance (DFX), Amp (AMP), Rally (RLY), Rari Governance Token (RGT), DerivaDAO (DDX), LCX, and XYO.

Gurbir Grewal, director of the SEC’s Division of Enforcement, commented that they were less concerned with labels “but rather the economic realities of an offering”.

He added: “In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved.”

Caroline Pham, a commissioner at the US Commodity Futures Trading Commission (CFTC), said that the SEC’s actions constituted “regulation by enforcement” rather than addressing the question of whether or not certain crypto assets are securities “through a transparent process that engages the public to develop appropriate policy with expert input”.

It’s become increasingly self-evident that regulatory clarity is required on the question of whether crypto assets are unregistered securities, as is often alleged. Securities require adequate disclosure, and arguably that remains conspicuously absent in the vast majority of crypto projects.

However, on the bright side, one benefit of crypto – as highlighted in this case – is that it’s very difficult to conceal your trail if shenanigans are underfoot:

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Coinbase Crime Crypto Exchange Cryptocurrency Law

Former Coinbase Employee Charged in First Crypto Insider Trading Case

Three people, including a former Coinbase employee, have been charged with wire fraud conspiracy and wire fraud over an insider trading tip-off scheme that ran from June 2021 until April 2022, netting the accused over US$1.5 million in realised and unrealised profits. 

These charges are the first to be brought against defendants in a cryptocurrency insider trading case and act as a reminder that crypto markets are subject to many of the same laws that govern traditional financial markets.

Employee Tips Off Brother and Friend to Coinbase Listings

The three individuals charged by the US Attorney’s Office are former Coinbase product manager Ishan Wahi, his brother Nikhil, and his friend Sameer Ramani. 

It’s alleged that Ishan Wahi used his detailed knowledge of upcoming Coinbase asset listings to tip off Nikhil Wahi and Ramani, who then purchased large quantities of the assets just prior to the announcements of their listings and sold them for a profit shortly after the announcements. 

It’s alleged the trio used this method on at least 14 separate occasions, trading at least 25 different cryptocurrencies. In an attempt to cover their tracks, Nikhil Wahi and Ramani created accounts at centralised exchanges in other people’s names and transferred their assets through multiple anonymous Ethereum accounts.

Speaking about the charges against the trio, Damian Williams, Attorney General for the Southern District of New York, said:

Today’s charges are a further reminder that Web3 is not a law-free zone.  Just last month, I announced the first ever insider trading case involving NFTs, and today I announce the first ever insider trading case involving cryptocurrency markets.  Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street. And the Southern District of New York will continue to be relentless in bringing fraudsters to justice, wherever we may find them. 

Damian Williams, US Attorney General, Southern District, New York

Twitter Post Helps Uncover Scheme

The beginning of the end for the insider trading scheme came on April 12 of this year when a Twitter user noted that an Ethereum wallet had bought hundreds of thousands of dollars’ worth of digital assets just 24 hours before their Coinbase listings were announced. 

The wallet was subsequently found to be under the control of Ramani. Following this tweet, Coinbase opened an investigation into the matter and on May 11, Coinbase’s director of security operations emailed Ishan Wahi to tell him to appear for an in-person meeting at Coinbase’s headquarters in Seattle, Washington, on May 16.

On the evening of May 15, Ishan Wahi bought a one-way ticket to India, which was scheduled to depart the following morning, just before the meeting with Coinbase security. However, before he could board his flight Wahi was intercepted by law enforcement and prevented from leaving the country.

Each of the defendants has been charged with one count of wire fraud conspiracy and one count of wire fraud – each charge carries a maximum sentence of 20 years in prison.

Insider trading is an ongoing issue that undermines confidence in both regulators and markets. Last September, the head of product development for the NFT marketplace OpenSea resigned following allegations of insider trading, and questions were raised about the integrity of the US Federal Reserve following the resignation of two regional Fed presidents over insider trading allegations.

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Crypto News Cryptocurrency Law Terra TerraUSD

Terra Drama Continues as Authorities Raid Exchanges Linked to the Collapse

South Korean authorities are raiding crypto exchanges linked to Terraform Labs’ collapse in May, according to report this week by News1 Korea:

‘At Least’ 15 Exchanges Raided

The Joint Financial and Securities Crime Investigation Team of the Seoul Southern District Prosecutors’ Office raided the offices of at least 15 entities, including Bithumb, Upbit, Coinone and Korbit. Prosecutors are seizing all materials that can work as evidence if Terraform Labs CEO Do Kwon or any other executive is found guilty of causing Terra’s meltdown.

A month ago, claims surfaced on Twitter accusing Do Kwon of cashing out over US$80 million a month prior to the LUNA collapse, which caused a domino effect on the stablecoin market.

Shortly after, Korean authorities launched a full-scale investigation targeting Terraform Labs staff. The company’s employees, who have been prohibited from exiting the country, were summonsed by prosecutors to testify as to their involvement with the project.

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Australia CBDCs Crypto News Cryptocurrency Law Regulation Stablecoins

Reserve Bank of Australia Chief: Private Stablecoins May Be Better Than CBDCs

In a recent panel discussion of the G20 finance officials meeting in Indonesia, Reserve Bank of Australia (RBA) governor Philip Lowe signalled his support for privately issued stablecoins, subject to appropriate consumer protection guardrails.

Private Sector Better Suited to Issuing Digital Dollars?

Just weeks after Australian Treasurer Jim Chalmers said that crypto would remain excluded from foreign currency tax arrangements, RBA head Lowe has said that privately issued stablecoins may be better than central bank digital currencies (CBDCs), provided the relevant companies are suitably regulated.

Treasurer Jim Chalmers (left) and RBA governor Philip Lowe (centre) represent Australia at the the 2022 G20 finance officials meeting. Source: The West Australian

In a panel discussion that included the inherent risks of decentralised finance (DeFi) projects, talk shifted to CBDCs and their potential application in both a retail or wholesale context.

With the recent implosion of “stablecoin” UST and Luna, regulation has come into sharp focus, an issue that no doubt partially informed the RBA chief’s comments on privately issued stablecoins:

If these tokens are going to used widely by the community they are going to need to be backed by the state, or regulated just as we regulate bank deposits.

Philip Lowe, RBA governor

Lowe added: “I tend to think that the private solution is going to be better – if we can get the regulatory arrangements right – because the private sector is better than the central bank at innovating and designing features for these tokens”.

As crypto regulation is one of the newly elected federal government’s stated priorities, those who oppose retail CBDCs on the basis of financial surveillance and infringements on freedom will be pleased to hear that the RBA governor is seemingly more inclined towards a free-market solution. However, that in itself provides no guarantee, as Tether (USDT) and Circle (USDC) have both been accused of censorship in the past.

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Crypto News Crypto Wallets Cryptocurrency Law Hackers NFTs

UK Court Rules That Lawsuits Can Be Served Via NFTs

In what is a legal precedent for the High Court of England and Wales, a plaintiff has been granted permission to file a lawsuit against anonymous defendants by means of an NFT drop.

The move will allow Fabrizio D’Aloia, founder of Italy-based online gaming company Microgame, to serve legal documents on people who are not known by name but connected via two digital wallets:

Joanna Bailey, an associate of Giambrone & Partners LLP who are representing D’Aloia, described the precedent as “significant” in a sector where scams and hacks can often only be tied to wallet addresses and not their actual individual owners:

This is so important because it shows the court’s willingness to adapt to new technologies and embrace the blockchain and actually step in to help consumers where previous legislation and regulators simply could not …

Joanna Bailey, associate, Giambrone & Partners LLP

D’Aloia claimed to have been lured by an online brokerage into depositing about 2.1 million USDT and 230,000 USDC into two wallets that turned out to be fraudulent. The court ruling, said Bailey, allows D’Aloia to sue those responsible for the fraudulent platform by sending court documents via an NFT drop to the two wallets.

Other Legal Firsts Involving NFTs

Such specified usage of an NFT drop follows a world-first international hacking case last month where a defendant was served with a temporary restraining order by means of an NFT.

A month earlier, the UK High Court of Justice ruled to recognise NFTs as private property, hailed as a “landmark” in the ongoing battle against fraud in the crypto space.

However, the catch in that ruling was that the conferred private property status did not extend to the underlying content represented by an NFT.

Civil Procedure Rules in the UK have previously allowed for lawsuits and legal documents to be served using Instagram, Facebook, and a contact form on a website. Until now, the only other means were via personal services, “snail” mail, dropped off at a physical address, or by sending a fax or another type of “electronic communication”.

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Crypto News Cryptocurrency Law Solana

Solana Labs Hit With Class-Action Lawsuit Alleging SOL is an Unregistered Security

A class-action lawsuit has been filed against Solana Labs by an investor who claims the layer-1 blockchain is an unregistered centralised security.

According to the July 1 filing in a California district court, Solana investor Mark Young alleges that Solana cannot fit the definition of “decentralised” when nearly half of its supply is retained by people close to the project.

As of May 2021, insiders held 48 percent of the total SOL supply, supporting the argument that the network is highly centralised:

The suit represents Young and all investors who bought SOL tokens from March 24, 2020, forward. It accuses Solana Labs, Solana Foundation co-founder and CEO Anatoly Yakovenko, Multicoin Capital Management, Kyle Samani, and FalconX of selling the unregistered tokens.

Defendants made enormous profits through the sale of SOL securities to retail investors in the US in violation of the registration provisions of federal and state securities laws, and the investors have suffered enormous losses.

Class-action lawsuit filed against Solana Labs

Suit Invokes Howey Test

The lawsuit mentions that Solana is in violation of US law pertaining to the sale of unregistered securities and invokes the Howey Test – a four-part metric established to determine whether a transaction qualifies as an investment contract.

The suit outlines: “The sale of SOL securities constituted the sale of unregistered securities under controlling federal law. SOL securities exhibit the following particular hallmarks of a security under the Howey Test:

  • in order to receive any SOL securities, an investment of money was required;
  • the investment of money was made into the common enterprise that is Solana; and
  • the success of the investment and any potential returns were entirely reliant on Solana and [Anatoly] Yakovenko’s ability to create the promised network.”

Crypto Market Plagued by Class Actions

As regulations remain deficient, many digital platforms are finding themselves in hot water. Earlier this year, one of the world’s leading digital exchanges, Coinbase, was named in a class-action lawsuit that claimed the platform sold 79 different digital assets that constituted “unregistered securities”. US-based decentralised exchange Uniswap was also hit by a lawsuit claiming it too was selling “unregistered securities”.

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Crypto News Cryptocurrency Law USD Coin Voyager Token

Crypto Broker ‘Voyager’ Files for Bankruptcy Amid Three Arrows Default

In a move that will surprise no one even remotely invested in the digital assets space, crypto exchange Voyager Digital has this week filed for Chapter 11 bankruptcy as a result of exposure to failed hedge fund Three Arrows Capital (3AC) and a foundering crypto market.

Voyager’s Voluntary Petition for Chapter 11 Bankruptcy. Source: Southern District Court of New York

Voyager ‘Has a Plan’

Said to be owing anywhere from US$1 billion to $10 billion in assets to more than 100,000 creditors, Voyager pleads that its voluntary bankruptcy move is part of a “reorganisation plan” that, once implemented, would enable clients to re-access their accounts. In so doing, Voyager says it would “return value to customers”.

Detailing the plan, Voyager CEO Stephen Ehrlich said customers with crypto in their accounts would receive a combination of crypto, proceeds from the 3AC recovery, common shares in the newly reorganised company, and Voyager tokens:

Ehrlich added that customers with US dollars in their accounts would be able to access those funds after a “reconciliation and fraud prevention process is completed with Metropolitan Commercial Bank”.

However, the bank has since clarified that its FDIC (Federal Deposit Insurance Corporation) cover does not apply in the event that Voyager fails:

FDIC insurance coverage is available only to protect against the failure of Metropolitan Commercial Bank. FDIC insurance does not protect against the failure of Voyager, any act or omission of Voyager or its employees, or the loss in value of cryptocurrency or other assets.

Metropolitan Commercial Bank statement

SBF to the Rescue?

Voyager’s announcement comes after trading firm Alameda Research, founded by FTX CEO Sam Bankman-Fried (aka SBF), led a US$60 million fundraising round for the crypto lender in May. Less than a fortnight ago, SBF warned that some “third-tier” crypto exchanges were secretly insolvent. Surely he’d seen the writing on the wall for Voyager?

Earlier this month, Voyager halted all trading and withdrawals on its platform, citing 3AC’s default on a US$650 million loan. In response, Alameda extended to Voyager a massive credit line made up of nearly US$200 million in cash and 15,000 bitcoin. Good money after bad?

Voyager says it intends to pay its employees in the usual manner and continue its “primary benefits and certain customer programs without disruption”. Trading, deposits, withdrawals and loyalty rewards, however, will remain suspended.

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Bitcoin Crypto News Cryptocurrency Law ETFs Regulation

US Regulator Sued by Grayscale After Latest Bitcoin ETF Rejection

Historically, the Grayscale Bitcoin Trust (GBTC) was the primary vehicle for US institutional exposure to bitcoin. As jurisdictions including Australia and Canada approved spot bitcoin exchange-traded funds (ETFs), the Securities and Exchange Commission (SEC) resisted. Once again, it has rejected appeals to approve a bitcoin ETF, and this time it is getting sued:

Grayscale Committed to a Spot Bitcoin ETF

As news broke that the SEC had rejected its application to convert GBTC into an ETF, Grayscale moved swiftly to file a petition for review with the US Court of Appeals for the District of Columbia Circuit.

Speaking on CNBC’s Squawk Box, chief executive Michael Sonnenshein commented that Grayscale was “of course very disappointed, but as an organisation [we] were ready”. He added that the firm “almost immediately” filed a petition for review as it “vehemently disagreed with the decision”.

When asked for the basis for Grayscale’s legal challenge, Sonnenshein responded:

The SEC is acting arbitrary and capricious by continuing to approve Bitcoin futures based ETFs while continuing to deny spot Bitcoin ETFs.

Michael Sonnensheim, CEO, Grayscale

Nonetheless, Grayscale has said that it remains “committed” to converting the GBTC into an ETF, adding that:

Through the ETF application review process, we believe American investors overwhelmingly voiced a desire to see GBTC convert to a spot Bitcoin ETF, which would unlock billions of dollars of investor capital while bringing the world’s largest Bitcoin fund further into the US regulatory perimeter. We will continue to leverage the full resources of the firm to advocate for our investors and the equitable regulatory treatment of Bitcoin investment vehicles.

Grayscale press release

‘Poked the Wrong Nest’

In a rare display of unity between Bitcoiners and the crypto community, both sides agreed that pushback was needed against the SEC’s decision, with on-chain analyst Will Clemente saying:

Others commented that the SEC’s decision “lacked substance” or “common sense”:

Tellingly, during Grayscale’s 240-day review, a record-breaking 11,400 submissions were received with over 99 percent demonstrating support for the conversion.

Even though a final decision is only likely to be reached within the next 12 months, it appears as if the SEC may well have poked the wrong nest. Bitcoiners, in particular, have a tendency to make their voices heard.

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Australia Crypto News Cryptocurrencies Cryptocurrency Law Regulation

Crypto Ads Crackdown Expected Soon to Protect Australian Consumers

Caroline Malcolm, the Australian-born head of international policy at crypto security firm Chainalysis, believes the federal government will soon introduce regulatory reforms to offer everyday Australians a higher level of consumer protection.

Regulations Likely Within Next Year

The former head of the OECD’s global blockchain policy centre told attendees at the Chainalysis LINKS conference in Sydney that she believes regulations will be implemented in the next six to 12 months.

Specifically, the focus is likely to relate to advertising standards and prohibited practices, and bringing those in alignment with traditional investment regulations:

Thinking about some of those traditional concepts around market manipulation, for example, and bringing those into crypto space and starting to have some obligations there in terms of whether it be wash trading, front-running, or insider trading.

Caroline Malcolm, head of international public policy and research, Chainalysis. Source: Australian Financial Review

Malcolm noted that the new regulations would require clarity, particularly in the areas of advertising and promotion:

It’s not about banning advertising or banning the sale of particular assets to particular parts of the community. But [it is] really about making sure that there’s no misleading advertising, that there are disclosures about what you’re actually buying when you’re getting into this sector, and making sure that those risks are as clear to you as the opportunities are.

Caroline Malcolm, head of international public policy and research, Chainalysis. Source: Australian Financial Review

‘Australia Can’t Tackle This Alone’

Malcolm suggested that Australia is likely to take a similar approach to the UK, which has brought crypto assets into a similar regime as for other financial products.

Speaking in relation to Australian regulators and the local industry, she added that both have “misconceptions” about risk levels in crypto, and “both need to work together to understand each other’s obligations”. Malcolm argued further that Australian regulators ought to be working with global counterparts to ensure one country’s approach is as consistent as possible with others’.

Australia can’t tackle these issues by itself. We really need to work together to almost have a sandbox for trialling new approaches which cannot just put us in the same position in terms of policy outcomes, but perhaps even put us in a better position to allow us to be more effective in some of these policy objectives that we have.

Caroline Malcolm, head of international public policy and research, Chainalysis. Source: Innovation Australia

While Australians made US$2.1 billion in crypto gains during 2021, it isn’t clear how they have fared thus far in 2022, particularly after the most recent downturn. Arguably, this may be the appropriate time to introduce sensible consumer regulations in alignment with other financial products.