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Crypto Compliance And Regulatory Defense

The law firm of Ford O'Brien, LLP, is proud to serve clients facing legal issues related to cryptocurrency regulation.  In a recent opinion letter, Ford O'Brien, LLP, assisted a client in navigating the complex issue of when a cryptocurrency may be considered a security by the U.S. Securities and Exchange Commission (the “SEC”) and thus subject to SEC registration requirements.  In addition, Ford O'Brien, LLP, is currently assisting early supporters of a cryptocurrency to recover tokens owed to them through litigation.  Another of the firm’s active cryptocurrency matters is a general representation of a Bitcoin mining company.  The firm also represents a subject in a federal grand jury investigation into possible fraud involving the leasing of cryptocurrency data mining equipment.

Virtual currencies are digital representations of value that function as a medium of exchange, a unit of account and/or a store of value.  One type of virtual currency is cryptocurrency, which has been described as an “electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”[1]  Examples of cryptocurrencies include Bitcoin, Ethereum, Bitcoin Cash, and EOS.  Blockchain, which is distributed ledger technology, supports many virtual currencies.

The regulatory environment for cryptocurrencies is rapidly evolving and implicates oversight and possible enforcement actions brought by a range of U.S. regulatory authorities.  Two agencies that have been active in addressing the consumer and investor risks of cryptocurrency are the U.S. Commodity Futures Trading Commission (“CFTC”) and the SEC.  Failure to comply with the law regulating cryptocurrencies may result in federal or state prosecution or civil or administrative enforcement actions.  For example, in February 2021, the New York State Attorney General and the SEC filed complaints alleging that, in addition to other violations, a cryptocurrency trading platform, which allowed users to trade in many virtual currencies, was selling unregistered securities.[2]  Reflecting uncertainty in existing law and regulations, the CEO of the trading platform complained that “they’re trying . . . to force all crypto companies to have commodities broker-dealers.”[3]  Another high profile case that was filed by the SEC in December 2020 also concerns the issue of when cryptocurrencies should be considered securities and subject to SEC registration requirements.[4]  Ford O'Brien, LLP, has an active practice advising on the law related to when cryptocurrencies are securities and thus subject to U.S. securities law and SEC registration requirements.

Other regulatory authorities that engage in cryptocurrency regulation include the Financial Industry Regulatory Authority (“FINRA”), the Financial Crimes Enforcement Network (“FinCEN”), and the Office of Foreign Assets Control (“OFAC”), which is located within the U.S. Department of the Treasury.  There are currently efforts in the U.S. Congress to create a working group to address the regulatory framework that applies to digital currencies. In February 2021, OFAC entered into a settlement agreement with a company that had offered payment processing for digital currency used in violation of American sanctions on foreign regimes, including the processing of transactions initiated by users in the Crimea region of the Ukraine, Cuba, North Korea, Iran, Sudan and Syria.[5]

Ford O'Brien, LLP, has deep experience in white collar and regulatory defense and stands ready to assist cryptocurrency clients facing criminal prosecution or civil or administrative enforcement actions.  In addition, Ford O'Brien, LLP, is well-placed to help trading platforms and other actors in the cryptocurrency space with their compliance obligations, including analysis of potential SEC registration requirements and designing effective compliance programs to address anti-money laundering laws and sanctions.

[1] Satoshi Nakamoto, Bitcoin: a Peer-to-Peer Electronic Cash System (Oct. 31, 2008).  Available at: https:bitcoin.org/bitcoin.pdf.

[2] See Complaint, The People of the State of New York v. Coinseed Inc. et al. (N.Y. Sup. Ct. Feb. 17, 2021); Complaint, SEC v. Coinseed, Inc., (S.D.N.Y. 2021) (No. 21 Civ. 01381).

[3] Craig Clough, NY AG, Feds Say Crypto Platform Sold Unregistered Securities, Law360 (Feb. 17, 2021).

[4] See Complaint, SEC v. Ripple Labs et. al., (S.D.N.Y. 2020) (No. 20 Civ. 10832).

[5] U.S. Department of the Treasury, Enforcement Release: February 18, 2021, OFAC Enters into $507,375 Settlement with BitPay, Inc. for Apparent Violations of Multiple Sanctions Programs Related to Digital Currency Transactions.  Available at: https://home.treasury.gov/system/files/126/20210218_bp.pdf.

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