Crypto news & regulatory update: January 12 – February 9, 2024

Editor’s note: The a16z crypto Regulatory Update is a series that highlights the latest crypto regulation and policy happenings relevant to builders in web3 and crypto, as tracked and curated by the a16z crypto regulatory team. The roundups are based on recent news, the latest updates, new guidance, ongoing legislation, and frameworks released by regulatory agencies/bodies, industry consortia and professional associations, banks, governments, and other entities as they impact the crypto industry (or applications) around the world. We also occasionally include select other resources such as talks, posts, or other commentary – from us or from others – with the updates.

🧠 tl;dr

• The Department of the Treasury and the Internal Revenue Service (IRS) announced that businesses do not have to report the receipt of digital assets the same way as they must report the receipt of cash until after Treasury and the IRS issue regulations. 
• The Securities and Exchange Commission (SEC) expanded the definition of “dealer” to include market participants who regularly provide significant liquidity in trading and market activities, including with respect to digital asset securities.  The new definition could capture certain crypto businesses, who would need to register with the SEC, become members of a self-regulatory organization, and comply with federal securities laws.
• The Energy Information Administration (EIA) received emergency clearance to initiate a provisional survey of electricity consumption information from certain crypto mining companies operating in the U.S.  The EIA plans to begin collecting data on a monthly basis from February through July 2024.

🌽 Commodity Futures Trading Commission

• The Commodity Futures Trading Commission (CFTC) charged digital asset platform Debiex in connection with its alleged use of popular romance scam tactics to fraudulently misappropriate $2.3 million in customer funds intended for digital asset commodity trading.
• The CFTC’s Office of Customer Education and Outreach issued a customer advisory warning the public about artificial intelligence scams, some of which include claims relating to crypto -asset arbitrage algorithms.
• The CFTC’s Office of Customer Education and Outreach issued a customer advisory alerting dating app, messaging service, and social media users to a scam asking for financial support or giving investment advice, sometimes in relation to crypto investments.
• Chair Rostin Behnam said that “lack of legislation has not hindered the enthusiasm for digital assets” and that the need for federal legislation over cash market digital assets has “never been more critical.” 

🦅 Congress

• Senators Bill Haggerty (R-Tenn.) and Cynthia Lummis (R-Wyo.) introduced the Stopping Illicit Finance By Partnership Act of 2024 that would establish a program under which certain government agencies and designated private sector entities would share information about potential illicit finance violations and threats and emerging risks relating to them.
• Senator Cynthia Lummis (R-Wyo.) and House Representatives Wiley Nickel (D-N.C.) and Mike Flood (R-Neb.) introduced a Congressional Review Act resolution to overturn SEC Staff Accounting Bulletin (SAB) 121, which directed firms safeguarding consumer crypto assets to track them as liabilities on their balance sheets.
• House Financial Services Committee Chairman Patrick McHenry (R-N.C.) and others sent a letter to Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra urging him to reopen and extend the public comment period on the CFPB’s recently proposed rule “Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications.”
• House Financial Services Committee Chairman Patrick McHenry (R-N.C.) and others sent a letter to Treasury Secretary Janet Yellen in her capacity as Chair of the Financial Stability Oversight Council (FSOC) asking for clarifications relating to FSOC’s calls to fill existing regulatory gaps in the spot market for digital assets that are not securities.
• Senators J.D. Vance (R-Ohio), Thom Tillis (R-N.C.), Bill Hagerty (R-Tenn.), Cynthia Lummis (R-Wyo.), and Katie Boyd Britt (R-Ala.) wrote to SEC Chair Gary Gensler to express concern about the developments in the SEC’s enforcement proceedings against Digital Licensing Inc., also known as “DEBT Box.”
• Senator Cynthia Lummis (R-Wyo.) told CoinDesk TV that she is optimistic about stablecoin legislation “this year and possibly even in the first half of this calendar year.”

⚖️ Department of Justice

• The Department of Justice (DOJ) unsealed an indictment charging a Belarusian and Cypriot national in connection with operating the now defunct crypto exchange BTC-e, which facilitated transactions for cybercriminals worldwide.
• The DOJ charged three individuals in connection with a SIM-swapping scam that resulted in the theft of more than $400 million.  According to media reports, FTX might have been a victim of the attack hours after it declared bankruptcy. 
• The DOJ charged two people and obtained the guilty plea of a third person in connection with a worldwide $1.89 billion crypto Ponzi scheme known as HyperFund.  The SEC charged two of the individuals in a related civil action.
• A federal jury convicted the former head of financial engineering at Hydrogen Technology for manipulating the price of a security and scheming to defraud investors in connection with the purchase of Hydrogen Technology’s cryptocurrency, HYDRO.
• A commodity trading adviser was sentenced to two years in prison and home confinement after pleading guilty to “cherry-picking” client profits in a pair of commodity pools he established to trade in crypto and foreign-exchange futures.
• An Indian national pleaded guilty to selling controlled substances on dark web marketplaces and agreed to forfeit $150 million in cryptocurrency.
• A federal grand jury indicted a Texas man for filing false tax returns that underreported or did not report the sale of $4 million worth of bitcoins for which he had substantial gains. 

💵 Department of the Treasury

• As mentioned in “tl;dr,” Treasury and the IRS announced that businesses do not have to report the receipt of digital assets the same way as they must report the receipt of cash until Treasury and the IRS issue regulations that make the requirement effective.
• Treasury published its 2024 National Risk Assessments on Money Laundering, Terrorist Financing, and Proliferation Financing, which highlight illicit finance risks, including risks relating to virtual assets.
• Treasury’s Office of Foreign Assets Control (OFAC) imposed a fifth round of sanctions on Hamas since the October 7 terrorist attack on Israel.  The sanctions target networks of Hamas-affiliated financial exchanges in Gaza, which played key roles in funds transfers, including crypto transfers.
• In testimony to Congress, Treasury Secretary Janet Yellen said that digital assets and related risks from runs on crypto asset platforms and stablecoins are one of five areas that the FSOC is focused on for ongoing work.  She also encouraged Congress to pass legislation for regulating stablecoins and of the spot market for crypto assets that are not securities.
• Treasury’s Assistant Secretary for Financial Institutions Graham Steele called on policymakers to “adopt higher standards” for crypto assets that “support responsible innovation.”
• The IRS reminded taxpayers that they must answer a digital asset question and report all digital asset related income when they file their 2023 federal income tax return, as they did for their 2022 federal tax returns.

⚡Energy Information Administration

• As mentioned in “tl;dr,” the EIA received emergency clearance to initiate a provisional survey of electricity consumption information from identified crypto mining companies operating in the U.S.  The EIA plans to begin collecting data on a monthly basis from February through July 2024.

🔐 Federal Deposit Insurance Corporation

• The Federal Deposit Insurance Corporation (FDIC) issued letters demanding that five entities, which include at least one purported crypto exchange, cease and desist from making false and misleading statements about FDIC deposit insurance.

📈 Securities and Exchange Commission

• As mentioned in “tl;dr,” the SEC expanded the definition of “dealer” to include market participants who regularly provide significant liquidity in trading and market activities, including with respect to digital asset securities.  The new definition could capture certain crypto businesses, who would need to register with the SEC, become members of a self-regulatory organization, and comply with federal securities laws.
• The SEC delayed its deadlines to make decisions on the Fidelity, BlackRock, Grayscale, and joint Invesco and Galaxy Digital proposals for a spot Ethereum exchange-traded fund (ETF).
• TradeStation Crypto, Inc. agreed to pay a $1.5 million penalty to the SEC to settle charges that it failed to register the offer and sale of a crypto lending product that allowed U.S. investors to deposit or purchase crypto assets in a TradeStation account in exchange for the company’s promise to pay interest.
• The founder of American Bitcoin Academy settled charges with the SEC in connection with allegations that he defrauded students of his online crypto trading course of more than a million dollars through a series of lies about investment opportunities in his purported crypto hedge fund.
• The SEC requested that a federal court dismiss its action against crypto project Digital Licensing Inc., also known as “DEBT Box,” and represented that its officials “have taken and are taking broader corrective action” relating to their alleged misrepresentations to the court.
• Genesis Global Capital agreed to pay a $21 million fine to the SEC relating to its defunct Gemini Earn Lending program if Genesis is able to fully repay customers in its bankruptcy.  The settlement agreement is subject to the approval of the bankruptcy court.
• The Financial Industry Regulatory Authority published an update to the targeted exam it launched in November 2022 to review the practices of member firms that communicate with retail customers concerning crypto assets.  FINRA identified potential substantive violations of its rules in approximately 70% of the communications.

🌍 International

🇪🇺 European Union

• The European Council and Parliament reached a provisional agreement on a new anti-money laundering package under which crypto asset service providers will have to apply customer due diligence measures when carrying out transactions amounting to €1000 or more and that adds measures to mitigate risks relating to transactions involving self-hosted wallets.
• The European Banking Authority extended its guidelines on money laundering and terrorist financing risk factors to crypto asset service providers.

🇩🇪 Germany

• The German police announced that it had seized 50,000 bitcoins worth $2.17 billion in its “most extensive” crypto seizure ever. 

🇱🇺 Luxembourg

• Crypto liquidity provider B2C2 announced that it received regulatory approval to operate in Luxembourg.

🇰🇷 South Korea

• South Korean authorities arrested three executives of crypto yield platform Haru Invest for allegedly stealing approximately $828 million worth of crypto.

🇹🇭 Thailand

• Thailand’s Securities and Exchange Commission ordered crypto exchange Zipmex to suspend its digital asset trading and brokerage services for 15 days during which it has the opportunity to “correct its financial position and operational deficiencies.”  The Commission also filed charges against the former Zipmex Thailand CEO.

🇦🇪 United Arab Emirates

• OKX’s Dubai-based subsidiary announced that it received a Virtual Asset Service Provider (VASP) license from the Dubai Virtual Assets Regulatory Authority.

🇬🇧 United Kingdom

• The Bank of England and HM Treasury published a response to a consultation paper on a digital pound.  The Bank and HM Treasury have not yet decided on the issuance of a digital pound, but they are committed to ongoing research and design efforts, as well as to guaranteeing privacy as a “core design feature.”

🇺🇳 United Nations

• A United Nations report discussed the use of crypto for casinos, money laundering, underground banking, and transnational organized crime in East and Southeast Asia.

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