A Hot Week in July Could Transform the Future of US Crypto Regulation

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Exchange Commission (SEC) Chairman Gary Gensler testifies before the Senate Banking, Housing, and Urban Affairs Committee (Photo by Kevin Dietsch/Getty Images)Getty Images

Over the past year, we’ve seen an awkward dance of US government engagement in the cryptocurrency space. However, in a hot week in July, we saw all three branches engage in significant and potentially transformative ways that could have a lasting impact on the future of crypto policymaking in America.

Judiciary finds that not all tokens are securities

First, on Thursday, July 13, the judiciary entered the fray when the U.S. District Court for the Southern District of New York granted partial summary judgment in favor of Ripple, in its litigation with the SEC, finding that the company had not violated the securities. Take action by selling its XRPXRP token on public exchanges.

What does this decision mean for the future of crypto regulation in the United States? Attorney Kayvan B. Sadeghi of Jenner & Block told me: The Ripple decision will have far-reaching effects on the SEC’s crypto enforcement program for the foreseeable future. The court clearly rejected a fundamental tenet of the SEC’s effort to regulate secondary crypto markets. The SEC cannot simply treat tokens as securities.

Regardless of the partial nature of the victory in which the Court concluded that XRP can be a security when institutional investors are involved, the Courts’ decision potentially began the process of clarifying an issue plaguing crypto in the United States. for years about how do we define certain digital assets and which financial regulator, if any, will have jurisdiction. For Sadeghi, an expert on legal issues in the crypto space, the move could send things back to the legislature.

Hopefully, this decision will help everyone realize that the best way forward is responsible legislation tailored to this asset class, Sadeghi added.

Legislative Branch Releases New Crypto Oversight Bill

The courts weren’t the only branch exploring the question of who can regulate the crypto space last week. On Wednesday, July 12, Senators Cynthia Lummis, a Republican from Wyoming, and Kristen Gillibrand, a Democrat from New York, revived cryptocurrency legislation that would give primary oversight of digital assets to the Commodity Futures Trading Commission.

Interestingly, the bill, like the district court’s ruling in Ripple, basically states that assets that don’t give an investor a clear financial interest in a company shouldn’t be considered securities even if they benefit from entrepreneurial and managerial efforts that determine the value of assets. . The bill therefore places oversight of most crypto tokens under the jurisdiction of the CFTC.

While the bill calls for client assets to be fully segregated, stablecoins to be issued only by regulated financial institutions, and, for the first time, addresses decentralized finance, the hallmark of the bill is its attempt to separate the regulatory obligations of the CFTC and the SEC.

In addition to the Lummis/Gillibrand bill, there also appears to be movement on stablecoin legislation from the House Financial Services Committee. As Ron Hammond, director of government relations at the Blockchain Association, told me, nearly 6 years after the first bipartisan crypto bill was introduced in Congress, it seems the House Financial Services Committee is supposed to advance comprehensive legislation on stablecoins and market structure. Mr. Hammond underscored the bipartisan nature of the work and signaled the importance of the shift from executive to legislative, Congress understands that regulation by enforcement and a patchwork of court decisions are no substitute for a clear legislative framework, he added.

Executive Branch Focuses on Criminal Abuse of NFTs and DeFi

While executive branch action in the crypto space is mostly associated with a litany of law enforcement actions, including the SEC’s case against Ripple, we’ve also seen law enforcement continue to pursue the criminals seeking to use cryptocurrencies to launder illicit proceeds. Last week, the United States Attorney’s Office for the Southern District of New York filed key lawsuits against illicit actors who attacked and abused the cryptocurrency ecosystem.

First, on Monday, July 10, the US Attorney’s Office and the FBI announced the indictment of a Moroccan man for stealing over $450,000 in crypto and NFT by spoofing the OpenSea NFT marketplace. According to the indictment, the spoofed website was deliberately designed to look like the legitimate OpenSea login page in order to trick unsuspecting victims into thinking they were interfacing with the real OpenSea. However, when the victims entered their login credentials or other private information on the spoofed site, their credentials were automatically sent to an email account controlled by the defendant allowing the defendant to steal cryptos and NFTs. A New York victim unwittingly provided the defendant with access to 39 NFTs, including a valuable Bored Ape Yacht Club NFT.

The following day, Tuesday, July 11, the United States Attorney’s Office, alongside Homeland Security Investigations and IRS-Criminal Investigations, announced the indictment and arrest of a qualified security engineer in the first criminal case involving an attack on a smart contract operated by a decentralized system. exchange. The hacker exploited a vulnerability in one of the exchange smart contracts by stealing around $9 million.

The case is unique in several respects. First, this is the first criminal prosecution of a DeFi hack. Second, it is rare to make an arrest in this type of cyberattack given that many cybercriminals reside in rogue states like Russia or North Korea, as opposed to New York where the arrest in this case took place. .

Finally, the case stands out for the sophistication of the attack, laundering and law enforcement response. The defendant allegedly exploited the smart contract associated with the exchange by providing false data to make it appear that he had provided a large volume of liquidity to the exchange, which he had not done. As a result, Defendant fraudulently received substantial fees from Target. Additionally, after discovering how to exploit the exchanges smart contract, the defendant allegedly used funds from flash loans to make a series of deposits into the exchange, generating additional fraudulent fees. The defendant then created another fraudulent account on the exchange and then manipulated the smart contract so that he could quickly withdraw the main funds from the exchange. The defendant then laundered the funds through the chains, through mixers, privacy coins and other obfuscation techniques.

However, law enforcement was able to use blockchain intelligence to track and trace the construction of the funds back to a warrant where authorities were able to obtain off-chain information such as web searches the defendant made. researched, can I cross the border with crypto, how to prevent the feds from seizing assets and buying citizenship; and he visited a website titled 16 Countries Where Your Investments Can Buy Citizenship. . . linking him to the crime.

While each of these cases would have been significant on its own, they are extraordinary in combination. The cases involve emerging DeFi and NFT technologies and demonstrate a commitment by US law enforcement to ensure that illicit actors do not take advantage of the cryptocurrency space. The cases also show a clear shift from BitcoinBTC to a more diverse and complex ecosystem of illicit actors attacking DeFi and moving funds across blockchains.

More importantly, however, perhaps these cases, and the continued efforts of law enforcement and regulators to tackle the illicit underbelly of the crypto ecosystem, foreshadow a future in which legislation like Lummis/Gillibrand and stablecoins and court rulings like Ripple combine to build a legal framework like the DOJ, Treasury, and others focus on illicit actors who seek to undermine this new financial system.

As we’re into years of Ripple appeals and seemingly endless debate and discussion about Lummis/Gillibrand, stablecoins and beyond, there’s no doubt that a hot week in July, during which every branch of the US government dug into key questions around cryptocurrencies, could have a lasting impact on an ever-changing space.

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I am the Legal and Government Affairs Manager at TRM Labs, a blockchain intelligence company. Prior to joining TRM, I was Senior Advisor to the Under Secretary and Under Secretary for Terrorism and Financial Intelligence at the United States Treasury. Prior to that, I served as the Assistant United States Attorney for the District of Columbia for eleven years, where I investigated and prosecuted terrorism, espionage, threat finance, cryptocurrency, export controls, child exploitation and human trafficking. I am passionate about compliance and investigate fraud and financial crime to build a safer financial system.

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