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Cod3x Updates: October 2, 2023
This newsletter provides weekly updates on the Cod3x progress, and longer form conceptual pieces on crypto law and art. The Cod3x is a free, open source (CC BY 4.0) legal treatise about crypto law. It is still under development, with lots to add! Are you a lawyer or law student and would like to help? Read more about how you can contribute at the bottom or right here.
The Cod3x’s Litigation Tracker provides a comprehensive listing of enforcement actions brought by the government against crypto firms, as well as challenges to government action by crypto firms. It is updated on a rolling basis and includes links, where available, to court dockets through Court Listener and press releases about the cases, and for significant matters, links to major rulings.
Case Additions and Updates
This week, the following cases were added to the Litigation Tracker:
Regulatory – DOJ
United States v. Storm, No. 1:23-cr-00430 (S.D.N.Y. 2023.08.21)
Short Summary: Criminal indictment against founders/developers of Tornado Cash, a privacy preserving cryptocurrency mixer allegedly used by North Korea and other criminal organizations to launder more than $1 billion in stolen funds. Charges include conspiracy to commit money laundering and conspiracy to operate an unlicensed money transmitting business (MSB).
United States v. DeSalvo, No. 2:23-mj-11153 (D.N.J. 2023.08.22)
Short Summary: Wire fraud, securities fraud, and money laundering charges based on fraudulent fundraising by DeSalvo, which included a cryptocurrency scheme that resulted in losses of more than $600,000. The crypto scheme targeted law enforcement and first responders to invest in a digital token, Blazar, that he falsely claimed was SEC-approved and listed on cryptocurrency exchanges. Related enforcement action by SEC brought simultaneously.
Regulatory – SEC
SEC v. DeSalvo, No. 1:23-cv-08092 (D.N.J. 2023.08.23)
Short Summary: Fraudulent sale of “Blazar token” through an unregistered securities offering, an ICO, promising extraordinary investment returns, while falsely claiming that the token was registered with the SEC. DeSalvo rapidly sold his massive amount of Blazar tokens shortly after the ICO, crashing the market price of the token, and misappropriated investor funds for personal use. Related criminal action by DOJ brought simultaneously.
In re Impact Theory, LLC, No. 11226 (Admin. Proc. 2023.08.28)
Dissenting Statement of Commissioners Peirce and Uyeda
Short Summary: First of its kind enforcement action based on sale of NFTs as an unregistered securities offering as an investment contract under the Howey test based on promises of “tremendous value” to KeyNFT purchasers, raising $29 million. Impact Theory also stated that it would use the offering proceeds for “development,” “bringing on more team,” and “creating more projects.” Settled in exchange for: destruction of all KeyNFTs held by Impact Theory, removing royalties required by the smart contract, and disgorgement/penalties/fees of over $5 million, among other remedies.
In re Stoner Cats 2, LLC, No. 11233 (Admin Proc. 2023.09.13)
Dissenting Statement of Commissioners Peirce and Uyeda
Short Summary: Second case against NFT project, this one based on the creation of a series of short animated films featuring stars like Ashton Kutcher and Mila Kunis. The order concludes the Stoner Cats NFTs were sold as an unregistered securities offering, on the basis that the proceeds of the NFT sales would be used to develop the animated films and because there was an active secondary market in the NFTs before and after the release of the films.
Regulatory – CFTC
CFTC v. Mosaic Exchange Ltd., No. 9:23-cv-81320-AMC (S.D. Fla. 2023.09.26)
CFTC v. Patreanu, No. 2:23-cv-20782 (D.N.J. 2023.09.29)
Short Summary: Action against four international individuals fraudulently soliciting, under a variety of trade names, including most prominently Cryptobravos, duping investors to send money that the charged individuals would purportedly use to trade bitcoin and other digital assets, generate risk-free returns for its customers, on the premise that customers could withdraw their funds at any time. The representations were a fraud.
Grayscale Investments, LLC v. SEC, No. 22-1142 (D.C. Cir. 2022.06.29)
Opinion: SEC’s denial of approval of spot market bitcoin exchange traded product (ETP) vacated as arbitrary and capricious. The D.C. Circuit concluded the SEC’s conclusion that the spot Bitcoin ETP was “not ‘designed to prevent fraudulent and manipulative acts and practices’” failed to treat like products alike, having previously approved two futures Bitcoin ETPs. The Court: “The Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decisionmaking.”
Van Loon v. Dep't of the Treasury, No. 1:23-cv-00312 (W.D. Tex. 2022.09.08)
Opinion: In case challenging OFAC’s designation of Tornado Cash to the SDN list as beyond its statutory authority, the court granted Treasury’s motion for summary judgment, and denied Van Loon’s MSJ. The court reasoned that “Tornado Cash is an entity that may be properly designated as a person under IEEPA,” specifically that it was an entity “composed of its founders, its developers, and its DAO.” The court also concluded that OFAC properly decided the entity had a property interest in the Tornado Cash smart contracts, noting “OFAC’s definition of property encompasses ‘contracts of any nature whatsoever,’ and—as other courts have recognized—smart contracts are merely a code-enabled species of unilateral contracts.” Van Loon is appealing the ruling.
Over the past few days I have been working on fleshing out one of the longer form sections on specific subject matters, namely the one near and dear to my heart: NFTs. I am working on a rough outline of the many, many issues involved in NFTs and will share that when it is in better shape.
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