US CFTC Announces Amendments to Rule Submission Procedures for Registered Entities
On 12 September 2024, the Commodity Futures Trading Commission (US CFTC) announced amendments to Regulation Part 40, which impact rule submission procedures for designated contract markets (DCMs), swap execution facilities (SEFs), and derivatives clearing organizations (DCOs). These changes aim to improve the certification process, update product certification requirements, and improve transparency for market participants, including those in the digital assets and cryptocurrency sectors.
- Updated product certification requirements now mandate that entities provide more detailed information when certifying new products. This includes thorough explanations of how the product complies with legal and regulatory standards set by the US CFTC.
- The amendments also expand the rule certification process, requiring entities to submit comprehensive explanations of any new or amended rules. These explanations must address the impact on market operations and participants, ensuring a proactive assessment of potential effects during the certification process.
- The amendments require more publicly available information about rule submissions, to enhance transparency, allowing market participants greater visibility into how rules are formulated and their potential market impact.
- The updated product certification process pays special attention to digital assets such as cryptocurrencies. Entities certifying cryptocurrency-related products must meet higher standards to ensure alignment with existing regulatory frameworks. This places additional responsibility on entities to thoroughly evaluate compliance aspects before market introduction, given the rapidly evolving nature of the cryptocurrency sector.
- Registered entities must now prioritize stronger internal compliance mechanisms. Establishing internal frameworks that focus on thorough documentation and legal review before submitting new rules or products will be critical. Close collaboration with legal and compliance teams will ensure that all regulatory requirements are met under these new amendments.
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UK High Court Identifies Tether as Property while Deciding a Case on Cryptocurrency Theft
On 13 September 2024, the UK High Court (Chancery Division) delivered its judgment in Fabrizio D’Aloia v Persons Unknown Category A & B and Others [2024] EWHC 2342 (Ch), confirming that Tether (USDT) is classified as property under English law. The case involved a cryptocurrency scam where the claimant, Mr. Fabrizio D’Aloia, sought to recover stolen USDT, with Bitkub Online Co Ltd accused of facilitating the laundering of the stolen funds.
- The court reaffirmed that USDT qualifies as property under English law, referencing the precedent in AA v Persons Unknown [2019]. This is due to its “rivalrous” nature, meaning ownership by one excludes others, and it can be traced and subjected to proprietary claims.
- Mr. D’Aloia, the founder of Microgame, was deceived into transferring approximately £2.5 million worth of USDT to wallets controlled by fraudsters, believing he was using a legitimate trading platform. These funds were laundered through multiple blockchain wallets, making them difficult to trace.
- A portion of the stolen USDT (46,291 units) was traced to a wallet on the Bitkub platform, registered under the name of Ms. Hlangpan. Despite internal red flags, such as large withdrawals exceeding her declared income and daily limits, Bitkub failed to conduct a proper investigation.
- Bitkub was found to have breached its Know-Your-Customer (KYC) and Anti-Money Laundering (AML) obligations by not investigating the suspicious transactions in Ms. Hlangpan’s account. The exchange allowed the conversion of stolen cryptocurrency into Thai baht and subsequent withdrawal, facilitating the laundering process.
- Despite Bitkub’s failure to follow its KYC/AML protocols, the claimant was unable to conclusively trace his specific stolen USDT to Bitkub’s platform. This was due to the intractability of assets in Bitkub’s hot wallet, which pooled various users’ funds, making identification of individual funds close to impossible.
- Hot wallets are digital wallets used by cryptocurrency exchanges to store and manage crypto assets. They act as a central pool where funds from multiple transactions are temporarily held and processed before being sent to the intended recipients. These wallets ensure liquidity for seamless transfers.
- The court dismissed the claims for constructive trust and unjust enrichment against Bitkub. Without clear evidence tracing the stolen cryptocurrency to the platform, Bitkub was not held liable for the fraud.
- The unjust enrichment claim also failed as no identifiable funds were proven to have been retained by Bitkub. The court concluded that while Bitkub may have breached its obligations, the claimant’s inability to trace the stolen assets made the claims untenable.
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US SEC Issues Cease-and-Desist Order Against Flyfish Club for Unregistered Offering of Crypto Asset Securities
On 16 September 2024, the U.S. Securities and Exchange Commission (US SEC) issued a cease-and-desist order against Flyfish Club, LLC, a Delaware-based company, for offering and selling unregistered crypto asset securities in the form of non-fungible tokens (NFTs). Flyfish Club raised approximately US $14.8 million through the sale of around 1,600 NFTs marketed as membership tokens for a luxury dining club in New York. The US SEC in its order held that these NFTs were investment contracts and should have been registered under federal securities laws. Under U.S. law, entities offering or selling investment contracts, must be licensed or registered with the U.S. Securities and Exchange Commission.
- Between August 2021 and May 2022, Flyfish Club, LLC sold about 1,600 NFTs, raising $14.8 million. These NFTs were marketed as “membership tokens” that provided access to an exclusive dining club in New York.
- The NFTs allowed holders to resell them on secondary markets, with Flyfish earning a 10% royalty on each resale. This generated an additional $2.7 million in royalties by early 2023.
- The US SEC found that investors had a reasonable expectation of profit from the resale of the NFTs, classifying them as “investment contracts” under the Howey test. This made them subject to federal securities regulations.
- Flyfish failed to register these NFTs as securities or seek an exemption from registration, violating federal securities laws. This prompted the US SEC’s enforcement action for the unregistered offering of securities.
- As part of the enforcement, Flyfish was ordered to pay US $750,000 in civil penalties. The payment schedule includes US $350,000 within 14 days, USD US $200,000 by December 31, 2024, and the remaining US $200,000 within 12 months.
- Flyfish was ordered to cease offering and selling unregistered securities, including NFTs, unless a valid exemption applies. This halts the sale of their Flyfish Membership NFTs until proper compliance is ensured.
- Flyfish is prohibited from conducting future securities offerings, including NFTs that qualify as securities, without appropriate registration or a valid exemption from the SEC.
- The company must cooperate fully with the SEC, including providing documents or evidence as part of any ongoing investigations or oversight activities related to this case.
- Flyfish is required to strengthen its internal compliance measures to ensure adherence to federal securities regulations in future operations, including revising its business practices to avoid further violations.
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Sui Network Integrates with USDC and CCTP to Boost Liquidity and Cross-Chain Capabilities
On 17 September 2024, Sui Network, a layer-1 blockchain, announced its integration with native USD Coin (USDC) and the Cross-Chain Transfer Protocol (CCTP). This integration aims to enhance liquidity and enable cross-chain transactions for users and developers in the Sui ecosystem.
- The transition will shift liquidity from the current bridged version of USDC to its native form, while Wormhole’s Portal bridge will continue to operate without interruption. The Ethereum-bridged USDC will be rebranded as “wUSDC” on block explorers.
- Nikhil Chandhok, Circle’s Chief Product Officer, emphasized Circle’s commitment to enhancing blockchain applications and improving payment experiences through this collaboration.
- This integration follows significant developments in the Sui ecosystem, including Grayscale’s launch of the Sui Trust.
- Sui Network’s Total Value Locked (TVL) saw a recovery after dropping from over US$1 billion in May 2024 to US$516 million in August. It has now rebounded to over US$700 million, positioning Sui as the 10th largest blockchain by TVL, according to DefiLlama.
- Futures market activity on Sui has also surged, with open interest reaching US$230 million, reflecting strong demand among traders.
- The Sui DeFi sector has grown by more than 15% in the past 30 days, with protocols like NAVI Protocol, Scallop Lend, Suilend, and Aftermath Finance leading the expansion. Stablecoin volume on Sui has grown to over US$360 million, while DEX volume has increased by over 32% in the past week, nearing US$300 million.
- Beyond the crypto space, Sui has attracted adoption from companies like 3DOS, a 3D printing device manufacturer, due to its fast transaction speeds and low costs.
- Technical indicators for Sui present mixed signals. The Relative Strength Index (RSI) and MACD suggest a neutral to positive trend, while the Commodity Channel Index (CCI) and Momentum indicators point toward potential selling. Most moving averages indicate buying opportunities, though the 200-period simple moving average signals resistance.
- Stablecoins like USDC play a crucial role in bridging traditional finance and decentralized finance (DeFi). By offering a stable, dollar-backed currency, they enable users to move between fiat and crypto markets with greater ease and security.
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US SEC Charges Prager Metis with Auditor Independence Violations, Agrees to US $1.95 Million Settlement
On 17 September 2024, the U.S. Securities and Exchange Commission (US SEC) announced a settlement with Prager Metis CPAs, LLC and its California affiliate Prager Metis CPAs LLP for violating federal auditor independence regulations during their audits of the now-defunct crypto asset platform, FTX. The settlement addresses allegations that Prager failed to comply with Generally Accepted Auditing Standards (GAAS) and engaged in negligence-based fraud. Without admitting or denying the findings, Prager has agreed to pay US $1.95 million in penalties and take remedial actions.
- Between February 2021 and April 2022, Prager issued two audit reports for FTX, claiming compliance with GAAS. However, the US SEC found that Prager failed to meet necessary auditing standards, especially in evaluating its competency and resources to handle the FTX audits.
- Prager’s audits did not properly account for the risks associated with the close relationship between FTX and Alameda Research LLC, a hedge fund controlled by FTX’s CEO. The firm’s internal controls were deemed insufficient, leading to material compliance failures during the audit process.
- The SEC’s charges against Prager focused on two key issues: failure to comply with GAAS in auditing FTX and failure to assess whether the firm had the required expertise and resources to audit FTX. This oversight caused Prager to miss significant risks linked to the FTX-Alameda relationship.
- Prager also violated federal auditor independence rules by including indemnification provisions in engagement letters for over 200 audits and reviews between December 2017 and October 2020. Despite warnings from regulatory bodies like the Public Company Accounting Oversight Board (PCAOB), Prager continued to issue reports that falsely claimed independence.
- As part of the settlement, Prager will pay a civil penalty of US $745,000 and will implement remedial actions, including hiring an independent consultant to review its audit and quality control practices. The firm is also restricted from accepting new audit clients.
- In a related action concerning auditor independence violations from 2017 to 2020, Prager will pay an additional US $1 million in civil penalties and disgorgement, along with US $205,000 in prejudgment interest. Both settlements include permanent injunctions barring future violations of federal securities laws, particularly those related to auditor independence and GAAS compliance.
- Prager Metis will be legally restrained from engaging in conduct similar to the violations found in their FTX audits and other client audits.
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DBS Bank to Offer OTC Crypto Options and Structured Notes by Q4 2024
In the Fourth Quarter of 2024, Singapore’s DBS Bank will introduce over-the-counter (OTC) cryptocurrency options and structured notes for institutional investors and accredited wealth clients. DBS is the first Asian bank to offer OTC for cryptocurrencies like Bitcoin and Ethereum.
- The decision follows a surge in market activity in the first half of 2024, with the total market value of digital assets increasing by nearly 50%. DBS Digital Exchange (DDEx) saw a 36% rise in active trading clients and an 80% surge in assets under custody.
- The new products will allow professional investors to manage their exposure to digital assets through advanced investment strategies. Clients can choose between cash settlements or delivery of the underlying cryptocurrency, depending on market conditions.
- These offerings will expand DBS’s existing digital asset services with the ability to trade cryptocurrencies and security tokens on DDEx.
- Jacky Tai, Group Head of Trading and Structuring for Global Financial Markets at DBS, emphasized the growing demand for digital asset exposure among professional investors, offering them alternative channels for sophisticated investment strategies.
- The launch comes amid heightened global regulatory scrutiny, particularly from the U.S. SEC. Nonetheless, DBS remains committed to ethical innovation in the digital asset space.
- AsiaNext, a Singapore-based platform has followed in by providing crypto derivatives for institutional clients and the stage is set for other institutions to follow.
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Reserve Bank of Australia and Treasury Release Joint Paper on CBDC’s and Digital Money Future in Australia
On 18 September 2024, the Reserve Bank of Australia (RBA) and the Treasury published a joint report titled Central Bank Digital Currency and the Future of Digital Money in Australia. The report presents the findings of their research into central bank digital currency (CBDC) and digital money, offering insights into potential retail and wholesale CBDC frameworks in Australia. It also outlines a three-year roadmap for further exploration of digital money’s role in enhancing financial systems.
- The report concludes that there is currently no strong case for introducing retail CBDC for everyday public use in Australia. The existing payment systems are already highly efficient and secure. However, the RBA and Treasury acknowledge that this may change as technology and economic conditions evolve, and they will continue to evaluate the benefits and costs of retail CBDC.
- There is greater support for a wholesale CBDC, which would be used by financial institutions rather than the general public. A wholesale CBDC could improve large financial transactions by making them faster, more transparent, and efficient. The RBA plans to prioritize research into wholesale CBDCs and their integration into the Australian financial system.
- The report introduces Project Acacia, a new initiative set to launch in October 2024, focused on tokenized money and new settlement technologies in wholesale markets.
- The introduction of a retail CBDC would require legislative changes and close collaboration between the RBA, Treasury, and the Australian Government by taking into account the potential impact on financial stability and monetary policy.
- Brad Jones, Assistant Governor of the RBA (Financial System), in his speech at the Intersekt Conference in Melbourne, stated that “…while there is no compelling public interest case for a retail CBDC at this time, a wholesale CBDC offers more promise. The RBA sees wholesale CBDC as an evolutionary step that could improve transparency, efficiency, and risk management in wholesale market transactions…”
- The Australian Government is taking a cautious approach toward introducing a CBDC. Any decision to introduce a retail CBDC would require careful policy deliberation, extensive research, and likely legislative changes.
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SEC Settles Charges with Rari Capital and Founders Over Misleading Investors and Unregistered Broker Activity
On 18 September 2024, the U.S. Securities and Exchange Commission (US SEC) announced a settlement with Rari Capital Inc. and its co-founders, Jai Bhavnani, Jack Lipstone, and David Lucid, over allegations of misleading investors and acting as unregistered brokers.
- Rari Capital operated two blockchain-based investment platforms, Earn and Fuse pools, which held over US $1 billion in crypto assets at their peak.
- The US SEC charged Rari Capital with conducting unregistered offerings of securities related to these platforms, as well as engaging in unregistered broker activity.
- The complaint stated that Rari Capital misrepresented the operation of the Earn pools, falsely claiming that crypto assets would be automatically rebalanced into high-yield opportunities. In reality, this process required manual intervention, which was sometimes not performed.
- Rari Capital and its co-founders exaggerated the annual percentage yields (APYs) investors would earn and failed to disclose fees and other costs, leading to investor losses.
- Rari Capital also operated the Fuse platform, allowing users to create lending pools while retaining control over smart contracts and charging performance fees, which the SEC deemed unregistered broker activity.
- In March 2022, Rari Capital Infrastructure LLC took over operations of the Fuse platform and continued unlawful offering of securities and unregistered broker activity. A hacking incident in May 2022 resulted in a loss of $80 million, leading to the halting of new deposits and eventual winding down of operations.
- The settlement includes permanent injunctions against Rari Capital and its co-founders, preventing future violations of federal securities laws and unregistered securities offerings.
- Conduct-based injunctions were imposed, prohibiting further unlawful broker activity, and the co-founders agreed to officer-and-director bars for five years, preventing them from serving in those roles for public companies.
- Rari Capital and its co-founders will pay civil penalties, disgorgement of ill-gotten gains, and prejudgment interest to compensate investors harmed by their misleading practices.
- Rari Capital Infrastructure LLC also agreed to a cease-and-desist order, reinforcing the SEC’s commitment to addressing unregistered securities activities in the decentralized finance (DeFi) sector.
- Monique C. Winkler, Director of the SEC’s San Francisco Regional Office, stressed that the SEC will continue to scrutinize decentralized platforms, ensuring that entities violating securities laws are held accountable.
- The settlement is subject to court approval.
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