Enforcement aplenty against blockchain transactions
Technology for Lawyers
Published: October 13, 2023
Once the feds figured out that some blockchain transactions looked illegal, and it took a while, they swooped in. Here’s some recent enforcement news.
The SEC recently announced two enforcement actions against NFT platforms Impact Theory LLC and Stoner Cats 2, LLC (no information on Stoner Cats 1).
The SEC charged Impact Theory with conducting an unregistered offering of “purported” NFTs, in violation of federal securities laws. Impact Theory is a LA-based human potential podcast. The SEC accused Impact Theory of marketing the NFTs as investable assets, telling their listeners that the better the podcast did, the more the NFTs would be worth. Busted!
Charge 2 dropped on Stoner Cats 2 (SC2 for you cool babies), accusing them of selling $8 million of unregistered NFTs to finance a cartoon called—are you ready?—Stoner Cats.
Gurbir S. Grewal, the SECs director of enforcement, stated the SEC’s position (and the obvious): “it’s the economic reality of the offering - not the labels you put on it or the underlying objects – that guides the determination of what’s an investment contract and therefore a security.” In this case, SC2 sold 10,000 NFTs for $800 each as an investment vehicle without registering them as a security. Busted!
On to the CFTC, which is now getting around to regulating decentralized finance (DeFi). DeFi handles financial transactions on the blockchain through smart contracts.
The agency got three DeFi organizations recently: Opyn, Inc., ZeroEx, Inc., and Deridex, Inc. all of which were accused of conducting in offering illegal asset derivative trading. Yes, somebody got paid big bucks for coming up with those names.
The CFTC said that:
1. smart contracts on these platforms qualified as “commodities” under CFTC regs
2. some of the qualified as “swaps”
3. some of them were offered on a leveraged basis
4. some of the swaps had multiple participants, qualifying them as “swap execution facility”
5. these are futures, which must be traded in a regulated market (FCM), and they weren’t
6. none of the trades had anti-money laundering controls in place.
And in other blockchain news, the IRS issued proposed regulations for brokering digital assets. It’s complicated.
Here’s the press release: https://home.treasury.gov/news/press-releases/jy1705
Ah, yes. I remember the first time I wrote about the blockchain in this very column.
How time flies.