Photo courtesy of the author
Introduction
Since 2018, when the then-European Commissioner for Justice Věra Jourová described the Danske Bank money-laundering catastrophe[1] as “the biggest scandal in Europe”[2], the European Commission (EC), as the politically independent executive arm of the European Union (EU)[3], has worked assiduously to repair the substantial defects in Europe’s anti-money laundering and counter-financing of terrorism (AML/CFT) mechanisms.
On January 10, 2024, the U.S. Securities and Exchange Commission (SEC) approved, for the first time, Bitcoin exchange traded funds for spot markets. A link to SEC Chair Gary Gensler‘s announcement is available here. In this post, two crypto experts discuss the SEC’s decision.
Daniel Payne and Ijeoma Okoli (photos courtesy of authors)
by Kevin S. Schwartz, Rosemary Spaziani, David M. Adlerstein, Samantha M. Altschuler, and Sabina M. Beleuz Neagu
Left to right: Kevin S. Schwartz, Rosemary Spaziani, David M. Adlerstein, Samantha M. Altschuler and Sabina M. Beleuz Neagu (Photos courtesy of Wachtell, Lipton, Rosen & Katz)
The U.S. cryptoasset industry just rang in the new year with the watershed SEC approval of the first spot ETFs for a digital asset. With the approval of the first bitcoin Spot ETFs, making possible a path for millions of Americans to have direct bitcoin exposure in retirement and other traditional investment accounts, it is an appropriate time to reflect on significant recent developments that may shape the crypto industry in the year to come.
The NYU Program on Corporate Compliance and Enforcement (PCCE) is following the recent federal enforcement actions against Binance, the world’s largest cryptocurrency exchange, and its founder Changpeng Zhao. In this post, crypto experts, former prosecutors, and the former Superintendent of the New York Department of Financial Services offer their expert insights on these developments.
Left to right: Maria Vullo, Eugene Ingoglia, Daniel Payne, Ijeoma Okoli, and Paul Krieger (Photos courtesy of authors)
by Robin M. Bergen, Elizabeth Lenas, Amber V. Phillips, and Anna Bintinger
From left to right: Robin M. Bergen, Elizabeth Lenas, Amber V. Phillips, and Anna Bintinger (Photos courtesy of Cleary Gottlieb Steen & Hamilton LLP)
The U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”) released its 2024 examination priorities on October 16, 2023 (the “2024 Priorities”), launching a new release schedule to align with the fiscal year. As in the 2023 examination priorities (the “2023 Priorities”), private fund advisers received special focus, with broad topic areas spanning both the existing Staff sweeps on custody, marketing and artificial intelligence, as well as renewed scrutiny of valuations and investment processes. Despite its release causing much fanfare, there was surprisingly little overlap between the 2024 Priorities and the newly adopted Private Fund Adviser Rules; the focus on fees and expense allocation carried over from the Private Fund Adviser Rules, and the Division picks up a theme from its adopting release by taking a shot at limited partnership advisory committees (“LPACs”) and compliance with private fund governance procedures.
The 2024 Priorities address private funds; standards of conduct (particularly fiduciary duties and conflicts of interest); information security and operational resiliency; emerging technologies and crypto; regulation systems compliance and integrity; broker dealers and exchanges; anti‑money laundering; oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies; and oversight of municipal advisers, security-based swap dealers and transfer agents.
Maria T. Vullo (Photo courtesy of the author)
The much-anticipated jury verdict,[1] convicting former FTX CEO Sam Bankman-Fried (SBF) of seven felonies, after less than five hours of deliberations, demonstrates the strength of the prosecution’s case and that juries have no patience for financial fraud. While many reports correctly note that fraud is at the core of the FTX/SBF case, the verdict also sends a clear message that regulatory arbitrage should not be tolerated.
The NYU School of Law Program on Corporate Compliance and Enforcement (PCCE) is following the collapse of FTX and the civil and criminal enforcement actions arising from FTX’s and its founder’s alleged misconduct. In this post, several white collar defense, former federal prosecutors, and cryptocurrency experts, offer their reactions to the verdict in the Sam Bankman-Fried (SBF) trial on November 2, 2023.
Top left to right: William Komaroff, Seetha Ramachandran, David I. Miller, and Ijeoma Okoli
Bottom left to right: Jessica Lonergan, Tarek Helou, Elizabeth Roper, and Chehak Gogia
(Photos courtesy of authors)
by Robert A. Cohen, Kendall Howell, Paul D. Marquardt, Will Schisa, Daniel P. Stipano, Charles Marshall Wilson, and Zachary Zweihorn
Top left to right: Robert A. Cohen, Kendall Howell, Paul D. Marquardt, and Will Schisa.
Bottom left to right: Daniel P. Stipano, Charles Marshall Wilson, and Zachary Zweihorn.
(Photos courtesy of Davis Polk & Wardwell LLP).
FinCEN released a proposed rule that would identify international convertible virtual currency mixing as a class of transactions of “primary money laundering concern” – a designation that would result in additional reporting and recordkeeping requirements for financial institutions for transactions involving CVC mixers.
On October 19, 2023, the Financial Crimes Enforcement Network (FinCEN) released a notice of proposed rulemaking (NPRM) that would designate transactions involving international convertible virtual currency[1] mixing (CVC mixing) as a class of transactions of primary money laundering concern.[2] Once implemented, the proposed rule would require covered financial institutions to collect and report certain details on transactions in CVC (including bitcoin and other digital assets) that the institutions know, suspect, or have reason to suspect involve CVC mixing activities outside of the United States. The NPRM is one of a series of measures that the United States Treasury Department (Treasury) has taken in recent years to target CVC mixers, which are third-party services used to anonymize cryptocurrency transactions.[3] According to Treasury, North Korea, terrorist groups, and other illicit actors have exploited CVC mixers to launder criminal proceeds and evade sanctions. FinCEN believes that the NPRM will curb the misuse of CVC mixers and facilitate law enforcement investigations into CVC transactions.
by Benjamin Gruenstein, Evan Norris, and Daniel Barabander
From left to right: Benjamin Gruenstein, Evan Norris, and Daniel Barabander. Photos courtesy of the authors
On August 23, 2023, the U.S. Attorney’s Office for the Southern District of New York announced the unsealing of an indictment against Roman Storm and Roman Semenov charging, among other things, conspiracy to operate an unlicensed money transmitting business in connection with their role as founders of Tornado Cash, from at least March 2022 until August 8, 2022.[1] A significant focus of the indictment is the “secret note” that customers used when depositing to and withdrawing from Tornado Cash, a “mixing service” that the indictment alleges “combined multiple unique features to execute anonymous financial transactions in various cryptocurrencies for its customers.” (¶¶ 1, 15, 18, 24.) However, despite allegations that the secret note was transmitted through various components of Tornado Cash that the founders controlled when a customer withdrew funds, in reality, the customer never relinquished control over the secret note. Rather, she sent only a “proof” that revealed nothing about the secret note and could only be validated by the smart contract to send funds directly from the smart contract to the customer. In this way, the founders may have exercised “necessary” control over funds, meaning that when the customer used Tornado Cash, components of the system the founders allegedly controlled may have been necessary to send the message to transfer the value in that particular transaction. However, based on our review of how the secret note worked during the period when the founders are alleged to have conspired to operate a money transmission business, the founders did not exercise “sufficient” control, meaning these components could not have transferred value independently from the customer. This is because Tornado Cash and its founders had no ability during this period to access the secret note to dictate how funds would be transferred.
This distinction between types of control is critical. Under the U.S. Department of the Treasury’s Financial Crimes Enforcement Network’s (“FinCEN”) non-binding 2019 guidance, a “money transmitter” must have “total independent control” over customer funds to qualify as such, which we interpret based on our review of the guidance to require both “necessary” and “sufficient” control.[2] Without access to a customer’s secret note, the Tornado Cash founders could not have had the requisite control over customer funds to qualify as a money transmitter under FinCEN’s 2019 guidance.[3]
by Ghaith Mahmood, Nima H. Mohebbi, Stephen P. Wink, Douglas K. Yatter, Adam Zuckerman, and Deric Behar
Top left to right: Ghaith Mahmood, Nima H. Mohebbi, and Stephen P. Wink.
Bottom left to right: Douglas K. Yatter, Adam Zuckerman, and Deric Behar.
(Photos courtesy of Latham & Watkins LLP)
On August 28, 2023, the Securities and Exchange Commission (SEC) issued a cease-and-desist order (the Order) against a Los Angeles media and entertainment company (the Company) for an unregistered securities offering relating to its sale of $29.9 million worth of non-fungible tokens (NFTs)[1]. The company agreed to a settlement that includes disgorging $5 million, paying another $1 million in fees and penalties, and ceasing and desisting from violating the Securities Act of 1933. Notably, the settlement does not include fraud charges.