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New administration and the DoJ’s continued flex in crypto, Oct. 30–Nov. 6

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Are you over the election? I’m over the election. But you can bet that as soon as I finish writing this week’s Law Decoded, I will compulsively check up on what’s happening in Georgia and Pennsylvania. And it seems that I’m not alone.

Despite the election highjacking the entire news cycle, crypto has not been completely left in the corner. Likely most notable, Bitcoin is hitting highs it hasn’t seen since January 2018. Given that BTC price typically reacts positively to fears of political instability, that’s not entirely surprising.

More specific to regulators’ interactions with crypto are continued enforcement measures. Taking the lead on this internationally has been the United States Department of Justice. Law Decoded has talked extensively about the DoJ over the past month, and for good reason. They’ve taken huge steps to get out in front of what they perceive as illegal crypto usage ever since releasing a framework for enforcement in virtual currencies at the beginning of October.

While we may be looking at some legal tantrums and recounts, Biden looks to have won the White House. The DoJ is run by the Attorney General — currently Trump appointee Bill Barr. While the regulator is hardly going to back-pedal its new capacities to monitor crypto, Barr has been at the forefront of that fight, as well as other anti-tech measures to ban end-to-end encryption and Section 230. The attitudes of any Biden nominee who will replace Barr will, consequently, be critical.

Deals with the DoJ

The Department of Justice filed to seize a massive stockpile of tokens that had originated with the Silk Road, following an investigation by the IRS and Chainalysis.

The hoard of cryptocurrencies are worth a total of $1 billion and were in the control of an unnamed hacker, who the DoJ’s filing enigmatically refers to as “Individual X.” Mr. X had apparently signed those tokens over to the DoJ as of Nov. 3, which was the same day that they moved.

Per the complaint, back in 2013 Individual X stole at least 69,471 Bitcoin from Ross Ulbricht, the founder of Silk Road currently serving a double-life sentence. Since then, apart from a 101 BTC transfer to defunct exchange BTC-e, those coins have mostly sat untouched, going through a series of splits and skyrocketing in value.

Some speculation suggests that the hacker in question just made a huge deal to stay out of jail. The complaint specifies that Ross Ulbricht knew their online identity, which may mean that Ulbricht turned over their info in order to get some leniency for his own sentence. $1 billion can probably persuade the justice system to get mighty merciful.

Visa’s Plaid acquisition comes under fire

Last week, Cointelegraph reported on news that the DoJ was looking into Visa’s $5.3 billion acquisition of Plaid, initially announced back in January. This week, the agency filed a formal complaint, kicking off an antitrust lawsuit that, if successful, would cancel that acquisition.

Antitrust considerations have picked up in a big way lately over concerns that data usage has constituted a new means of illegal market domination, one that the Sherman Act of 1890 could hardly have prepared for. Major tech firms are having to answer questions about how they prioritize content and share consumer information.

Plaid is a widespread mediator, enabling interoperation between digital systems that handle financial information — the sort of personal knowledge that people are sort of touchy about keeping private. The DoJ alleges that Visa is trying to gobble up a potential competitor. But, independently, Plaid is facing a rash of class action lawsuits over its own misuse of client data, which is particularly egregious because most people sending their data through Plaid never even know they’re doing so. Which may be part of what Visa had its eyes on.

Is the Cayman Islands coming in from the cold?

New legislation on the Cayman Islands has begun to tighten anti-money laundering controls in the country’s crypto market, and especially heighten registration of local crypto exchanges.

The Cayman Islands’ legislative body initially began considering a comprehensive crypto overhaul back in April, but the first provisions are just now rolling out.

Like many other British Overseas Territories and Crown dependencies, the Cayman Islands has a long history as a hotbed of tax evasion, offshoring and money laundering. It looks to be trying to rehabilitate that image, at least somewhat. The European Union only took the country off their blacklist in October, though it has yet to be added to the white list. The U.S. still identifies the jurisdiction as “higher risk.”

The issue is, most of these offshore havens make a lot of their revenues by hosting financial services that the U.K. proper, EU or U.S. wouldn’t allow. So how much motivation with the Cayman Islands actually have to clean up their act?

Further reads

Chris Giancarlo and Daniel Gorfine of the Digital Dollar Project opine on a cashless future for MarketWatch.

The Volkov Law Group finishes their analysis of the DoJ’s crypto enforcement framework from last month.

Brookings’ Techstream runs down misinformation seen during the week of the presidential election.



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Regulation

ICO issuer charged with fraud by SEC for selling unregistered security

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The United States Securities and Exchange Commission, or SEC, has charged a cryptocurrency issuer for “making materially false and misleading statements” in connection with an unregistered security offering conducted between August 2017 and January 2018, offering further evidence that regulators were still targeting initial coin offerings from the last major market mania. 

Loci Inc., the platform behind LOCIcoin, and CEO John Wise were formally charged on Tuesday. The SEC claims that Loci and Wise misled investors about the company’s revenues, employee numbers and user base during the $7.6 million crowdsale. The regulator also alleges that Wise misused $38,163 in investor proceeds for personal expenses.

“Loci and its CEO misled investors regarding critical aspects of Loci’s business,” said Kristina Littman, the head of the SEC Enforcement Division’s cyber unit, adding:

“Investors in digital asset securities are entitled to truthful information and fulsome disclosures so they can make informed investment decisions.”

The order also requires that Loci and Wise pay a $7.6 million civil penalty for their transgressions.

Handing out penalties to cryptocurrency businesses is nothing new for U.S. authorities. Regulators from the SEC, Commodity Futures Trading Commission and Financial Crimes Enforcement Network have imposed fines of more than $2.5 billion on cryptocurrency-related businesses since 2014, underscoring the murky regulatory climate surrounding digital assets.

Elliptic Enterprises, a blockchain analytics firm headquartered in the United Kingdom, reported Tuesday that the $2.5 billion in penalties covered a broad range of infractions, including fraud, the selling of unregistered securities and a failure to uphold Anti-Money Laundering regulations.

The SEC accounted for the lion’s share of the penalties at $1.69 billion. The CFTC imposed penalties of $624 million and FinCEN slapped crypto businesses with $183 million in fines. The Office of Foreign Asset Control handed out the smallest fines among the regulators at $606,000.

Cryptocurrencies have been described by many as the wild west of finance. Tens of thousands of crypto-centric projects have launched in the wake of Bitcoin’s genesis block in early 2009. Many of these companies got their start in 2017 during the height of the initial coin offering boom.

Related: With US regulators handing out $2.5B in fines since 2014, crypto is not the ‘wild west’ of finance

ICOs allowed crypto startups to raise millions of dollars without having to meet the stringent regulations of more traditional security offerings. ICO funding reached the tens of billions in 2017 and 2018 combined, attracting unwanted attention from securities regulators. The SEC successfully charged the founders of several crypto companies, which effectively put an end to the mania — in the United States, at least.