The United States is home to many participants engaging with blockchain technology and crypto-assets. These include crypto-asset trading platforms, custodians of crypto-assets, developers of layer 1 blockchain networks, layer 2 networks, permissioned blockchain networks, decentralised applications, and the components of the technology stacks involved in these networks and applications. The USA has also been a centre of innovation when it comes to the use of blockchain technology and crypto-assets in providing traditional financial services and the tokenisation of real-world assets.

Over the past 12 months, we have seen a resurgence of development activity and excitement in the wake of the collapse of a few major crypto platforms, such as FTX, Voyager and Celsius, as well as other significant players, such as 3AC, and projects, such as Terraform Labs in 2022. The global cryptocurrency market rebounded in 2023, and activity across the board has been robust. The approval of Bitcoin (BTC) and Ether (ETH) exchange-traded products has propelled the industry forward, and renewed interest from institutional players in tokenised funds and real world assets has been encouraging.

Despite the encouraging news in 2023 and early 2024, significant regulatory activities with respect to digital assets have been undertaken by various regulators in the past 12 months, including the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), the Treasury Department and many state agencies. These include enforcement actions, rulemaking proposals, and litigation proceedings. A number of judicial decisions are anticipated in the coming year that could have a significant impact on how digital assets are categorised for regulatory purposes.

In addition, legislative proposals focusing on digital assets continue to be introduced and refined in Congress with the aim of providing more legal and regulatory clarity to market participants.

US businesses are using blockchain technology in a wide variety of ways, including:

• crypto-asset trading platforms;
• crypto-asset custody;
• securities issuance and record-keeping;
• securities clearing and settlement;
• gaming;
• art, collectibles and fan engagement platforms;
• protocol and software development;
• tokenised real world assets;
• payments;
• trade finance;
• logistics and tracking goods; and
• self-sovereign identity.

While there are not any definitive laws or court cases specifying how ownership of a digital asset is determined in the USA, most non-security digital assets are likely to be considered “bearer” instruments. In general, control over the asset equates to ownership, primarily through control of the private key necessary to effectuate an on-chain transaction involving the digital asset. There are many instances in which the owner of a digital asset transfers control to a third party, in which case the owner’s right to the asset is contractual, pursuant to the terms of their agreement with the third party.

In the USA, there is significant uncertainty with respect to the appropriate characterisation of digital assets. Digital assets that are intended to be securities or “tokenised” securities would be treated as securities. Fungible digital assets that are not necessarily intended to be securities may nevertheless be transacted under circumstances that constitute securities transactions. Determining whether such circumstances exist requires application of the Howey test. If the each of the elements of the Howey test is satisfied (meaning there is an investment of money, in a common enterprise, with the expectation of profits, from the essential managerial efforts of others), then there is an investment contract, which is a type of security, and thus is subject to securities law compliance. The Howey test is a facts and circumstances specific test and it is not at all straightforward for market participants to apply.

In the USA, securities are regulated by the SEC and commodity derivatives are regulated by the CFTC. To the extent that fungible digital assets, or transactions in fungible digital assets, are not regulated as securities, they would be treated as commodities and subject to CFTC jurisdiction with respect to manipulation of the spot market or any derivatives.

There is no formal categorisation of “utility tokens” or “exchange tokens” in the USA.

Tokenised securities are treated as securities in the USA. However, questions remain about the viability of tokenised securities because they are not provided for in the Uniform Commercial Code, which only recognises two categories of securities – certificated and uncertificated. A tokenised security cannot be certificated because the rights and obligations associated with the security are not reduced to writing on paper and electronic certificates are not provided for. Therefore, tokenised securities may be uncertificated, but there are specific rules regarding how uncertificated securities may be transacted and recorded on the books and records of the issuer that may not be consistent with the manner in which blockchain-based assets are transferred.

The regulatory treatment of stablecoins in the USA is still unclear and there is no formal categorisation of stablecoins for regulatory purposes. The SEC has treated stablecoins as securities in certain circumstances, including (i) an enforcement action against Binance alleging its US dollar-backed stablecoin, BUSD, being offered and sold as a security, (ii) an enforcement action against Terraform Labs alleging that UST, an algorithmic stablecoin, was offered and sold as a security, and (iii) a widely reported Wells notice to BUSD’s issuer, Paxos, asserting that this stablecoin is an unregistered security.

In November 2021, the President’s Working Group on Financial Markets released a report on stablecoins calling for Congress to address the inconsistent and fragmented oversight of stablecoins. In April 2023, the House Financial Services Committee released a draft version of a potential stablecoin bill, including a potential moratorium on stablecoins backed by other cryptocurrencies (such as UST) and a request to study a central bank digital currency. Since then, other legislation has been introduced that addresses stablecoins, but no legislative proposal has been passed to date.

There are no regulations in the USA that are specific to NFTs as such, but existing laws will apply to activities involving NFTs. Given their non-fungible nature, NFTs are unlikely to be considered “commodities.” To the extent that the offer or sale of NFTs constitutes an investment contract under the Howey test, compliance with the securities laws would be required. 

Dapper Labs was sued in one of the first private plaintiff actions in the NFT space, alleging securities violations associated with NFT sales. In denying Dapper Labs’ motion to dismiss, the district court judge signalled that the offer and sale of Moment NFTs may satisfy the Howey test, considering that the value of Moment NFTs is dependent almost entirely on Dapper Labs’ control over the private blockchain upon which the NFTs are created and traded.

Additionally, the offer and sale of NFTs as consumer products would be subject to consumer protection laws and regulations. Both federal and state consumer protection laws generally prohibit unfair or deceptive acts and practices with respect to consumer goods and services. Those selling NFTs must keep sanctions compliance in mind and take steps to avoid engaging in transactions with sanctioned individuals or individuals residing in sanctioned jurisdictions.

Digital assets may be used as collateral in the USA. To that end, lenders may attempt to perfect a security interest in a digital asset pledged as collateral under the applicable provisions of the Uniform Commercial Code (UCC), a body of laws governing commercial transactions that is adopted at the state level. Currently, many treat the digital asset pledged as collateral for a loan as a “financial asset,” treat the borrower’s account with the lender as a “securities account,” treat the borrower as an “entitlement holder,” and have the borrower acknowledge that the lender is a “securities intermediary,” as all of these terms are defined under the UCC. This should create a “security entitlement” under the UCC that will allow for perfection of a security interest in the collateral by the lender.

In July 2022, amendments to the UCC were approved, pending adoption by each state, which create a new Article 12 that governs the transfer of property rights in a “controllable electronic record” (CER) and amend existing Article 9 to allow perfection of a security interest in a CER by obtaining control of the CER. Once the amendments are in effect in a particular state, the parties to a digital asset transaction under that state’s law can benefit from new Article 12 and updated Article 9.

Digital assets may be used as collateral in the USA. To that end, lenders may attempt to perfect a security interest in a digital asset pledged as collateral under the applicable provisions of the Uniform Commercial Code (UCC), a body of laws governing commercial transactions that is adopted at the state level. Currently, many treat the digital asset pledged as collateral for a loan as a “financial asset,” treat the borrower’s account with the lender as a “securities account,” treat the borrower as an “entitlement holder,” and have the borrower acknowledge that the lender is a “securities intermediary,” as all of these terms are defined under the UCC. This should create a “security entitlement” under the UCC that will allow for perfection of a security interest in the collateral by the lender.

In July 2022, amendments to the UCC were approved, pending adoption by each state, which create a new Article 12 that governs the transfer of property rights in a “controllable electronic record” (CER) and amend existing Article 9 to allow perfection of a security interest in a CER by obtaining control of the CER.  Once the amendments are in effect in a particular state, the parties to a digital asset transaction under that state’s law can benefit from new Article 12 and updated Article 9.

The general view in the US legal community is that private contractual arrangements that are executable, in whole or in part, using blockchain or distributed ledger technology are valid and enforceable, assuming the elements necessary to form a contract are present – offer, acceptance, the intention to be legally bound and consideration.  Whether a smart contract is coded to reflect the intentions of the parties is a separate question and one that has prompted significant debate.

There is no applicable information in this jurisdiction.

At the federal level, there are no regulatory sandbox programmes in the USA specifically geared towards blockchain projects. At the state level, both Wyoming and Utah have regulatory sandbox programmes relevant to blockchain. Additionally, Arizona, Kentucky and Nevada have passed laws providing for regulatory sandbox programmes to promote innovation, though they address more generally the use of emerging technologies for innovation.

The USA has implemented international standards in several areas impacting blockchain. Most notably, the USA has been a proponent of applying a corollary to the “Funds Travel Rule” to entities known as virtual asset service providers (VASPs) that process transactions involving virtual assets, and significantly expanding the universe of entities that meet the definition of a VASP and would therefore be subject to the Funds Travel Rule. In 2018, the Financial Action Task Force (FATF), a multi-governmental organisation that sets global standards related to anti-money laundering, clarified how the FATF standards apply to activities or operations involving virtual assets and imposed a corollary to the Funds Travel Rule on VASPs that process virtual asset transfers.

In October 2021, the FATF updated its guidance regarding virtual assets and VASPs. Notably, the FATF guidance broadly interprets the definition of a VASP to include “a central party with some measure of involvement” with a decentralised application. This broad interpretation would potentially bring a variety of parties within the definition of a VASP and subject them to compliance with AML/CFT laws in jurisdictions that adopt this interpretation of the VASP definition.

It is not surprising that the US delegation to the FATF pushed for a global Funds Travel Rule corollary and the expansive interpretation of the entities that might be deemed VASPs. In doing so, the USA is attempting to promote compliance through global standard setting, which would make it easier for the USA to enforce the laws in place domestically in this area. Without a global standard, US-based money transmitters would have to determine whether or not they would process transmittal orders originating from outside the USA that may not include the information required by the Funds Travel Rule. If they were to process such orders, they would need to perform their own due diligence to obtain the information required to fill any gaps, which would require additional cost and time.

There are a number of regulatory bodies in the USA that are relevant to blockchain and digital assets.

The Securities and Exchange Commission (SEC)

The SEC has broad regulatory authority over securities transactions, securities professionals and intermediaries in the USA.  The threshold question that determines whether the SEC has authority with respect to blockchain or digital assets is whether a “security” is involved. The definition of the term “security” in both the Securities Act of 1933 and the Securities Exchange Act of 1934 includes the term “investment contract.” When commercial arrangements do not fall plainly within the other enumerated types of securities in the definitions of the term “security,” they may still be treated as securities if they are deemed to constitute investment contracts. The test for whether a particular scheme is an investment contract was established in the Supreme Court’s Howey decision. The test looks to “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” In 2017, the SEC issued a Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: the DAO (DAO Report), applying the Howey test to an offering of cryptographic tokens for sale and concluding it was an offering of securities. The DAO Report noted that “[w]hether or not a particular transaction involves the offer and sale of a security – regardless of the terminology used – will depend on the facts and circumstances, including the economic realities of the transaction.” The SEC continues to take the position that most digital assets themselves are securities.

The Commodities Futures Trading Commission (CFTC)

The CFTC has broad regulatory authority over derivative markets for commodities, and general anti-fraud and anti-manipulation authority over the spot markets for commodities pursuant to the Commodities Exchange Act (CEA). CFTC jurisdiction is primarily with respect to derivatives transactions. Derivatives transactions subject to CFTC jurisdiction include futures, options, swaps and leveraged retail commodities transactions under the CEA. The CFTC has asserted jurisdiction over transactions in virtual currencies as “commodities,” and numerous courts have found that the CFTC’s jurisdiction extends to virtual currencies in this context. The CFTC has explicitly taken the position that bitcoin and ether are commodities subject to their jurisdiction under the CEA. Accordingly, it is widely accepted that bitcoin and ether are commodities subject to CFTC jurisdiction. 

The Treasury Department and the Financial Crimes Enforcement Network (FinCEN)

FinCEN is the arm of the Treasury Department that is responsible, in the first instance, for enforcing the US federal laws and regulations relating to crimes involving the transmission of money, frequently working in conjunction with other federal agencies and bureaus, including the Federal Bureau of Investigation and the National Security Agency. This includes enforcing the Bank Secrecy Act (BSA), which is a comprehensive AML/CFT statute. The BSA mandates that “financial institutions” must collect and retain information about their customers and share that information with FinCEN. “Money services business” are included within the definition of “financial institutions,” and “money transmitters” are money services businesses. FinCEN guidance from May 2019 examined a number of hypothetical business models involving digital assets to provide guidance with respect to the application of the BSA. Not surprisingly, many businesses engaging in activity involving convertible virtual currency, a subset of digital assets, have an obligation to comply with the BSA.

The Treasury Department and the Office of Foreign Assets Control (OFAC)

The OFAC is a division of the US Treasury Department and administers and enforces economic and trade sanctions to promote national security and US foreign policy objectives. OFAC can take enforcement action against entities in the USA that violate sanctions programmes. OFAC has taken several such actions that involve digital asset transactions – for example, BitGo, BitPay and most recently Poloniex (a subsidiary of Circle). Each of these actions was settled, and OFAC emphasised that US sanctions compliance obligations apply to all US persons, and encouraged companies that provide digital asset services to implement controls commensurate with their risk profile, as part of a risk-based approach to US sanctions compliance. Further, OFAC published Sanctions Compliance Guidance for the Virtual Currency Industry in October 2021 to assist participants in the virtual currency industry in navigating and complying with OFAC sanctions.

The Consumer Financial Protection Bureau (CFPB)

The CFPB has authority pursuant to the Consumer Financial Protection Act (CFPA) to address unfair, deceptive or abusive acts and practices (UDAAP) with respect to financial products offered primarily for consumer use by certain “covered persons” as defined by the CFPA. To date, the CFPB has not pursued a case alleging a violation of the CFPA involving digital assets and thus far has declined to extend Regulation E – which governs electronic fund transfers involving consumers and financial institutions – to virtual currencies. The CFPB has announced that it will begin examining non-bank financial companies that pose risks to consumers in reliance on previously little-used authority. The CFPB is expected to become much more active in the next several years, including by addressing consumer financial issues relating to digital assets.

State Money Transmission Regulators

Historically in the USA, states rather than the federal government have been the primary regulators of “money transmitters.” Each state, other than the state of Montana, has independently passed a statute that defines the activities that constitute money transmission in that state. State laws generally define a money transmitter very broadly and typically include any entity that engages in “receiving money for transmission” or “transmitting money” or issuing or selling stored value. The scope of each state’s law, and its application to virtual currency, is dependent on how broadly the definitions of money and money transmission are interpreted by the applicable state regulator. As a result, exchanging virtual currency or facilitating payments in virtual currency may be subject to state-by-state regulation as money transmission.

While federal law requires only registration of money transmitters, state law requires licensing. It is significant to note that money transmission regulations are extraterritorial; a person must have a licence in every state in which it has customers. What matters from a jurisdictional standpoint is the location of the customer, not the location of the transmitter. States have taken different positions with respect to whether convertible virtual currency activities fall within the definition of money transmission.

State Securities Regulators

State securities regulators enforce and administer state-specific securities laws. These laws are often referred to as “blue sky” laws and are generally similar, but certain aspects vary significantly from state to state. Many state securities statutes are derived from either the 1956 or 2002 version of the Uniform Securities Act.

State securities regulators have been very active in regulating cryptocurrency-related investment products and the sale of digital asset securities. In the cryptocurrency space, state securities regulators were first to file enforcement actions with respect to centralised lending businesses offering consumers interest in cryptocurrency deposited to certain accounts. State securities regulators filed cases against BlockFi, Celsius and Voyager prior to their collapses, alleging that their interest account products constituted investment contracts under the Howey test that needed to be either registered or exempt from registration.

There are no self-regulatory organisations in the USA specifically dedicated to blockchain or digital assets. There are a variety of trade groups, but none of them perform a formal regulatory or even quasi-regulatory function. Instead, these trade groups advocate on behalf of their members with respect to the adoption and regulation of blockchain technology and digital assets. There are, however, self-regulatory organisations associated with the securities and commodities industries that do have regulatory authority relevant to blockchain and digital assets, and these are discussed below.

The Financial Industry Regulatory Authority (FINRA)

FINRA is a government-authorised organisation tasked with the oversight of US-registered securities broker-dealers to ensure they operate fairly and honestly. FINRA works under the supervision of the SEC and writes rules governing the activities of broker-dealers, examines broker-dealers for compliance with those rules, promotes market transparency to protect market integrity, and provides for investor education.

FINRA has taken a specific interest in activity involving digital assets. It joined the SEC in putting out a joint statement regarding broker-dealer custody of digital asset securities in July 2019. The release dealt with the application of the customer protection rule pursuant to the Securities Exchange Act of 1934, and the related rules, to digital asset securities. The joint statement provided guidance with respect to how digital asset securities may be custodied by broker-dealers, indicating several areas of concern. FINRA has also asked broker-dealers to notify it if they engage in activities related to digital assets, and has made digital assets an examination priority.

The National Futures Association (NFA)

The NFA is an industry-wide self-regulatory organisation for the derivatives industry. It is a registered futures association designated by the CFTC and registers a number of different participants in the commodities derivatives markets.

Development of Digital Assets outlining a widespread US government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. Following the Executive Order, agencies across the US government developed frameworks and policy recommendations that advance the six key priorities identified in the Executive Order: consumer and investor protection; promoting financial stability; countering illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

On 16 September 2022, nine reports were submitted to the President. Together, they presented a framework for responsible digital asset development. The reports encouraged regulators like the SEC and the CFTC to pursue investigations and enforcement actions against unlawful practices in the digital assets space. A fully comprehensive framework has yet to be developed.

In addition, President Biden’s directive on research and development of a US central bank digital currency has been followed by leadership of the Federal Reserve, the National Economic Council, the National Security Council, the Office of Science and Technology Policy, and the Treasury Department, with the launch of an interagency working group to report on ongoing research.

Judicial decisions have played an important role in interpreting the laws applicable to blockchain technology and digital assets. In the securities law context, these decisions fall into two categories of cases – those involving initial allocations of tokens and those that involve secondary transactions in tokens.

Judicial Decisions Involving Initial Allocations of Tokens

SEC v Ripple Labs

In the Ripple Labs case, the SEC alleged that Ripple Labs, along with certain of its executives, violated federal securities laws by failing to register the crypto-asset known as XRP.  The complaint alleges that XRP was sold as a security and sets forth an analysis of XRP pursuant to the Howey test to support that assertion.

Several holders of XRP attempted to intervene, in this case as defendants. When responding to the request to intervene filed by these holders, the SEC briefly addressed its view on secondary transactions of digital assets originally sold in an investment contract, arguing that the security at issue is not XRP (the digital asset) itself, but rather all the facts and circumstances surrounding the digital asset and the manner in which it was initially offered and sold. They then indicated their view that XRP (the digital asset) is “the embodiment of those facts, circumstances, promises, and expectations and today represents that investment contract.” 

Notably, on 13 July 2023, Judge Analisa Torres of the Southern District of New York entered an order (the “Ripple Order”) deciding the key issues in Ripple Labs. In the Ripple Order, Judge Torres granted Ripple Labs’ motion for summary judgment with respect to two out of the three categories of XRP distributions by Ripple Labs and granted the SEC’s motion for summary judgment with respect to the institutional sales XRP by Ripple Labs. The SEC subsequently dropped its claims against the individual defendants in order to expedite the timeline for appellate review.

In the Ripple Order, Judge Torres expressly rejected the SEC’s theory that a digital asset initially sold in an investment contract transaction thereafter “embodies” the elements of that investment contract. Instead, Judge Torres recognised that Howey is a facts-and-circumstances specific test that applies to a “transaction, contract or scheme” and applied that test to each category of XRP distribution at issue in the case. Nevertheless, because (i) the status of XRP tokens in secondary transactions is not germane to the case before Judge Torres (that is, the case involved fundraising (primary) sales by the defendants that could have violated Section 5 of the Securities Act, even if XRP tokens where found not to be securities) and (ii) because the Ripple Order is potentially subject to appeal, the position in the Ripple Order has relatively limited precedential weight at this time.

The lawsuit is currently in the remedies phase. The final judgement in the case is anticipated to be entered around September 2024.  It is expected that the case will then be appealed to the Second Circuit. 

SEC v LBRY, Inc.

In the case of LBRY, Inc., Judge Paul Barbadoro of the District of New Hampshire granted the SEC’s motion for summary judgment, finding that LBRY offered and sold LBC tokens as securities and violated Section 5 of the Securities Act. The court held that LBRY sold a digital asset known as LBC in fundraising transactions “as securities” and that these fundraising sales constituted unregistered securities transactions in violation of Section 5 of the Securities Act. Subsequent to the release of his decision, Judge Barbadoro held an on-the-record hearing on remedies in which he clarified that although his opinion repeatedly referred to LBRY selling LBC “as securities,” he had not concluded that the digital assets themselves were “securities.”

SEC v Terraform Labs, et al.

In SEC v Terraform Labs Pte Ltd., Senior Judge Jed Rakoff of the Southern District of New York expressed a notably different view from that of Judge Torres in the Ripple Order. Judge Rakoff declined to analyse different types of sales of the relevant digital assets by the defendants or draw a distinction between the manner of sale of these assets. Moreover, in his decision Judge Rakoff expressly rejected Judge Torres’ approach as set out in the Ripple Order. The result once again highlights the significant uncertainty as to how courts will treat various types of transactions involving the sale of fungible digital assets. 

Judicial Decisions Involving Secondary Transactions in Tokens

SEC v Coinbase

On 6 June 2023, the SEC charged Coinbase, Inc. and certain affiliated entities with operating its crypto-asset trading platform as an unregistered national securities exchange, broker, and clearing agency. Each of these charges turns on whether the digital assets trading on the Coinbase platform are “securities” independent of whether any fundraising sale by a sponsor or other party.

On 27 March 2024, Judge Katherine Polk Failla of the Southern District of New York rejected Coinbase’s motion for judgment on the pleadings, concluding that the SEC had plausibly alleged at least some of the crypto assets traded on the Coinbase platform constituted “investment contracts” under the Howey test. Like Judge Rakoff in  Terraform Labs, Judge Failla did not follow the approach taken by Judge Torres in Ripple Labs, which distinguished between primary sales and programmatic sales of digital assets for purposes of SEC jurisdiction. Following the decision by Judge Failla, Coinbase has requested an interlocutory appeal of the order. A decision on this request is currently pending.

Notable SEC Actions

SEC v Kraken

In November 2023, the SEC charged Payward Inc. and Payward Ventures Inc. (together, “Kraken”) with operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.  In the complaint, the SEC asserted that many of Kraken’s transactions on the platform involving crypto-assets were “investment contracts” under Howey. On 22 February 2024, Kraken filed a motion to dismiss the complaint based on the SEC’s failure to satisfy the Howey test, including its failure to allege that issuers incur any post-sale obligations in connection with secondary sales on the platform. 

Emphasising that an “investment contract” requires post-sale obligations, Kraken cited several Ninth Circuit precedents to illustrate that unlike in some recent digital assets cases in other federal circuits, including in SEC v Terraform Labs and SEC v Kik, the “Ninth Circuit has ... treated the existence of one or more contracts as an irreducible requirement for an investment contract,” and “neither the state courts interpreting the blue sky laws nor the Supreme Court interpreting the federal securities laws has ever abandoned the requirement for a contract.” Instead, according to Kraken, the “SEC seems to rely on allegations that the eleven issuers initially offered and sold their digital assets in primary sales not involving Kraken or its customers,” but that is insufficient in cases involving only secondary sales of most digital assets, since those assets are materially different from “securities, such as equity, [which] have contractual rights that travel with the instrument.”

Kraken also preemptively contested the SEC’s “ecosystem theory,” which the SEC also posed in its litigation with Coinbase and Binance, arguing not only that the complaint fails to plead a requisite “ecosystem,” but also that it “has no grounding in Howey,” has no limiting principle and is nothing more than “a dressed-up version of its allegation that the digital asset itself is the investment contract.” Kraken further explained that an “endless variety of collectibles and commodities could theoretically have an associated “ecosystem,” where a large asset holder is making ongoing promotional statements and taking steps that could increase the value of assets held by others.” In its opposition, the SEC again endorsed a broad reading of the term “investment contract" and rejected Kraken’s attempt to insert three additional prongs into the Howey test: the existence of a written contract, the existence of post-sale obligations, and privity between the issuer and investor. The motion to dismiss is currently pending.

SEC v Sam Bankman-Fried

In December 2023, the SEC filed an amended complaint charging Samuel Bankman-Fried, FTX, Alameda, FTX Co-Founder Gary Wang, and Alameda Co-CEO Caroline Ellison for an alleged fraudulent scheme involving digital asset commodities, including misappropriation and the illegal offering of digital asset derivatives to US customers causing the loss of over USD8 billion in FTX customer assets. 

The case was stayed pending the conclusion of the parallel criminal case, United States v Samuel Bankman-Fried, in which case Bankman-Fried was sentenced to 25 years in prison and USD11 billion in forfeiture.

Notable CFTC Actions

In March 2023, the CFTC charged Binance, its founder, and a former chief compliance officer with operating an illegal digital asset derivatives exchange and, for the first time, charging defendants with willfully evading or attempting to evade provisions of the Commodity Exchange Act (CEA) and CFTC regulations. It also charged Celsius and its former CEO Alex Mashinsky in July 2023 with fraud and material misrepresentations in connection with a commodity pool scheme involving digital asset commodities and, for the first time, charging a digital asset lending platform for unlawfully operating as an unregistered commodity pool.

Notable Criminal Matters

On 20 November 2023 Sam Bankman-Fried was found guilty of two counts of wire fraud, two counts of conspiracy to commit wire fraud, conspiracy to commit securities fraud, conspiracy to commit commodities fraud and conspiracy to commit money laundering stemming from his activities at FTX and Alameda Research. He was later sentenced to 25 years in prison.

In August 2023, the US Department of Justice filed a criminal indictment against two developers of Tornado Cash, an open-source privacy protocol that facilitates anonymous transactions by obscuring the origins of cryptocurrencies like Bitcoin and Ether. OFAC had previously added certain blockchain addresses associated with Tornado Cash to the Specially Designated Nationals and Blocked Persons List (SDN List). As a result, all US persons or those within the US are prohibited from engaging in transactions with these blockchain addresses and any violations will be a strict liability crime. The criminal case against the developers of the Tornado Cash software alleges that the developers engaged in a conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmission business. The indictment alleged that the defendants created, operated, and promoted Tornado Cash, a cryptocurrency mixer that facilitated more than USD1 billion in money laundering transactions, and laundered hundreds of millions of dollars for the Lazarus Group, the sanctioned North Korean cybercrime organisation.

More recently, in April 2024 the developers of the Samurai Wallet were criminally charged with conspiracy to commit money laundering and conspiracy to operate an unlicensed money transmission business. The indictment alleged that the defendants developed, marketed, and operated Samurai Wallet, an application that included a service called “whirlpool” that was a cryptocurrency mixer and a service called “ricochet” that was another tool to obfuscate the address initiating a transfer of crypto-assets.

In 2014, the Internal Revenue Service (IRS) issued its first guidance with respect to virtual currency, noting that virtual currency is “property” for federal tax purposes and that general tax principles applicable to property transactions apply to transactions in which virtual currency is used. 

In 2019, the IRS issued further guidance addressing the tax implications of a hard fork. When a hard fork results in a taxpayer receiving new units of cryptocurrency over which they have dominion and control, they will have gross income as a result. If they do not receive any new units of cryptocurrency over which they have dominion and control in connection with a hard fork, they will not have any gross income.

Earlier in 2023, the Treasury Department and the IRS announced that they were soliciting feedback for upcoming guidance regarding the tax treatment of NFTs as a collectible under the tax code. Until further guidance is issued, the IRS intended to determine when an NFT is treated as a collectible by using a look-through analysis, under which a NFT is treated as a collectible if the NFT’s associated right or asset falls under the definition of collectible in the relevant section of the tax code.

In August 2023, the IRS proposed rules that would require “brokers” including digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets, to file information returns and furnish payee statements, on dispositions of digital assets effected for customers in certain sale or exchange transactions. More recently, the IRS proposed that new form 1099-DA be used by brokers in connection with reporting pursuant to the August rule proposal. Comments on form 1099-DA are being accepted until 21 June 2024.

A lawsuit was filed by private litigants against the IRS in 2021 with respect to the taxation of staking rewards.  The plaintiffs sought a refund on taxes paid on staking rewards earned on Tezos. The IRS subsequently authorised a full tax refund on the claim. The federal judge dismissed the case as the action was moot after a tax refund was issued. The plaintiffs are currently appealing the dismissal.

There are not any ESG/sustainable finance requirements in the USA that specifically apply to digital assets.  There are significant mandatory ESG disclosures that the SEC has required of reporting organisations.  Accordingly, reporting organisations, including those in the digital asset space, are required to provide disclosures regarding ESG.

The Department of the Treasury has proposed an excise tax on any firm using computing resources, whether owned by the firm or leased from others, to mine digital assets equal to 30% of the costs of electricity used in digital asset mining for 2025. 

In September of 2022, the White House released a fact sheet addressing the climate and energy implications of crypto-assets in the USA. It cited a report by the White House Office of Science and Technology Policy addressing the challenges and opportunities of crypto-assets with respect to the clean energy climate change goals set out by the administration. The fact sheet proposed several recommendations to ensure that the energy and climate impacts of crypto-asset mining and other activities are addressed.

Certain legislative proposals regarding ESG and crypto-assets have been introduced, but none have passed and become law.

Data privacy laws are enacted at the state level in the USA. There are differing obligations in each state with respect to data privacy. Practically speaking, this means that national companies will seek to comply with the most robust state-level data privacy law. The California Consumer Privacy Act (CCPA) is the most robust state data privacy law, and became effective in 2020. 

Among other things, the CCPA provides consumers with the following:

• the right to access data collected about them by covered businesses;
• the right to delete that data; and
• the right to opt out of data collection altogether.

Covered businesses also need to provide consumers with a privacy notice, with two or more methods to opt out of the sale of personal information, and are prohibited from using opt-out mechanisms that make it difficult for a consumer to execute and have the effect of subverting the consumer’s choice to opt out. The CCPA does not directly implicate blockchain, but any covered business using blockchain to gather, store or refer to customer information should have compliance with the CCPA in mind.

Data protection laws are also enacted at the state level in the USA. The CCPA has a data protection component requiring covered businesses to implement and maintain reasonable security procedures. Similar data protection laws have been passed in other states, as have data breach reporting statutes. These laws do not specifically apply to the use of blockchain-based products or services.