Category: Cryptocurrency

2024: The Year of the Spot Bitcoin ETP

The US Securities and Exchange Commission (SEC) is making 2024 a significant year for exchange-traded products (ETPs) by declaring effective the registration statements of ten Bitcoin ETPs, and approving their listing on one of the major stock exchanges. This is a monumental step to bringing access to Bitcoin to a broader retail market in the US For over a decade, the staff of the SEC (Staff) had denied or otherwise blocked applications to list spot Bitcoin ETPs, claiming, in part, that there were insufficient protections against market manipulation in the underlying Bitcoin market. The approvals issued this week unlock – although do not widely open – a previously dead bolted door to registered products offering direct exposure to Bitcoin, providing an opportunity for retail investors to have easier access to exposure to Bitcoin in a regulated product.

The approvals follow the US federal appeals court ruling in August 2023 that the SEC was “arbitrary and capricious” in its decision to reject an application by the NYSE Arca to list shares of the Grayscale Bitcoin Trust. In granting the approvals, Chair Gensler acknowledged that the law had changed following the Grayscale decision stating “we are now faced with a new set of filings similar to those we have disapproved in the past. Circumstances, however, have changed.” Rather than appeal the court ruling, the staff of the SEC chose to engage with the sponsors of proposed spot Bitcoin ETPs to discuss parameters necessary for approval, including the inclusion of additional disclosure and other requirements to provide for investor protection. In approving the listing of the ETPs, the SEC relied, in part, on its confirmation that the “CME bitcoin futures market has been consistently highly correlated with this subset [(Coinbase and Kraken)] of the spot [B]itcoin market throughout the past 2.5 years,”1 a fact which was heavily leaned upon in the Grayscale decision. Among the requirements insisted upon by the Staff were requirements that the ETPs effect sales and redemptions of ETP creation units solely in cash (rather than in-kind) and hardcoding of key service providers (including Bitcoin custodians) into the listing rule. The SEC’s approved all listing rule applications simultaneously, in an effort to prevent a single ETP from having a first mover advantage.

While this initial round of approvals is promising for the ETP and cryptocurrency industries, it does not signal a general acceptance of all spot cryptocurrency ETPs. Rather, the SEC granted approval only to ETPs investing in Bitcoin, and it is unclear whether it will be receptive to products investing in other crypto assets. Chair Gensler’s statement in announcing the approvals indicated that he and the staff remain skeptical of digital assets generally, including Bitcoin, stating that the approval is not an endorsement of Bitcoin and that investors should remain cautious and aware of the risks. Issuers wishing to offer similar products with other digital asset investments may now have examples to follow, but will still need to undergo a comprehensive review process, and ultimate approval is not guaranteed. Moreover, future exchange-traded products seeking to directly invest other cryptocurrencies or digital assets may have to satisfy a correlation test similar to that which was relied on by the SEC in approving the current products and may not be able to do so.

1 SEC Release, Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units, No. 34-99306 (10 January 2024).

Copyright 2024 K & L Gates
For more news on Bitcoin ETPs in 2024, visit the NLR Securities & SEC section.

Crypto Fraud Remains Focus of CFTC Whistleblower Program

For the second straight year, the majority of whistleblower tips received by the Commodity Futures Trading Commission (CFTC) Whistleblower Program were related to cryptocurrency fraud.

On October 31, the CFTC released its Annual Report on the Whistleblower Program for the 2023 Fiscal Year. The report revealed that during the fiscal year, the CFTC received a record 1,530 whistleblower tips.

According to the report, “the majority of tips received during the Period involved allegations of fraudulent solicitation and subsequent misappropriation of crypto/digital assets.” The report further explains that examples of these crypto frauds include “pump-and-dump schemes, fraudulent representations of moneymaking opportunities, or refusals to honor withdrawal requests.”

“The majority of the tips received this year involved crypto—an area that continues to have pervasive fraud and other illegality,” said CFTC Commissioner Christy Goldsmith Romero in a statement supporting the Whistleblower Program. “With the rise of crypto, more retail customers have come under the CFTC’s jurisdiction, making even more critical the efforts of the CFTC’s Whistleblower Program and the Office of Customer Education and Outreach.”

Through the CFTC Whistleblower Program, qualified whistleblowers are entitled to monetary awards of 10-30% of the sanctions collected by the CFTC in the enforcement action related to their disclosure. To qualify for an award, a whistleblower must voluntarily provide original information that leads to a successful enforcement action of at least $1 million.

Back in 2019, the CFTC Whistleblower Program issued a Whistleblower Alert drawing attention to how individuals can blow the whistle on cryptocurrency fraud. The Alert explains that “when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce, CFTC enforcement of the [Commodity Exchange Act] comes into play.”

Since then, the CFTC has filed a number of high-profile charges against entities for crypto fraud. For example, in 2021, BitMEX was ordered to pay $100 million for illegally operating a cryptocurrency trading platform and Coinbase was ordered to pay $6.5 million for false, misleading, or inaccurate reporting and wash trading. Earlier this year, the CFTC charged Binance and its founder, Changpeng Zhao, with operating an illegal digital asset derivatives exchange.

In December 2022, CFTC Chair Rostin Behnam testified before the U.S. Senate about the CFTC’s regulation of digital assets and cryptocurrency. Behnam highlighted the essential role the agency’s whistleblower program plays in its enforcement efforts in these areas. “In the absence of direct regulatory and surveillance authority in an underlying cash market, CFTC enforcement activity begins with a referral or whistleblower tip from an external source,” Behnam stated.

Over the past decade-plus, the CFTC Whistleblower Program has become an integral part of the CFTC’s enforcement efforts. Given that in recent years the agency has increasingly focused on cryptocurrency fraud, it is no surprise that the whistleblower program is playing a central role in the CFTC’s efforts on that front.

“Whistleblowers play a vital role in supporting CFTC investigations related to fraud and other illegality,” Commissioner Romero further stated. “The CFTC could not fully protect customers and markets without whistleblowers. Whistleblowers help identify fraud and other illegality, interpret key evidence, and save considerable Commission resources and time. The faster we can stop fraud, the more we can protect customers from harm.”

This article was authored by Geoff Schweller.

Copyright Kohn, Kohn & Colapinto, LLP 2023. All Rights Reserved.
For more news on Crypto Fraud and the CFTC Whistleblower Program, visit the NLR Communications, Media & Internet section.

Breaking News – Hermès Makes History With First NFT Trademark Trial Victory

A New York City jury just returned a verdict in favor of Hermès in a historic dispute between the luxury fashion house and digital artist Mason Rothschild over Hermès’ alleged trademark rights relating to Hermès’ famous Birkin handbag. The jury awarded Hermès $133,000 in total damages for trademark infringement, dilution, and cybersquatting.

The jury finding that the First Amendment did not shield Rothschild from liability in connection with his MetaBirkins NFTs project is significant, particularly as this matter involved the first trial by jury to consider the interplay of free speech and trademark protection in the context of NFTs. This decision, which may be appealed, provides guidance for artists, brands, and others seeking ingress into metaverse, including to what extent “real world” intellectual property rights apply to and may be enforced in virtual worlds.

Haute-ly Contested NFTs

Throughout the dispute over this past year, the parties have contested each other’s characterization of the MetaBirkins NFTs. To Hermès, the MetaBirkins NFTs are merely the instruments of a “digital speculator” looking to exploit one of its most exclusive assets via NFTs. In contrast, Rothschild argues that the MetaBirkins NFTs project, a series of 100 NFT images that depict a range of reimagined Hermès Birkin bags featuring a variety of colorful fur, is digital art and a commentary on the famed BIRKIN bag, consumerism, and animal cruelty within the fashion industry. As a result, he argues that the MetaBirkins NFTs are artistic works that should be shielded from liability under the free speech principles of the First Amendment of the Constitution. The nine-member jury disagreed, finding that the MetaBirkins NFTs were more like commodities that are subject to trademark and other laws, rather than artwork. A factor that may have influenced the jury’s decision was evidence suggesting that Rothschild may have seen the MetaBirkins NFTs as a “cash cow.” This may have cast doubt on the authenticity of his characterization of the MetaBirkins NFTs as an art project.

The Test is Yet to Come

Although the jury found the MetaBirkins NFTs to be infringing, the final disposition of this dispute remains pending with the possibility of appeal. Given the importance of the issues at stake, the outcome of this case is bound to be subject to debate regardless of any appeal.

Moreover, while no NFT-specific legal test appears to have emerged from this case and the legal landscape for IP in the Metaverse (and beyond) continues to lack clear guidance, this case has nonetheless provided insight on how courts (and juries) may view the interplay of IP and NFTs. The ultimate outcome of this landmark case is likely to form the basis of the emerging law involving IP rights and NFTs.

© 2023 ArentFox Schiff LLP
For more Intellectual Property Legal News, click here to visit the National Law Review

Who Owns the Crypto, the Customer or the Debtor?

Whose crytpo is it? With the multiple cryptocurrency companies that have recently filed for bankruptcy (FTX, Voyager Digital, BlockFi), and more likely on the way, that simple sounding question is taking on huge significance. Last week, the Bankruptcy Court for the Southern District of New York (Chief Judge Martin Glenn) attempted to answer that question in the Celsius Network LLC bankruptcy case.

The Facts of the Case

Celsius and its affiliated debtors (collectively, “Debtors”) ran a cryptocurrency finance platform. Faced with extreme turbulence in the cryptocurrency markets, the Debtors filed Chapter 11 petitions on July 13, 2022. As part of their regular business, the Debtors had allowed customers to both deposit cryptocurrency digital assets on their platform and earn a percentage yield, as well as take out loans by pledging their cryptocurrencies as security. One specific program offered by the Debtors was the “Earn” program, under which customers could transfer certain cryptocurrencies to the Debtors and earn “rewards” in the form of payment of in-kind interest or tokens. On the petition date, the Earn program accounts (the “Earn Accounts”) held cryptocurrency assets with a market value of approximately $4.2 billion. Included within the Earn Accounts were stablecoins valued at approximately $23 million in September 2022. A stablecoin is a type of cryptocurrency designed to be tied or pegged to another currency, commodity or financial instrument.

Recognizing their emerging need for liquidity, on November 11, 2022, the Debtors filed a motion seeking entry of an order (a) establishing a rebuttable presumption that the Debtors owned the assets in the Earn Accounts and (b) permitting the sale of the stablecoins held in the Earn Accounts under either section 363(c)(1) (sale in the ordinary course of business) or section 363(b)(1) (sale outside the ordinary course of business) of the Bankruptcy Code. The motion generated opposition from the U.S. Trustee, various States and State securities regulators and multiple creditors and creditor groups. The Official Committee of Unsecured Creditors objected to the sale of the stablecoins under section 363(c)(1) but argued that the sale should be approved under section 363(b)(1) because the Debtors had shown a good business reason for the sale (namely to pay ongoing administrative expenses of the bankruptcy cases). On January 4, 2023, the court issued its forty-five (45) page memorandum opinion granting the Debtors’ motion.

The Court’s Decision

Although the ownership issue may appear complex given the nature of the assets (i.e., cryptocurrency), the bankruptcy court framed the issue into relatively straightforward state law questions of contract formation and interpretation. The court first analyzed whether there was a valid contract governing the parties’ rights to the cryptocurrency assets in the Earn Accounts. Under governing New York law, a valid, enforceable contract requires an offer and acceptance (i.e., mutual assent), consideration and an intent to be bound. The court found that all three elements were satisfied. The Debtors required that all customers agree to and accept “Terms of Use.” The Terms of Use was set up as a “clickwrap” agreement that required customers to agree to the terms and prevented the customers from advancing to the next page and completing their sign up unless they agreed to the Terms of Use. Under New York law, “clickwrap” agreements are sufficient to constitute mutual assent. The court also found that consideration was given by way of allowing the customers to earn a financing fee (i.e., the rewards in the form of payment of in-kind interest or tokens). Finally, the court noted that no party had presented evidence that either the Debtors or the customers lacked intent to be bound by the contract terms. Accordingly, the court held that the Terms of Use constituted a valid contract, subject to the rights of customers to put forth individual contract formation defenses in the future, including claims of fraudulent inducement based on representations allegedly made by the Debtors’ former CEO, Alex Mashinsky.

Having found a valid contract to presumptively exist, the court turned its attention to what the Terms of Use provided in terms of transfer of ownership. In operative part, the Terms of Use provided:

In consideration for the Rewards payable to you on the Eligible Digital Assets using the Earn Service … and the use of our Services, you grant Celsius … all right and title to such Eligible Digital Assets, including ownership rights, and the right, without further notice to you, to hold such Digital Assets in Celsius’ own Virtual Wallet or elsewhere, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all the attendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession and/or control a like amount of Digital Assets or any other monies or assets, and use or invest such Digital Assets in Celsius’ full discretion. You acknowledge that with respect Digital Assets used by Celsius pursuant to this paragraph:

  1. You will not be able to exercise rights of ownership;
  2. Celsius may receive compensation in connection with lender or otherwise using Digital Assets in its business to which you have no claim or entitlement; and
  3. In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.

Based on this language, the court held that the Terms of Use unambiguously transferred ownership of the assets in the Earn Accounts to the Debtors. Central to the court’s decision was that under the Terms of Use customers had granted the Debtors “all right and title to such Digital Assets, including ownership rights.” Based on this language, the court found that title and ownership of the cryptocurrency held in the Earn Accounts was “unequivocally transferred to the Debtors and became property of the Estate on the Petition Date.”

Finally, the court found that the Debtors had shown that they needed to generate liquidity to fund the bankruptcy cases, and that additional liquidity would be needed early this year. Accordingly, the court held that the Debtors had shown sufficient cause to permit the sale of the stablecoins outside of the ordinary course of business in accordance with section 363(b)(1).

Implications

Given the turbulent nature of the cryptocurrency market and the likelihood of further cryptocurrency bankruptcy filings, the court’s ruling is sure to have significant implications. First, unless it is reversed on appeal, the opinion means that the Debtors’ Earn program customers do not own the funds in their digital accounts and will instead be relegated to the status of unsecured creditors with a highly uncertain recovery. Second, the opinion underscores the Wild West nature of crypto and the fact that unlike deposits at a federally insured financial institution, deposits at cryptocurrency exchanges are not similarly insured and may be at risk. Third, customers or account holders in other cryptocurrency exchanges or businesses should carefully review the applicable terms of use to determine if those terms transferred ownership of their digital assets to their cryptocurrency counterparty. It is likely a fair assumption that such other terms of use transferred ownership in the same way that the Celsius Terms of Use did, in which case customers must remain vigilant of the financial health of their cryptocurrency counterparty. Finally, all parties engaging in on-line business transactions, including those outside of cryptocurrency, are on notice that clickwrap agreements commonly found in such transactions are, at least under New York law, enforceable. In short, those agreements mean something, and the fact that a party did not read the terms before agreeing to them through a “click” is likely not going to be a viable defense to the enforcement of those terms.

For more Bankruptcy Legal News, click here to visit the National Law Review.

© Copyright 2023 Squire Patton Boggs (US) LLP

Top Legal News of 2022: A Review of the Most Notable and Newsworthy Thought Leadership from the National Law Review’s Contributors

Happy New Year from the National Law Review! We hope that the holiday season has been restful and rejuvenating for you and your family. Here at the NLR, we are wrapping up the second season of our legal news podcast, Legal News Reach. Check out episode seven here: Creating A Diverse, Equitable and Inclusive Work Environment with Stacey Sublett Halliday of Beveridge & Diamond! A few weeks ago, we also announced the winners of our 2022 Go-To Thought Leadership Awards! Each year, around 75 recipients are selected for their timely and high-quality contributions to the National Law Review. This year’s slate of winners was particularly competitive – to see the full list, check out our 2022 National Law Review Thought Leadership Awards page.

As we look forward to a bright and busy 2023 for the legal industry, it is more prudent than ever to review the previous year and all that came with it. 2022 was a chaotic and monumental year for not only the legal profession, but for the world at large. The invasion of Ukraine, global supply chain issues, and the ongoing coronavirus pandemic were only some of the many challenges all industries and sectors faced. In the United States, companies and employers dealt with enormous changes at every level, including but not limited to the reversal of Roe v. Wade, shifting attitudes toward cannabis legalization, and ever-changing standards for COVID-19 vaccinations.

Read on below for some thought leadership highlights from this past year, and for a reminder of all that we’ve passed through in 2022:

January

Most prominently in 2022, the US Supreme Court handed down substantial rulings for coronavirus vaccine mandates, which affected not only healthcare workers but all employers across the country. With a 6-3 majority, SCOTUS stayed the Biden Administration’s OSHA Emergency Temporary Standard that applied to all private employers, but simultaneously ruled in a 5-4 majority that issued a 5–4 unsigned majority that vaccine mandates for medical facilities and medical workers can remain.

January also saw noteworthy changes to labor law in the United States, inviting a handful of significant standard changes for all employers. At the end of 2021 and early in 2022, the NLRB considered cases that altered the standard for determining independent contractor status, as well as the standard that established whether a facially neutral work rule violates Section 8(a)(1) of the National Labor Relations Act. These changes also paved the way for briefings on determining appropriate bargaining units.

Read January 2022’s thought leadership focusing on Labor and Employment law and the related Supreme Court rulings  below for more information:

Supreme Court Stays Private Vaccine Mandate; Upholds Requirement for Certain Healthcare Workers

On Again, Off Again Vaccine Mandates: What Should Employers Do Now?

NLRB Rings in the New Year by Inviting Briefing on Multiple, Far-Reaching Standards Impacting Employers

February

On February 24, 2022, Russia launched a large-scale ground invasion of Ukraine, leading to considerable damage and loss of life and throwing the geopolitical landscape into chaos. Both in February and in the months since, the Russia-Ukraine war has placed an extraordinary  strain on the global supply chain and businesses around the world, as the European Union, the United Kingdom, and the United States have continued to enforce sanctions and trade regulations. Companies must be careful to comply with these orders as the political landscape continues to change and learn how to juggle the dual headaches of the lingering COVID crisis and evolving Ukrainian war

Domestically, President Biden nominated Ketanji Brown Jackson to the US Supreme Court. Succeeding Justice Stephen Breyer, Judge Jackson graduated magna cum laude from Harvard University in 1992 and cum laude from Harvard Law in 1996 and has since served as a judge on the U.S. Court of Appeals for the District of Columbia Circuit. She is the first African American woman to serve on the United States’ highest court of law.

Read select thought leadership articles below for more information:

President Biden Nominates D.C. Circuit Judge Ketanji Brown Jackson to U.S. Supreme Court

Russian Invasion of Ukraine Triggers Global Sanctions: What Businesses Need to Know

Consequences from the Ukrainian Conflict

March

March of 2022 saw the long term  impacts from the military conflict in Ukraine emerge locally and around the world. Sanctions continued to affect businesses, leading to global supply chain slowdowns and difficulties in manufacturing and shipping and new immigration changes and challenges. In the US, the Securities and Exchange Commission “SEC” issued new and noteworthy regulations regarding Environmental, Social & Corporate Governance “ESG” and climate change disclosures for public companies. The Supreme Court also heard oral argument for a large slate of cases, perhaps most notably in ZF Auto. US v. Luxshare, Ltd. and AlixPartners v. The Fund for Prot. of Inv. Rights in Foreign States, which interpreted provisions of Title 28 of the US Code’s (“Section 1782”) reach in seeking US-style discovery from a interested party to a foreign proceeding and whether or not ection 1782 can be used to obtain key information for private international arbitrations.

Read key thought leadership articles published in March for more details:

SEC Issues Long-Awaited Proposed Rule on Climate Disclosures

U.S. Supreme Court Hears Oral Argument on Circuit Split Over Scope of 28 U.S.C. § 1782 for Obtaining Discovery in International Arbitrations

The Effects of the Military Conflict in Ukraine on Supply Contracts

April

In April of 2022, the Biden Administration made notable changes to the National Environmental Policy Act, better known as NEPA, which had been substantially altered under the Trump Administration. A number of key provisions were returned to their pre-Trump state in order to better center the administration’s larger focus on environmental justice. Also of note, a US court for the first time contested the Center for Disease Control’s  “CDC’s” travel mask mandate, on the grounds that it exceeded the CDC’s Statutory Authority under the Administrative Procedure Act “the federal APA”. This ultimately led to a vacating of the COVID travel mask mandate on a nationwide basis.

Elon Musk announced his intention to purchase Twitter in April of 2022, as well. Twitter ultimately adopted a shareholder rights plan, known as a poison pill, in hopes of preventingMusk’s hostile takeover. Poison pills are widely regarded as the an effective but a draconian anti-takeover defense available.

Read select  thought leadership articles below for more information:

Biden Administration Walks Back Key Trump Era NEPA Regulation Changes

Twitter Board of Directors Adopts a Poison Pill

Administrative Law Takeaways from the Federal Travel Mask Mandate Decision

May

On May 17th, the first case of Monkeypox in the United States was reported in Massachusetts. In response, the Environmental Protection Agency “EPA” and the federal government implemented a number of policy changes in hopes of preventing a wider spread, including the speedy authorization of anti-Monkeypox claims for certain registered pesticides and disinfectant products.

The SEC and administrative law at large received a considerable blow after the Fifth Circuit’s ruling in Jarkesy v. SEC. The Fifth Circuit Court held that the SEC in-house courts violated a series of constitutional protections, which may result in far-reaching impacts for how administrative bodies are used to regulate in the future. Additionally in May, the Senate confirmed Commissioner Alvaro Bedoya for the Federal Trade Commission “FTC”, shifting the balance of power back at the Commission in favor of the Democratic Party.

Read the following highlighted thought leadership articles published in May  for more information:

EPA Authorizes Anti-Monkeypox Claims for Pre-Designated Disinfectant Products

Fifth Circuit Holds That SEC Administrative Law Courts Are Unconstitutional

Big News at The FTC: Democrats Finally Get the Majority Back

June

In June of 2022, the Supreme Court released its decision in Dobbs v. Jackson, reversing Roe v. Wade’s 50-year precedent of ensuring abortion as a  protected right. Dobb’s is a  momentous decision and has resulted in a myriad of complex issues for employers, healthcare providers and individuals, including the updating of employee policies, healthcare provisions, ethical and criminal considerations for healthcare providers and the protection of personal data, and ultimately represents a massive shift away from women’s bodily autonomy in the United States. And the partial advance leak of the Dobb’s ruling, added to the myriad of concerns about the stability and public perception of the Supreme Court.

Other notable litigation and legislation in June included the passing of the Uyghur Forced Labor Prevention Act, subjecting the importers of raw materials from China to new enforcement provisions. The Supreme Court also ruled in West Virginia v. EPA, limiting the SEC’s ability to enforce ESG requirements on public companies. The West Virginia v. EPA ruling  presents a considerable obstacle for the Biden Administration’s ongoing climate goals.

Read select legal news  articles below for more information:

Employment Law This Week: SCOTUS Overturns Roe v. Wade – What Employers Should Consider [VIDEO]

Uyghur Forced Labor Prevention Act Enforcement Starts on Imports from China and on Imports with China Origin Inputs

Implications of West Virginia v. EPA on Proposed SEC Climate Rules

July

July of 2022 saw a great deal of changes for the Equal Opportunity Commission’s “EEOC’s” COVID testing guidance for employers. The largest change is determining if testing is needed to prevent workplace transmission and interpreting the business necessity standard under the American with Disabilities Act “ADA”.. The labor law landscape around the country also saw an increased focus on pay transparency laws – most notably, New York state passed a bill requiring employers to post salary or wage ranges on all job listings. Notably, this law is quite similar to one already in effect in New York City and Washington state, Colorado, and Jersey City.

Beginning most prominently in July, the cryptocurrency world also found itself under increased scrutiny by the federal government. Of note this month, the SEC filed a complaint against certain Coinbase employees, alleging insider trading and claiming that these employees had tipped off others regarding Coinbase’s listing announcements. This move was one of the more aggressive moves made by the SEC toward the digital asset industry.

Read select legal thought leadership articles published in July for more information:

EEOC Revises COVID-19 Testing Guidance for Employers

SEC v. Wahi: An Enforcement Action that Could Impact the Broader Crypto / Digital Assets Industry

Pay Transparency Laws Are All The Rage: Looks Like New York State Is Joining the Party

August

On August 12, 2022, the Inflation Reduction Act (“IRA”) was passed by Congress, representing enormous changes for industries across the country. Perhaps most notably, the landmark legislation contained new government incentives for the clean energy sector, creating tax incentives for renewable energy projects that previously did not exist. The Act also included 15% alternative minimum corporate tax and a 1% excise tax on stock buybacks to raise government revenue.

The Inflation Reduction Act also provided significant funding for tribal communities, including but not limited to the reduction of drug prices, the lowering of energy costs, and additional federal infrastructure investments. While the funding is not as significant as COVID relief from previous years and there are still some remaining hurdles, the IRA provides groundbreaking new opportunities for Native communities, including those in Alaska and Hawaii.

Read the select legal articles published in August for more information:

The Inflation Reduction Act: How Do Tribal Communities Benefit?

The Inflation Reduction Act: A Tax Overview

Relief Arrives for Renewable Energy Industry – Inflation Reduction Act of 202

September

In September of 2022, Hurricane Ian made landfall in the United States, caused substaintial property damage and loss of life despite preparations ahead of time. After addressing safety concerns, policyholders began reviewing their insurance policies, collecting documentation and filing claims. In addition to filing claims for property damage, corporate policyholders also filed claims for business interruption and loss of business income.

Lawsuits opposing the remaining COVID-19 vaccine mandates also continued throughout the month of September, exceeding 1,000 complaints nationally. Previously, lawsuits had largely targeted the Biden Administration, but additional focus was also directed toward large employers with vaccine mandates.

Of global significance, Queen Elizabeth II, the UK’s longest reigning monarch, passed away at 96 years old. Her funeral was held September 19, 2022, and was a national holiday in the United Kingdom marking the last day of public mourning.

Read following key thought leadership articles on Hurrican Ian, UK Bank Holiday due to the Sovereign’s passing and Employer’s COVID Mandate headaches  for more information:

Hurricane Ian – Navigating Insurance Coverage

Bank Holiday Announced for Her Majesty Queen Elizabeth II’s State Funeral

Challenges Against Employer COVID-19 Vaccine Mandates Show No Sign of Slowing

October

October saw forward movement in environmental justice, cannabis decriminalization, and Artificial Intelligence  “AI” regulation. The EPA launched their new Office of Environmental Justice and External Civil Rights, to work with state, local, and tribal partners providing financial and technical support to underserved communities disproportionately impacted by the ill effects of climate change. The EPA’s new office has 200 staff members across 10 regions and is expected to provide a unifying focus on civil rights and environmental justice for the EPA and federal government as a whole.

President Biden’s pardon of federal marijuana charges and mandate to review the plant’s Schedule I status signaled a shift in cannabis regulation, with the president urging state officials to follow his example and consider the contrast between wealthy cannabis business owners and those imprisoned for possession in the recent past.

Later in the month, the White House Office of Science and Technology Policy addressed the swell of artificial intelligence technology with their Blueprint for an AI Bill of Rights, which provides guidelines to prevent privacy violations, implicit bias, and other forms of foreseeable harm.

Read selected thought leadership articles below for more information:

EPA Launches Their New Office: What Does the Office of Environmental Justice and External Civil Rights Mean for Companies and ESG in the United States?

“Up in Smoke?” President Biden Announces Pardons and Orders Review of Cannabis Classification

The White House’s AI Bill of Rights: Not for the Robots

November

November was dominated by a nail-biting midterm election season, a cryptocurrency catastrophe, and NDA (Non Disclosure Agreement) reform. While the midterms did not result in a Red Wave as expected, Republicans were able to regain a small majority in the House of Representatives, with the Senate remaining in Democratic control.

The digital finance world was considerably less stable, with the second largest cryptocurrency trading platform, FTX, filing for bankruptcy three days after its lawyers and compliance staff abruptly resigned. The collapse brought into stark relief the importance of solidifying the cryptocurrency custody and insurance landscape.

Also of note, President Biden signed the Speak Out Act, rendering unenforceable nondisclosure and nondisparagement agreements signed prior to incidents of sexual harassment or assault. The law’s passage offers employers the opportunity to review their states’ more robust laws in this area and ensure clauses meant to protect trade secrets and proprietary information don’t inadvertently create issues for sexual misconduct claimants.

Read select  thought leadership articles below fora deeper dive:

2022 Midterm Election Guide

The Spectacular Fall of FTX: Considerations about Crypto Custody and Insurance

Nondisclosure and Nondisparagement Agreements in Sexual Harassment and Assault Cases: Speak Out Act Heads to President’s Desk

December

In December, the Federal Trade Commission (FTC) released their hotly anticipated “Green Guides” amendment proposals, intended to combat greenwashing amidst growing demand for environmentally friendly products. The amended Guides for the Use of Environmental Marketing Claims would impose stricter standards for the use of terms such as “recyclable,” “compostable,” “organic,” and “sustainable” in advertising and on packaging.

Meanwhile, Congress narrowly avoided a railroad worker strike by passing Railway Labor Act legislation affirming all tentative agreements between rail carriers and unions. The contracts included a roughly 24% increase in wages over 4-5 years, along with an extra day of leave. Biden promised to address paid leave further in the near future.

The National Labor Relations Board (NLRB) closed out 2022 with a number of impactful decisions favoring workers. Employees have expanded remedies for National Labor Relations Act violations and protection during Section 7 questioning, while employers have the burden of proof when seeking to expand micro-units or deny union protestors.

Read select legal thought leadership pieces below for more details:

Congress Votes to Impose Bargaining Agreement to Avoid Nationwide Railroad Strike

FTC Starts Long-Awaited Green Guides Review

NLRB Issues Flurry of Blockbuster End-of-Year Decisions (With More to Come?) (US)

Thank you to our dedicated readers and as always to our highly regarded contributing authors and our talented NLR editorial staff for working day in and day out to produce one of the most well read and reputable business law publications in the US.  Have a happy 2023!

Copyright ©2023 National Law Forum, LLC

Tom Brady, Larry David, and Others Named Defendants in Class Action Suit Filed Against FTX

Four days after FTX, once the world’s third-largest crypto exchange, filed for voluntary Chapter 11 bankruptcy, former FTX investors filed a class action against 11 athletes and celebrities who promoted FTX in advertisements and on social media, including NFL quarterback Tom Brady and comedian Larry David.

The lawsuit, which also names FTX’s co-founder and former chief executive Sam Bankman-Fried as a defendant, seeks $11 billion in damage.

Background

The FTX bankruptcy filing covers about 130 FTX Group companies, including FTX.com, FTX’s US operations, and Bankman-Fried’s cryptocurrency trading firm, Alameda Research. According to published reports, Bankman-Fried had covertly used funds from FTX customers to make risky bets for Alameda Research – a hedge fund he also ran – and had commingled funds between the two entities.

Allegations Against FTX Celebrity Endorsers

The class action was brought on behalf of US investors who hold FTX yield-bearing accounts funded with crypto assets. The plaintiff and class-action members alleged that FTX lured them to its yield-bearing accounts and transferred investor funds to related entities to maintain the appearance of liquidity.

While an investor class action following bankruptcy is not necessarily surprising, the fact that the complaint named various celebrity endorsers and spokespeople as defendants is fairly unusual. Among them, Larry David starred in an advertisement for FTX that aired during the 2022 Super Bowl. The ad featured David being a skeptic on inventions such as the wheel, the fork, the toilet, democracy, the light bulb, the dishwasher, the Sony Walkman, and, finally, FTX, and cautioned viewers, “Don’t be like Larry.” Other conduct cited by the complaint includes:

  • Tom Brady and Gisele Bundchen: according to the complaint, Brady and Bundchen served as brand ambassadors for FTX, took equity stakes in FTX Trading Ltd., and appeared in an advertisement showing them telling acquaintances to join the FTX platform.

  • Kevin O’Leary: served as brand ambassador and FTX shareholder and made several public statements, including on Twitter, “designed to induce consumers to invest in” FTX’s yield-bearing accounts.

  • Naomi Osaka: the tennis star served as a brand ambassador for FTX in exchange for an equity stake and payments in an unspecified amount of cryptocurrency, appeared in advertisements, and promoted FTX to her Twitter followers.

The plaintiff and class members claimed that those FTX promoters engaged in a conspiracy to defraud investors and violated Florida state laws prohibiting unfair business practices. Specifically, in their civil conspiracy claim, the plaintiff and class members alleged that “the FTX Entities and Defendants made numerous misrepresentations and omissions to Plaintiff and Class Members about the Deceptive FTX Platform in order to induce confidence and to drive consumers to invest in what was ultimately a Ponzi scheme, misleading customers and prospective customers with the false impression that any cryptocurrency assets held on the deceptive FTX Platform were safe and were not being invested in unregistered securities.” [1]

Celebrities Under Scrutiny in Crypto Industry

The US Securities and Exchange Commission (SEC) has gone after celebrities for deceptively touting cryptocurrencies since 2017. In November 2017, SEC Chair Gary Gensler warned celebrities that federal securities laws require people who tout a certain stock or crypto security to disclose the amount, the source, and the nature of those payments they received.[2]

In October 2022, the SEC found that Kim Kardashian violated the anti-touting provision of the federal securities laws by plugging on social media a crypto asset security offered and sold by EthereumMax (EMAX) without disclosing the payment she received for the promotion.[3] Kardashian later settled with the SEC, paid $1.26 million in penalties, disgorgement, and interest, and cooperated with the Commission’s ongoing investigation.[4] “Ms. Kardashian’s case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities,” Gensler added.[5]

Investors have also gone after celebrities for deceptively touting cryptocurrencies. In January 2022, a group of investors filed a lawsuit against Kim Kardashian, along with boxer Mayweather and former basketball star Paul Pierce, for losses they suffered after the celebrities promoted EMAX.

Implications

This case offers a stark warning to celebrities and non-crypto companies that might be considering serving as brand ambassadors or paid influencers for crypto companies, or engaging in sponsorships. Any individual or organization considering entering into a co-promotion or sponsorship agreement with a company in the crypto industry should ensure adequate due diligence has been conducted on the potential partner and carefully scrutinize crypto and NFT offerings for potential liability or exposure under US securities laws. Notably, the US Federal Trade Commission is also carefully scrutinizing the use of influencers and endorsements in commercial marketing and imposes its own disclosure obligations.

© 2022 ArentFox Schiff LLP

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FOOTNOTES

[1] See Complaint, Count Three.

[2] See SEC Statement Urging Caution Around Celebrity Backed ICOs, available at SEC.gov | SEC Statement Urging Caution Around Celebrity Backed ICOs.

[3] See SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security, available at SEC.gov | SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security.

[4] Id.

[5] Id.

Quantifying Cryptocurrency Claims in Bankruptcy: Does the Dollar Still Reign Supreme?

In the past six months, four major players in the crypto space have filed for chapter 11 bankruptcy protection: Celsius Network, Voyager Digital, FTX, and BlockFi, and more may be forthcoming.  Together, the debtors in these four bankruptcy cases are beholden to hundreds of thousands of creditors.  The bulk of the claims in these cases are customer claims related to cryptocurrency held on the debtors’ respective platforms.  These customer claimants deposited or “stored” fiat currency and cryptocurrencies on the debtors’ platforms.  Some of these funds allegedly were commingled or rehypothecated, leaving customer accounts severely underfunded when liquidity crunches arose at the various entities.  The total amount of such claims is estimated to be in the billions — that is, if these claims ultimately are measured in United States Dollars (“USD”).

Crypto-watchers and bankruptcy lawyers alike have speculated how customer claims based on digital assets such as cryptocurrencies should be valued and measured under bankruptcy law.  Given the volatility of cryptocurrency prices, this determination may have a significant effect on recoveries, as well as the viability of the “payment-in-kind” distribution mechanics proposed in Voyager, Celsius, and BlockFi.  A number of creditors appearing pro se in these proceedings have expressed a desire to keep their mix of cryptocurrencies through these proposed “in-kind” distributions.

However, a crypto-centric approach to valuing claims and making distributions raises a number of issues for consideration.  For example, measuring customer claims in cryptocurrency and making “in-kind” distributions of these assets could lead to creditors within the same class receiving recoveries of disparate USD value as the result of the fluctuation in cryptocurrency prices. Moreover, as has been discussed in the Celsius proceedings, the administrative burden associated with maintaining, accounting for, and distributing a wide variety of cryptocurrencies as part of a recovery scheme would likely prove complex.  Equity holders also might challenge the confirmability of a plan where valuations and recoveries are based on cryptocurrency rather than USD, as a dramatic rise in cryptocurrency values could return some value to equity.

Like most issues at the intersection of insolvency and cryptocurrency, there is little precedent to guide creditors through the uncertainties, but a recent dispute in the Celsius bankruptcy proceedings as to whether a debtor is required to schedule claims in USD, or whether cryptocurrency claims can be scheduled “in-kind,” may serve as a preview of things to come.

I.          General Background

Celsius Network (“Celsius” and, together with its affiliated debtors and debtors in possession, the “Debtors”), self-described as one of the “largest and most sophisticated” cryptocurrency-based finance platforms and lenders that claimed over 1.7 million users worldwide,1 filed petitions under Chapter 11 of the Bankruptcy Code on July 13, 2022.2  On October 5, 2022, the Debtors filed their schedules of assets and liabilities (“Schedules”).  Each Debtor’s schedule of unsecured creditors’ claims (Schedule E/F) lists the claims of the Debtors’ customers by the number of various forms of cryptocurrency coins and account types, rather than in USD.3

On October 25, 2022, a group of beneficial holders, investment advisors, and managers of beneficial holders (collectively, the “Series B Preferred Holders”) of the Series B Preferred Shares issued by debtor Celsius Network Limited filed a motion seeking entry of an order directing the Debtors to amend their Schedules to reflect customer claims valued in USD, in addition to cryptocurrency coin counts.4

II.         Arguments

a.         Series B Preferred Holders

Broadly, pursuant to Bankruptcy Rule 1009(a),5 the Series B Preferred Holders sought to have the Debtors amend their Schedule E/F to “dollarize” creditors’ claims, i.e., value customer claims in their dollar value as of the petition date.  As filed, the Series B Preferred Holders asserted that the Debtors’ schedules were “improper, misleading, and fail[ed] to comply” with the Bankruptcy Rules “because they schedule[d] customer claims in cryptocurrency coin counts, rather than in lawful currency of the United States as of the Petition Date.”6  The Series B Preferred Holders asserted that such amended schedules are essential to the Debtors’ ability to structure, solicit, and confirm a plan of reorganization under the requirements of Section 1129, including whether “(i) claims are impaired or unimpaired, (ii) holders of similarly situated claims are receiving the same treatment, and (iii) the plan meets the requirements of the ‘absolute priority rule.’”7  In support of their arguments that USD valuation of a customer’s claim should be required, the Series B Preferred Holders relied on provisions of the Bankruptcy Rules, Bankruptcy Code, and Official Forms.  The Series B Preferred Holders stressed that the motion “takes no position regarding the form of distribution customers” should receive under the Debtors’ plan, but rather that the Debtors must “add the [USD] amount of each customer claim in Schedules E/F to the cryptocurrency coin counts.”8

The Series B Preferred Holders also asserted that the requirement to denominate claims in USD is consistent with Section 502(b) of the Bankruptcy Code, which provides that when a debtor or party-in-interest objects to a claim, the court determines the amount of the claim in USD as of the debtor’s petition date.

b.         Debtors’ Response

The Debtors had previously indicated that they were not seeking to dollarize its customers’ claims; rather, the Debtors represented that they intend to return cryptocurrency assets to its customers “in kind.”9  The Debtors stated that they interpreted Bankruptcy Rule 9009(a)(1)-(2) and General Order M-386, dated November 24, 2009 (the “General Order M-386”) to allow the Debtors to remove the dollar symbol when scheduling claims regarding cryptocurrency coin counts.10  This approach, the Debtors argue, lessens confusion for its customer case and decreases administrative expense for the estate.11

Further, the Debtors argued that the Series B Preferred Holders’ reliance on Section 502(b) was misplaced because the application of such section is inapplicable at this stage of the proceedings where no claims objection has taken place.12

The Committee of Unsecured Creditors (“UCC”) agreed with the Debtors’ approach, stating that it “makes sense” for account holders to validate their scheduled claims by cryptocurrency type and that it wished to be consulted on the petition date prices used by the Debtors if they filed an amendment to the schedules.13

III.        Analysis

a.         Bankruptcy Code & Rules & Forms

Bankruptcy Rule 1007(b)(1) requires that a debtor’s schedules of assets and liabilities must be “prepared as prescribed by the appropriate Official Forms.”14  The relevant official form that a debtor must use to prepare its schedule of assets and liabilities is Official Form 206, which contains a USD symbol to denote the amount of liabilities that a debtor must list.15  Specifically, Official Form 206 provides:

As seen above, Official Form 206 does “hardwire” a dollar sign (“$”) into the boxes provided for claim amounts.  Bankruptcy Rule 9009 states that the official forms are to “be used without alteration, except as otherwise provided in the rules, [or] in a particular Official Form.”16  Bankruptcy Rule 9009 permits “certain minor changes not affecting wording or the order of presenting information,” including “expand[ing] the prescribed areas for responses in order to permit complete responses” and “delet[ing] space not needed for responses.”17  Lastly, General Order M-386 permits “such revisions as are necessary under the circumstances of the individual case or cases.”18 The introduction to General Order M-386 states that standard forms were adopted to “expedite court review and entry of such orders” and that courts will expect use of the standard forms “with only such revisions as are necessary under the circumstances of the individual case or cases.”19

b.         Section 502(b)

Bankruptcy Code Section 502(b) provides that if there is an objection to a claim, the court “shall determine the amount of such claim in lawful currency of the United States as of the [petition] date . . . .”20  This “prevents the value of a claim from fluctuating by setting the claim as of the petition date and converting it to the United States dollars.”21  Acknowledging the “novel phenomenon” of dollarizing claims in cryptocurrency, the Series B Preferred Holders analogize this to cases where courts have required claims asserted in or based on in foreign currency or amounts of gold should be valued in USD.  However, these cases were decided in the context of a claims objection. The Celsius Debtors argued that these cases have limited utility in the context of a motion for an order directing the Debtors to amend their schedules pursuant to Bankruptcy Rule 1009(a).22

IV.        The Court’s Order

Ahead of the hearing regarding the motion for an order directing the Debtors to amend their schedules, the Debtors and the Series B Preferred Holders were able to consensually resolve the motion and filed a revised proposed order prior to the hearing on the motions on November 15.23  The Debtors agreed to amend their schedules by filing a conversion table within three days of the entry of the order, in consultation with the UCC and Series B Preferred Holders, that reflects the Debtors’ view of the rate of conversion of all cryptocurrencies listed in the Debtors’ schedules to USD as of the petition date.  The idea is that the conversion table could be used by customers as a reference for calculating the USD value of their claim, to the extent needed for filing a proof of claim.  The conversion table is not binding – the order preserves the rights of all parties to contest the conversion rates and does not require a party-in-interest to file an objection that is not stated in USD “solely on the basis that such claims should be reflected in [USD].”24  The order also requires the Debtors to file updated schedules “dollarizing” its account holders’ cryptocurrency holdings to the extent required by any future court order or judicial determination.

On November 17, 2022, the court entered the revised proposed order.25

V.         Cash Is Still King?

Other bankruptcy courts have taken similar approaches as the Celsius court in this issue.  An earlier cryptocurrency case, In re Cred Inc., the debtors did not schedule cryptocurrency claims in USD, but included a conversion table in their filed schedules, which set forth a conversion rate to USD as of the petition date.26  Debtors in other cases, such as Voyager Digital, scheduled the amounts of their customer claims as “undetermined” and listed them in Schedule F in cryptocurrency.27  BlockFi, which filed for bankruptcy on November 28, 2022, already has filed a proposed plan that would distribute its cryptocurrencies to its customers in–kind in exchange for their claims against the BlockFi debtors.28  To date, neither BlockFi nor FTX have filed their schedules, and it remains to be seen whether they will follow the pattern established in Celsius and Voyager.

For creditors and equity holders, whether claims are measured in USD or the applicable cryptocurrency is only the beginning of what will likely be a long and contentious road to recovery.  It remains to be seen whether any of these debtors will be able to confirm a viable restructuring plan that relies on any sort of “in-kind” distribution of cryptocurrencies.  Further issues are likely to arise in the claims resolution process even further down the road as claimants and liquidation trustees (or plan administrators) wrestle with how to value claims based on such a volatile asset, subject to ever-increasing regulatory scrutiny.  However, for the time being, the bankruptcy process continues to run on USD.

FOOTNOTES

1 Declaration of Alex Mashinsky, CEO of the Debtors ¶¶ 1, 9, 20, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 23].

2 Id. at ¶ 131.

3 Debtors’ Schedules of Assets and Liabilities and Statements of Financial Affairs, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 974]; see also Schedule E/F, Case No. 22-10967 [Docket No. 5]; Case No. 22-10970 [Docket No. 5]; Case No. 22-10968 [Docket No. 5]; Case No. 22-10965 [Docket No. 6]; Case No. 22-10966 [Docket No. 7]; Case No. 22-10964 [Docket No. 974]; Case No. 22-10969 [Docket No. 5]; Case No. 22- 10971 [Docket No. 5].

4 Series B Preferred Holders Motion to Direct Debtors to Amend Schedules, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1183].

5 “On motion of a party in interest, after notice and a hearing, the court may order any . . . schedule . . . to be amended and the clerk shall give notice of the amendment to entities designated by the court.” Fed. R. Bankr. P. 1009(a).

6 Series B Preferred Holders Motion to Direct Debtors to Amend Schedules ¶ 1.

7 Id. ¶ 3 (citing 11 U.S.C. §§ 1123(a)(2)-(4), 1129(a)(1), 1129(b)).

8 Series B Preferred Holders’ Reply ¶ 10, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1334].

9 See 8/16/22 Hr’g Tr. at 35:5-7 (“The company is not seeking to dollarize claims on the petition date and give people back a recovery in fiat.”); id. at 42:11-16 (“[The UCC is] pleased that the company is not focused on dollarization of claims . . . an in-kind recovery is absolutely critical.”).

10 General Order M-386 is a resolution of the Board of Judges for the Southern District of New York, which provides for “a standard form for orders to establish deadlines for the filing of proofs of claim . . . in chapter 11 cases” to “thereby expedite court review and entry of such orders.”

11 Debtors’ Objection to Series B Preferred Holders’ Motion ¶ 9, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1304].

12 Id. ¶ 12 (citing In re Mohr, 425 B.R. 457, 464 (Bankr. S.D. Ohio)).

13 Id. at 42:12-16 (“We are pleased to hear that the company is not focused on dollarization of claims . . . receiving an in-kind recover is 16 absolutely critical.”); UCC Statement and Reservation of Rights ¶ 6, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1303].

14 Fed. R. Bankr. P. 1007(b)(1).

15 See Official Form 206, Part 2, Line 4 (using the USD sign into Form 206 for scheduling the debtor’s liabilities).

16 Fed. R. Bankr. P. 9009(a).

17 Id.

18 General Order M-386 ¶ 9.

19 General Order M-386 ¶ 2 (unnumbered, preliminary statement).

20 11 U.S.C. § 502(b).

21 In re Aaura, Inc., No. 06 B 01853, 2006 WL 2568048, at *4, n.5 (Bankr. N.D. Ill. Sept. 1, 2006).

22 In re USGen New Eng., Inc., 429 B.R. 437, 492 (Bankr. D. Md. 2010) (using the exchange rate in effect on the petition date, in the context of a claims objection, to convert the claim to USD), aff’d sub nom. TransCanada Pipelines Ltd. v. USGen New Eng., Inc., 458 B.R. 195 (D. Md. 2011); Aaura, 2006 WL 2568048, at *5 (“Section 502(b) converts Aaura’s obligation to repay the obligation in gold into a claim against the estate in dollars, but it makes this transformation only as of the petition date, not retroactive to the date on which Aaura first became liable.”); Matter of Axona Intern. Credit & Com. Ltd., 88 B.R. 597, 608 n.19 (Bankr. S.D.N.Y. 1988) (noting Section 502(b) refers to the petition date as “the appropriate date for conversion of foreign currency claims”), aff’d sub nom. In re Axona Intern. Credit & Com. Ltd., 115 B.R. 442 (S.D.N.Y. 1990); ABC Dev. Learning Ctrs. (USA), Inc. v. RCS Capital Dev., LLC (In re RCS Capital Dev., LLC), No. AZ-12-1381-JuTaAh, 2013 Bankr. LEXIS 4666, at *38-39 (B.A.P. 9th Cir. July 16, 2013) (same).

23 Notice of Proposed Order, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1342].

24 Id. at ¶¶ 7, 8.

25 Order Pursuant to Bankruptcy Rule 1099 Directing the Debtors to Amend Their Schedules in Certain Circumstances, In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1387].

26 Schedules at 12, In re Cred Inc., Case No. 20-128336 (JTD) (Bankr. D. Del. 2021) [ECF No. 443].

27 Schedules, In re Voyager Digital Holdings, Inc., Case No. 22-10943 (MEW) (Bankr. S.D.N.Y. Aug. 18, 2022) [ECF No. 311].

28 Joint Plan of Reorganization § IV.B.1.a, In re BlockFi Inc., Case No. 19361 (MBK) (Bankr. D.N.J. 2022) [ECF No. 22].

Article By Cadwalader, Wickersham & Taft LLP

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© Copyright 2022 Cadwalader, Wickersham & Taft LLP

CFPB Investigates Crypto Lender

On December 1, 2022, the Consumer Financial Protection Bureau (Bureau) made public an administrative order denying Nexo Financial LLC’s (Nexo) petition to modify the Bureau’s civil investigative demand.  The order represents the first publicly known Bureau investigation of a digital asset company, in this case, over Nexo’s “Earn Interest” crypto lending product.

The Bureau served Nexo with a civil investigative demand in late 2021 seeking further information about whether Nexo products were subject to federal consumer financial law, and in particular Nexo’s compliance with the Consumer Financial Protection Act and regulations under the Electronic Funds Transfer Act.  Nexo sought to set aside the civil investigative demand and argued that, because the SEC had taken the position that other crypto lending products were securities, the Bureau was estopped from investigating it under provisions of federal law that preempt the Bureau from regulating securities products.

The Bureau rejected Nexo’s line of reasoning.  According to the Bureau order, “Nexo Financial is trying to avoid answering any of the Bureau’s questions about the Earn Interest Product (on the theory that the product is a security subject to SEC oversight) while at the same time preserving the argument that the product is not a security subject to SEC oversight.”  The order continues, “This attempt to have it both ways dooms Nexo Financial’s petition from the start.”  The Bureau also found that Nexo’s petition was not timely filed.

As we recently noted, the Bureau has been increasing its attention to the digital asset sector.  The Nexo order includes a lengthy discussion about the breadth of its jurisdiction and ability to investigate potential violations of law.  As the crypto winter persists, we expect to see the Bureau continue to explore ways to assert its authority to regulate elements of the digital asset sector.

Article By Scott H. Kimpel of Hunton Andrews Kurth

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Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

New York Enacts Crypto Mining Moratorium

On November 22, 2022, New York Governor Kathy Hochul signed into law a two-year moratorium against granting permits to crypto mining operations that “are operated through electric generating facilities that use a carbon-based fuel.” Renewable sources of energy are not impacted.

The legislation, among the first of its kind in the nation, prohibits the state’s Department of Environmental Conservation from issuing any new or renewal permits to electricity generating facilities reliant on carbon-based fuel supporting crypto mining operations that use proof-of-work authentication methods to validate blockchain transactions. The law applies to all permits and renewal applications filed after its effective date, and therefore grandfathers certain businesses that held permits prior to the date of enactment. The Department of Environmental Conservation and the Department of Public Service are also tasked under the legislation with preparing an environmental impact statement on cryptocurrency mining operations that use proof-of-work authentication techniques.

For more Environmental Law news, click here to visit the National Law Review.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

Dead Canary in the LBRY

In a case watched by companies that offered and sold digital assets1 Federal District Court Judge Paul Barbadoro recently granted summary judgment for the Securities and Exchange Commission (“SEC”) against LBRY, Inc.2 This case is seen by some as a canary in the coalmine in that the decision supports the SEC’s view espoused by SEC Chairman Gary Gensler that nearly all digital assets are securities that were offered and sold in violation of the securities laws.3 For FinTech companies hoping to avoid SEC enforcement actions, the LBRY decision strongly suggests that all companies offering digital assets could be viewed by courts as satisfying the Howey test for investment contract securities.4

LBRY is a company that promised to use blockchain technology to allow users to share videos and images without the need for third-party intermediaries like YouTube or Facebook. LBRY offered and sold LBRY Credits, called LBC tokens, that would compensate participants of their blockchain network and would be spent by LBRY users on things like publishing content, tipping content creators, and purchasing paywall content. At launch, LBRY had pre-mined 400 million LBC for itself, and approximately 600 million LBC would be available in the future to compensate miners. LBRY spent about half of the 400 million LBC tokens on various endeavors, such as direct sales and using the tokens to incentivize software developers and software testers.

Judge Barbadoro concluded as a matter of law (i.e., that no reasonable jury could conclude otherwise) that the LBC tokens were securities under Section 5 of the Securities Act. Applying the Howey test, Judge Barbadoro noted the only prong of the Howey test that was disputed in the case was: Did investors buy LBC tokens “with an expectation of profits to be derived solely from the efforts of the promoter or a third party”? Judge Barbadoro answered resoundingly, “Yes.”

Most important to his conclusion that investors purchased LBC tokens with the expectations of profits solely through the efforts of the promoter (i.e., LBRY) were: the many statements made by LBRY employees and community representatives about the price of LBC and trading volume of LBC; and many statements that LBRY made about the development of its content platform, including how the platform would yield long-term value to LBC holders. Critically, however, Judge Barbadoro found that even if LBRY had made none of these statements, the LBC token would still constitute a security because “any reasonable investor who was familiar with the company’s business model would have understood the connection” between LBC value growth and LBRY’s efforts to grow the use of its network. Even if LBRY had never said a word about the LBC token, Judge Barbadoro found that the LBC token would constitute a security because LBRY retained hundreds of millions of LBC tokens for themselves, thus signaling to investors that it was committed to working to improve the value of the token.

Judge Barbadoro flatly rejected LBRY’s defense that the LBC token cannot be a security because the token has utility.5 The judge noted, “Nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract.” Likewise, Judge Barbadoro was unmoved by LBRY’s argument that it had no “fair notice” that the SEC would treat digital assets as unregistered securities simply because this was the first time the SEC had brought an enforcement action against an issuer of digital currency.6

In sum, if Judge Barbadoro’s reasoning is applied more broadly to the thousands of digital assets that have emerged over the last several years—including companies that tout the so called “utility” of their tokens—they will all likely be deemed digital asset securities that were offered and sold without a registration or an exemption from registration.

The LBRY decision is yet another case in which a court has concluded a digital asset is a security. Developers of digital assets must proceed with a high degree of caution. The SEC continues to display a high degree of willingness to initiate investigations and enforcement actions against issuers of digital assets that are viewed as securities under the Howey and Reeves tests, investment companies, or security-based swaps.

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Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

FOOTNOTES

1 The SEC defines “digital assets” as intangible “asset[s] that [are] issued and transferred using distributed ledger or blockchain technology.” Statement on Digital Asset Securities Issuance and Trading, Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets, SEC (Nov. 16, 2018), available here.

2 SEC v. LBRY, Inc., No. 1:21-cv-00260-PB (D.N.H. filed Mar. 29, 2021), available here. A copy of the complaint against LBRY can be found here.

3 See, e.g., Gary Gensler, Speech – “A ‘New’ New Era: Prepared Remarks Before the International Swaps and Derivatives Association Annual Meeting” (May 11, 2022) (“My predecessor Jay Clayton said it, and I will reiterate it: Without prejudging any one token, most crypto tokens are investment contracts under the Supreme Court’s Howey Test.”), available here. Section 5(a) of the Securities Act of 1933 (the “Securities Act”) provides that, unless a registration statement is in effect as to a security, it is unlawful for any person, directly or indirectly, to sell securities in interstate commerce. Section 5(c) of the Securities Act provides a similar prohibition against offers to sell or offers to buy securities unless a registration statement has been filed.

4 SEC v. W.J. Howey Co., 328 U.S. 293 (1946). This case did not address when digital assets could be deemed debt securities under the test articulated by the U.S. Supreme Court in Reves v. Ernst & Young, 494 U.S. 56, 66-67 (1990), or when digital assets could be deemed an investment company under the Investment Company Acy of 1940. See, e.g., In the Matter of Blockfi Lending, Feb. 14, 2022, available here. This case also does not address when a digital asset is a security-based swap. See, e.g., In the Matter of Plutus Financial, Inc., (July 13, 2020), available here.

5 The argument a digital asset is not a security because it has “utility” is a favorite argument of critics of the SEC’s enforcement actions against issuers of digital assets. Unfortunately, the “utility” argument appears to be of little merit when the digital asset is offered and sold to raise capital.

6 This is an argument that has been made by a number of defendants in SEC enforcement actions involving digital asset securities.