Category: Digital Currency

On July 5, 2022, the popular cryptocurrency services firm Voyager filed a petition for Chapter 11 bankruptcy. With over three million customers, Voyager’s bankruptcy has had rippling effects throughout the cryptocurrency industry. The Law Offices of Andrew Dressel LLC has received numerous inquiries from affected customers, as well as others within the industry, about what could happen going forward and what Voyager customers could do to protect themselves. This blog is designed to answer some of the most common questions.

What is/was Voyager?

Voyager is a family of companies providing financial services in the cryptocurrency industry. Specifically, Voyager provided three main services: (1) it was a broker, allowing buyers and sellers of various crypto-tokens to match with each other; (2) it provided deposit services, whereby depositors could store their crypto-assets while earning interest; (3) it provided lending services by which customers could borrow tokens and pay interest. In layman’s terms, Voyager was a “crypto-bank.”

What Went Wrong?

While Voyager has largely been the victim of an overall downturn in the crypto-markets, the real deathblow has come from the fall of the Singapore-based hedge fund Three Arrows Capital. Three Arrows had invested hundreds of millions of dollars in the Luna token, developed by Terraform Labs. Luna was backed by TerraUSD, a “stablecoin” tied to the value of the US dollar.

However, due largely to panic selling during the general crypto downturn, TerraUSD became unpegged from the dollar, leading to a collapse in TerraUSD and a subsequent collapse in Luna. This led to huge losses for Three Arrows and equally huge losses for one of its largest lenders, Voyager.

On June 23, 2022, Voyager first signaled its troubles to customers by lowering its withdrawal limit to $10,000 (it had previously been $25,000). On July 1, 2022, Voyager suspended all trading, deposits, and withdrawals. On July 5, 2022 it filed for Chapter 11.

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a process by which a business can be reorganized in order to be in a position to better pay out its creditors. It does not mean that the company is without assets, it simply signals that the company at issue is in significant financial distress and requires reorganization. The most important effect of the Chapter 11 petition is the automatic stay on collections efforts by creditors.

Are the Customers Creditors?

The present petition lists customers as creditors, but it is unclear precisely how these creditors will be treated under any proposed reorganization. It seems Voyager may be approaching this reorganization by taking the position that it is a broker/dealer operation, in which case customers would have some priority of claim. However, there are other large creditors out there, including Sam Bankman-Fried’s crypto-fund, Alameda Ventures. Those creditors may seek to oppose such a designation in order to receive priority on payment. The potential is there for lengthy litigation over these very unique bankruptcy issues.

What Can a Voyager Customer Do?

Unfortunately, the bankruptcy process can be a lengthy one, and this one appears set to be especially contentious. Bankman-Fried seems to be viewing this as an opportunity to acquire either Voyager or Voyager’s customers. Indeed, Bankman-Fried has sent out, via Twitter and other media, offers to Voyager’s customers about transferring their assets to FTX, Bankman-Fried’s rival platform. The Law Offices of Andrew Dressel LLC has no view on that offer, including whether it is a valid offer under United States bankruptcy law.

While we believe it is unlikely to matter much in the context of bankruptcy law, especially now that a bankruptcy petition has been filed, The Law Offices of Andrew Dressel LLC does believe it is a prudent move for customers to continue to contact Voyager’s customer relations team in order to express any interest in withdrawing funds or moving them to another platform, if a customer has such interest. Again, given the ongoing bankruptcy process, it is not our view that these requests are likely to result in any action on Voyager’s part. However, our firm does not see the harm that could come in providing such a notice if it reflects a customer’s actual interest.

If you wish to discuss the Voyager situation further, please visit our website www.d-mlaw.com and complete an online contact form or call us at (848) 202-9323. The above is not intended to constitute legal advice and should not be relied upon as such.

It’s not often that a defendant will label a $100 million dollar judgment against him as a “victory,” but it’s a surprising result of current cryptocurrency courtroom disputes. It was precisely the label Craig Wright attached to a jury’s award earlier this month in the action filed against him by Ira Kleiman, the brother of Wright’s business partner David Kleiman.

Anonymous Bitcoin Creator Unmasked?

Why would a $100 million dollar award be considered a victory? Because the plaintiff here was seeking an award of half of 1.1 million Bitcoin (BTC), a potentially staggering sum, worth well over $50 billion. But just as interesting is the theory behind the recovery. Wright has long claimed to be Satoshi Nakamoto, the still anonymous creator of Bitcoin, and Nakamoto, or some other very early Bitcoin miner, has a stash of 1.1 million BTC, created at the initial stages of Bitcoin mining, and untouched since. Wright’s claims have long been doubted, and Wright has not produced any firm evidence of his claim, but interestingly both parties took the position that Wright is Nakamoto in presenting their cases. Whether Wright is Nakamoto, a claim for which Wright has never put forth any evidence, was not actually an issue before the jury.

Plaintiff’s Attorneys Fail to Establish Early Partnership

So why isn’t Mr. Kleiman coming home with half of 1.1 million Bitcoin? Putting aside the issue of whether Wright is Nakamoto, Plaintiff still had to establish that Wright and David Kleiman had a partnership related to the creation of Bitcoin or the initial stages of Bitcoin mining. Based on the jury’s verdict, it appears that Plaintiff’s attorneys failed to do so. What they did establish, however, was that there was a joint venture, W&K Information Defense Research LLC, which was involved in the creation of software that helped make blockchain and cryptocurrency technologies possible. The fruits of those efforts entitled Plaintiff to $100 million.

Trial Just the Start of This Story

However, Plaintiff has another problem waiting in the wings. There are other members of W&K Information Defense Research LLC, including Wright’s ex-wife and his current wife, who dispute Kleiman’s ownership interests in that enterprise and his right to bring suit on that enterprise’s behalf. Depending on how those disputes play out, Kleiman’s recovery could be reduced even further. Those disputes are currently playing out in Palm Beach County court.

And then there is the question of how Wright will pay the $100 million verdict. Will it involve liquidation of BTC? And will it involve litigation of part of the 1.1 million BTC at issue in this matter? One can only guess what effect the liquidation of about 2,000 of those original BTC would have on crypto markets. As is usually the case after trial, the story is far from over.

The attorneys at The Law Offices of Andrew Dressel LLC are experienced litigators in the cryptocurrency and blockchain spaces. If you would like to contact one of our attorneys, please reach out via email at contact@d-mlaw.com, call at 848.202.9323, or visit our website www.d-mlaw.com.

Disclaimer: Please note that any legal question requires consideration of individual facts, and this article is not intended as legal advice to any individual or business and should not be relied upon as such.

The story of the SQUID crypto token is a perfect illustration of the opportunities cryptocurrency permits for scammers and the dangers it poses for investors.

The SQUID token was a game token, ostensibly used to play games within the internet environment made by the token’s creators. Like many game tokens, it had a play-to-earn system, but primarily investors were buying from other speculators, including the token’s creators. Tied to a pop culture phenomenon, the token quickly attracted buzz and its rise was truly meteoric. At its height, SQUID was trading at about $2,800. And then within ten minutes it was worth $0.

What Happened—Heard of a Rug Pull?

So, what happened? It was something called a “rug pull.” The creators of the coin sold off a large amount quickly, leaving no liquidity left in the exchange. Essentially this is a pump and dump for crypto and it is something that happens with some frequency in pop culture-based tokens. Indeed, the SQUID token story is a virtual beat-for-beat repeat of the MANDO (as in Mandalorian) token earlier this year. Again, there was a token tied to a hot IP property, again, there was hype and again, there were investors left holding the bag after the price plummeted—the classic “rug pull.”

Red flags were there for investors. The white paper and the website for the token were riddled with typos, which is a good indicator that this was something hastily put together to capitalize on a trendy topic. The token’s official social media accounts were also designed to prevent token holders from communicating their concerns. Moreover, the token system was designed to prevent non-insiders from selling. The SQUID token had to be converted to another token before it could be sold. This meant outsider funds were essentially locked up while insiders could sell off.

The SEC and its Role in Preventing Crypto Currency Scams

Scams such as these beg the question of when the SEC is going to step in and begin aggressively enforcing securities laws in the crypto space. These projects have gone well beyond the decentralized monetary future imagined by Bitcoin’s early adopters. New tokens are largely centralized plans tied to some sort of platform that is centrally managed, with gaming tokens being among the most popular versions of these centralized tokens. However, many purchasers are buying these tokens with an eye, not towards gaming, but towards investing.

Gaming is a perfectly legitimate use for blockchain-based crypto currency tokens. Projects like Zed Run and Decentraland are making a compelling case for in-universe tokens. But gaming tokens also have become a ripe environment for scammers and, unless the SEC or some other governmental entity is willing to exercise oversight, they will only become increasingly common.

The attorneys at The Law Offices of Andrew Dressel LLC are ready to assist people who lost money in crypto-based frauds or companies facing accusations of fraud. If you would like to contact one of our attorneys, please contact us via email at contact@d-mlaw.com, call at 848.202.9323, or visit our website www.d-mlaw.com.

Disclaimer: Please note that any legal question requires consideration of individual facts, and this article is not intended as legal advice to any individual or business and should not be relied upon as such.

Last month accusations emerged that an executive at OpenSea, a leading Non-Fungible Tokens (NFT) sales platform, was possibly front-running sales by buying drops before they were listed on OpenSea’s main page and then selling them after they had been publicized by OpenSea. Such use of insider information, if true, would seem to be a classic violation of securities laws prohibiting insider trading. Or rather it would be if there were any clarity regarding whether NFTs are securities at all. Let’s take a closer look at NFTs, securities fraud, and insider trading.

What is a Security?

The SEC was created to regulate the sale of “investment contracts,” and the question arose quite quickly as to what constituted an “investment contract,” or a “security.” The Supreme Court case that delivered the first definitive answer on this was SEC v. W. J. Howey. That matter involved the sale of contracts that would provide the purchaser with a share of the proceeds in the profits of Florida orange groves. The Supreme Court held that these contracts were securities and announced a three-part test regarding what would be considered a “security.” A security is (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit to be derived from the effort of others. In other words, the orange trees themselves were not securities, but investment contracts that purported to provide investors with a share of the profits from the orange growers’ activities were.

Are NFTs Securities?

How does this translate to NFTs? On the one hand, NFTs are tokens and so far, the SEC has not taken the view that tokens by themselves, are securities. But lately, the SEC is taking a more nuanced view, asking what the token really represents. The most prominent example is the action the SEC is taking with regards to Ripple. The SEC has taken the view that Ripple’s efforts to promote its token and manage its availability make it akin to security. This is in opposition to tokens like Bitcoin or Ethereum that lack central promotion or management.

It is my belief that the SEC will take the view that at least some NFTs are securities. Take one of the most notable NFT issues of the year: Bored Ape Yacht Club. While purchasers of BAYCNFTs are just purchasing individual tokens, there is a central organization managing the availability of BAYC, its various spinoffs, the membership benefits, and their overall market value. I believe there is a good chance the SEC will take the view that BAYC Apes function in much the same way as Ripple tokens, even though each individual Ape has its own market. This likelihood only increases if market makers like OpenSea misbehave.

What is Insider Trading?

Insider trading is a term that most people in the investment community have a passing familiarity with, but what does it mean, legally speaking? The body of case law surrounding insider trading is complex, but a good shorthand would be the misuse of confidential information for one’s own personal gain. The case that comes to my mind when reading about the OpenSea situation is U.S. v. Carpenter, a Supreme Court case from 1986. In that matter, the Court upheld mail and wire fraud convictions for a defendant who had been tipped by a fellow Wall Street Journal writer regarding columns that would appear in the Journal. This seems akin to trading in NFTs in advance of their promotion on OpenSea to the front page of the Wall Street Journal. This is, without doubt, a case that bears monitoring.

Summing it All Up

The NFT industry is ever-changing, as is the government’s regulation of the industry. If you are operating within the industry and are seeking legal advice or have invested in NFTs and believe you have been defrauded, please contact us for a free consultation at 848.202.9323 or email us at andrew@dressellaw.com. Please note that any legal question requires consideration of individual facts and this article is not intended as legal advice to any particular individual or business, and should not be relied upon as such.

Every year FINRA issues a new regulatory notice regarding the reporting of activities involving digital assets and every year we see FINRA-regulated entities run afoul of those reporting requirements. Why? Because the FINRA reporting requirements are much broader than most people within the brokerage and exchange community realize and much broader than is practically necessary. However, all FINRA-regulated entities and persons should be aware of these requirements.

Who is Covered by the FINRA Reporting Requirements?

The reporting requirements request that member firms inform their risk-monitoring analyst if the firm, associated persons, or affiliates are engaged in activities involving digital assets, including cryptocurrencies, virtual coins, tokens, and presumably the now popular asset class of non-fungible tokens (NFTs).

While it is certainly understandable that a risk-monitoring analyst should be informed of any risky bets a FINRA-regulated firm may be placed in digital assets, the trickier part for FINRA-regulated entities is that the reporting requirements also extend to the digital holdings of associated persons. In other words, under the terms of the Regulatory Notice, firms should be reporting the digital assets of all their FINRA-licensed employees. This is an incredibly onerous imposition on firms, requiring them to keep track of employees’ investment choices. But as of now, that is the state of the law.

What activities need to be reported?

Regulatory Notice 21-25, the current operative FINRA notice, requires firms to report:

• Purchasing or selling of digital assets
• Purchasing or selling pooled funds that are invested in digital assets
• Creating or providing management or advisory services for pooled funds invested in digital assets
• Purchasing derivatives tied to digital assets
• Participating in initial or secondary offerings of digital assets
• Accepting cryptocurrencies from customers
• Mining cryptocurrencies
• Providing clearance and settlement service for cryptocurrencies
• Using blockchain or other distributed ledger technologies (DLT) for recording cryptocurrency transactions

A Vast Expansion of FINRA Reporting Requirements

This is a wide-ranging set of transactions for firms to report and represents a vast expansion of FINRA reporting requirements. While FINRA-associated persons have long been required to report internally their accounts at institutions that engage in securities transactions, this Regulatory Notice requires reporting a whole host of transactions directly to FINRA including activities like cryptocurrency mining, which appear wholly unrelated to FINRA’s regulatory mission.

Nonetheless, Regulatory Notice 21-25, like the notices that have preceded it, says what it says, and firms should comply. Firms, therefore, need proactive procedures for collecting the required information from their FINRA-associated employees.

The attorneys at The Law Offices of Andrew Dressel LLC are ready to assist FINRA-regulated firms with these new reporting requirements. If you would like to contact one of our attorneys, please contact us via email at contact@d-mlaw.com, call at 848.202.9323, or visit our website www.d-mlaw.com.

Please note that any legal question requires consideration of individual facts, and this article is not intended as legal advice to any individual or business and should not be relied upon as such.

The Biden administration has been seeking changes to tax-reporting requirements for cryptocurrency since its early days. This is part of a package of changes to tax-reporting requirements the Biden administration is seeking as a means of cracking down on supposed misreporting of business income and general tax non-compliance.

A New Reporting Regime

Generally, the Biden administration has proposed creating a “comprehensive financial account information reporting regime.” This regime would include annual reports from financial institutions which would include gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.

This proposed tax-reporting requirement would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts, with the exception of accounts below a gross flow threshold of $600 or a fair market value of $600. Additionally, payment settlement entities would collect Taxpayer Identification Numbers and file a revised Form 1099-K reporting not only gross receipts, but also gross purchases, physical cash, as well as payments to and from foreign accounts, and transfer inflows and outflows.

The Impact on Asset Exchanges and Custodians

Importantly, cryptocurrency asset exchanges and custodians would be subject to these proposed reporting requirements. There would also be reporting requirements that would apply in cases in which taxpayers buy crypto-assets from one broker and then transfer the assets to another broker. Moreover, businesses that receive crypto-assets in transactions with a fair market value of more than $10,000 would have to report such transactions. These proposed changes would take effect on January 1, 2023.

Provisions to Watch

These proposed changes have yet to become law, but a couple of them feature prominently in the new bipartisan infrastructure legislation before Congress. There are two key provisions that those in the crypto-industry should be aware of.

First, it appears that the proposed reporting requirements for crypto-transactions with a fair market value of more than $10,000 will become law. This requirement appears to have bipartisan support and has not received much push back, even from those within the crypto-community.

Second, the more important—and more controversial—change would be a clarification of the definition of the term “broker” for the purposes of determining who is required to file a 1099 form. The newly proposed definition is “any person who [for consideration] is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” These “brokers” would be required to provide information such as names, addresses, and gross proceeds of transactions, much as equities brokers are required to do.

The Impact on Smaller Miners or Network Validators

While such a requirement may not seem onerous to a large, centralized brokerage operation such as Coinbase, there are numerous other decentralized exchanges that do not collect this type of information. Indeed, it has been the concept of decentralization that has been one of the impetuses for crypto-currency development in the first place. The proposed legislation is also not clear on whether businesses such as miners or network validators would be subject to the reporting requirements. While there have been repeated assurances from senators that such businesses are not the intended targets of reporting requirements, ultimately the rules implementing these requirements will be developed by the Department of the Treasury, a department that has an obvious interest in collecting as much useful information as possible for the purpose of collecting taxes.

To Sum it Up: Reporting is Coming

Legislation on these issues remains in flux, and no doubt further edits on these requirements are on the way. But the message from Washington is clear: reporting is coming and businesses operating in the crypto-space should be prepared for these tax-reporting requirements for cryptocurrency.

The Law Offices of Andrew Dressel LLC is boutique law firm with experience in the crypto-space. If you are starting out in the crypto-business, or face litigation related to blockchain-based assets, please contact us at contact@d-mlaw.com or call at 848-202-9323. The above article is not intended to be used as legal advice and should not be considered or relied upon as such.

As New York Times columnist Paul Krugman noted in a recent column, blockchain is now a bit long-in-the-tooth as far as internet technologies go. Bitcoin was launched in 2009, and over the past decade-plus, countless alt-coins have hit the market. However, as tokens have become more mainstream, as well as an increased tool for ne’er-do-wells, cries to regulate the crypto space have grown substantially. Not only are we seeing this nationally, through such events as the SEC’s suit against the creators of Ripple, we are seeing this internationally as well, as the Chinese government has cracked down on the crypto-mining industry in that country. While the international regulation is certainly interesting, and well worth watching for both investors and crypto-industry professionals, now is a good time to take stock of what the regulatory environment has been in the United States for the past decade and where it may be heading.

Crypto Regulation to Date

The big question on everyone in the crypto industry’s minds is whether the SEC will begin to regulate crypto. Billions of dollars worth of coins are being traded on a daily basis, and it’s quite rare for trading activity of that volume to escape the federal government’s attention.  However, there is one big obstacle to that regulation, and that obstacle has to do with oranges.

The SEC was created to regulate the sale of “investment contracts,” and the question arose quite quickly as to what constituted an ‘investment contract,” or a “security.” The Supreme Court case that delivered the first definitive answer on this was SEC v. W.J. Howey. That matter involved the sale of contracts that would provide the purchaser with a share of the proceeds in the profits of orange groves in Florida. The Supreme Court held that these contracts were securities and announced a three-part test regarding what would be considered a “security.” Security is (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit to be derived from the effort of others. In other words, the orange trees themselves were not securities, but investment contracts that purported to provide investors with a share of the profits from the orange growers’ activities were.

Returning to the realm of crypto, the tokens themselves would appear to fall outside the ambit of the Howey test. If I purchase a token, it is not an investment in a common enterprise with the expectation of profit to be derived from the effort of others. It is more akin to buying the orange tree itself than shares in the orange juice company.

But the crypto business has developed well beyond the simple buying selling of tokens. Investors now have all sorts of ways to make (and lose money) in the crypto space, some of which certainly fall within the definition of security. For example, crypto-mining companies and crypto-trading firms may offer shares in their business to investors; those would almost certainly be securities. If you are starting a crypto business, you need to ask yourself, are you selling the orange trees or the orange juice company?

The SEC’s Approach

Historically, the SEC has taken the approach to date has been that tokens are not securities, just as the orange groves in Howey were not. However, recently the SEC has begun to turn a more critical eye to token issuers. The most significant recent development is the SEC’s action filed last year against Ripple Labs Inc., which seeks to charge that company and its executives with the unlicensed sale of securities. Why the change in approach? It seems the core issue is that the token sales were being used to finance company operations. In other words, the token was functioning in a way more akin to security, asking purchasers to invest money in Ripple with the increase in the value of the token to come from the efforts of Ripple Labs. The SEC has argued that given this structure, Ripple Labs was required to provide investors with the disclosures that ordinarily accompany a public securities offering, something the SEC alleges that Ripple Labs failed to do. The outcome of this case and the new SEC rulemaking on token issuances merit further monitoring.

The crypto industry is ever-changing, as is the government’s regulation of the industry. If you are operating within the industry and are seeking legal advice please contact us for a free consultation at 848.202.9323 or email us at andrew@dressellaw.com. Please note that any legal question requires consideration of individual facts and this article is not intended as legal advice to any particular individual or business and should not be relied upon as such.