Michael Bacina, Steven Pettigrove, Tim Masters, Jake Huang,
Luke Higgins, Luke Misthos & Kelly Kim of the Piper Alderman
Blockchain Group bring you the latest legal, regulatory and project
updates in Blockchain and Digital Law.
SBF Sentenced in FTX Failure Fraud Fallout
Today Sam Bankman-Fried (commonly known as
SBF), former CEO and founder of the collapsed
cryptocurrency exchange FTX, was sentenced to 25 years in prison in
the US following his conviction last year on 7 counts of fraud and
conspiracy.
Judge Kaplan said during sentencing the:
He knew it was wrong. He knew it was criminal.
SBF gave an apology saying:
A lot of people feel really let down, and they were very let
down … I’m sorry about that. I’m sorry about what
happened at every stage
The 31-year-old former billionaire was convicted last year on
two counts of fraud and five counts of conspiracy related to the
failure of FTX in November 2022, after an USD$8 billion hole was
uncovered in its balance sheet. With his lieutenants, Caroline
Ellison, Gary Want, and Nishad Singh, who were all his friends (and
in Ms Ellison’s case a sometimes romantic partner) testifying
against him, and the evidence drawing damning instances of
falsehoods presented to customers, the outcome of his conviction
was not at all unexpected.
The sentence of 25 years in prison is at the lower end of
betting platform Polymarket which showed popular opinion of
convicted 20 to 40 years.
This sentence arrives about 17 months after FTX
filed for bankruptcy, leading to a rapid corporate collapse
that shocked financial markets and erased Bankman-Fried’s
estimated USD$26 billion personal fortune.
The collapse and subsequent fraud case has been swift:
Before the sentencing verdict was delivered, a presentence
probation officer complied a report recommending a 100-year
sentence. The Department of Justice urged a 40 to 50 year sentence, and SBF’s lawyers suggested 63 to 78 months. SBF’s legal
team argued there was a lack of actual losses by the victims based
on FTX’s bankruptcy estate estimation that creditors will
likely be made whole and repaid as much as 120-140 per cent of what
their assets were worth on the day of FTX’s bankruptcy.
John Ray strongly criticised the argument by SBF’s legal
team last week, saying that despite the exchange returning
“substantial value to creditors” SBF:
continues to live a life of delusion.
Michael Lewis’ book about FTX, Going Infinite, however criticised Mr
Ray’s actions after being appointed, which he claimed increased
fees dramatically.
A dozen of creditors submitted
letters saying they suffered hardships because they
couldn’t access their funds for the last year and a half.
Once considered a prominent figure in the crypto world,
SBF’s fall from grace now places him among the ranks of
individuals convicted of major U.S. financial crimes, including Bernie
Madoff, Jordan Belfort, and Ivan Boesky. An appeal over the
verdict and the sentencing is planned.
Singapore rolls out new crypto rules
Singapore has finalised amendments to the Payment Services Act
(PSA) and its subsidiary legislation this week,
expanding the scope of regulated activities and introducing more
stringent obligations on digital payment token
(DPT) service providers.
The changes take effect in stages from today, 4 April
2024, and will bring the following activities within the scope
of the PSA:
- (i) Provision of custodial services for DPTs;
- (ii) Facilitation of the transmission of DPTs between accounts
and facilitation of the exchange of DPTs, even where the service
provider does not come into possession of the moneys or DPTs;
and - (iii) Facilitation of cross-border money transfer between
different countries, even where moneys are not accepted or received
in Singapore.
Further, under the amended Act, the Monetary Authority of
Singapore (MAS) is empowered to impose
obligations concerning anti-money laundering and counter terrorism
financing (AML/CTF), user protection and financial stability on DPT
service providers. The provisions on safeguarding consumer
assets are expected to take effect six months after 4 April
2024.
DPT service providers and crypto firms providing any of the
regulated activities are required under transitional arrangements
to:
- (i) notify the MAS within 30 days;
- (ii) submit a licence application within 6 months from 4 April
2024; and - (iii) submit an attestation report of the entity’s business
activities and AML/CTF compliance, within 9 months from 4 April
2024
The regulator warned:
Entities that do not fulfil the requirements above are required
to cease the activities
In addition, the MAS recently published guidelines on consumer
protection requirements for firms engaged in DPT services, with
a view to promoting ‘sound and robust practices’ for DPT
service providers. The guidelines will take effect on 4 October
2024 and address items including segregation of customer assets,
risk management controls, disclosure requirements to customers
among other consumer protection measures.
Angela Ang, a former MAS regulator and policy
advisor at TRM Labs, stated:
This expansion has been in the works since 2021 and brings much
anticipated regulatory clarity to crypto custody players in
Singapore.
The latest changes to the Payment Services Act are the culmination of several years of work to expand
the scope of Singapore’s regulatory regime with respect to
crypto related services, and incorporate greater consumer
protections in relation to custody and marketing of those services.
The legislation itself will no doubt be the subject of careful
scrutiny as providers who offer services in Singapore will need to
carefully assess the scope of the regulation to determine if they
will require licensing in order to continue carrying on business in
the city state.
The latest changes to the PSA position Singapore alongside Hong
Kong and Japan in APAC in seeking to establish comprehensive and
fit for purpose regulatory regimes for crypto-assets.
Coinbase to seek SEC discovery
In the latest development in the US Securities and Exchange
Commission (SEC) v Coinbase, a US federal
judge has allowed the SEC’s enforcement action against Coinbase (COIN.O) to move forward, but dismissed
allegations by the US regulator relating to Coinbase’s self
custodial wallet product, Coinbase Wallet.
The SEC sued Coinbase in June 2023, alleging Coinbase
breached US securities laws in
operating its crypto asset trading platform as an unregistered
national securities exchange, broker, and clearing agency.
Coinbase filed a motion to dismiss the lawsuit in August 2023,
on the basis that none of the 12 tokens cited in the SEC’s
complaint are unregistered securities. Coinbase asserted during oral arguments in January that the four
Coinbase services cited in the SEC’s complaint—general
token sales, Coinbase Prime for institutional customers, the
Coinbase Wallet, and the exchange’s staking service—were
all outside the SEC’s purview.
In determining dueling summary judgment applications, US District Judge Katherine Polk Failla sided with
Coinbase’s arguments in relation to its wallet services,
while permitting the SEC allegations in respect of the remaining
products to move forward.
Coinbase Chief Legal Officer Paul Grewal commented on X that the
result was not unexpected, as
Early motions like ours against a government agency are almost
always denied
Coinbase intends to use the court’s discovery process to
gain insight into the SEC’s evolving regulatory approach on
crypto:
Grewal also encouraged Congress to build on momentum from last
year to advance comprehensive digital assets legislation, which he
said is critical for innovation to remain in the US.
Coinbase has long been seeking regulatory clarity from the SEC,
even before this dispute. Coinbase’s efforts include filing a petition requesting the SEC to exercise its rule making
powers to establish a clear regulatory regime for crypto-assets,
and later suing the SEC for failure to respond to the petition, which
led to the SEC being ordered by court to explain its failure to respond.
That dispute looks set to return to the Courts with Coinbase
challenging the SEC’s failure to exercise its rule making
powers in respect of cryptocurrencies as “arbitrary and
capricious”.
While the SEC appears to have scored an early victory in its
litigation against Coinbase, the proceedings remain at a
preliminary stage and, as we have seen in the Ripple litigation, there
are likely to be several more twists and turns as Coinbase battles
the SEC’s claims on its own behalf and, in many ways, on behalf
of the industry as a whole.
Bitcoin blunder: Craig Wright’s assets frozen by UK
judge
The crypto caper for Craig Wright continues as UK judge Justice
Mellor recently ordered a worldwide freeze over
Wright’s assets. The order was made following an
application by the Crypto Open Patent Alliance
(COPA), after their recent victory over Wright where Justice Mellor
ruled that Wright was not the pseudonomous creater of Bitcoin, Satoshi
Nakamoto.
Central to the Justice Mellor’s concerns was Wright’s
endeavor to transfer assets, amounting to £6 million, to
offshore entities through his RCJBR Holding company shortly after
the judgment in the high-profile case was handed down on 14 March
2024. Justice Mellor found that this manoeuvre was a potential
strategy to circumvent the financial repercussions of Wright’s
legal defeat.
Judge Mellor’s judgment highlights Wright’s past
tendencies of financial non-compliance, emphasising the gravity of
COPA’s claim for legal costs which stands at a substantial
£6.7 million. This history, coupled with the recent asset
transfer, raised red flags regarding the likelihood of dissipation,
prompting the imposition of a global freezing order. In their
submissions, COPA raised several arguments that were persuasive,
including to Wright’s “dishonesty” in light of the
overall history and narrative of the case:
At the general level, COPA submit that Dr Wright has shown
himself prepared to lie and double-down on his lies, on such a
grand scale that his “commercial morality” can only be
assessed as being unacceptably low.
COPA also referred to another of Wright’s legal losses in the 2021 Kleiman litigation where
he was ordered to pay US $142m, and noted that Wright was held
to be in contempt of court in Florida just two days after his loss
in the COPA case:
There [has been] a recent ruling against Dr Wright in the
ongoing Kleiman litigation in Florida. As recently as 15 March
2024, Dr Wright was held to be in contempt of court in Florida, by
reason of his failure to provide asset disclosure previously
ordered by the Florida court.
Justice Mellor ultimately found COPA’s arguments convincing
and ordered a worldwide indefinite freeze over Wright’s assets,
making the following orders:
First, COPA has a very powerful claim to be awarded a very
substantial sum in costs.
Second, I consider there is a very real risk of dissipation.
Third, it is just in all the circumstances to grant a freezing
order [over Wright’s assets].
In the particular circumstances, it is also plain that the order
must extend worldwide.
Many in the blockchain space are keen to see the spectacle of Dr
Wright’s lawsuits come to an end, and the decisions for
contempt and asset freezing may well be the start of the end of
this sorry story.
Binance executive sues Nigeria over illegal detention
Tigran Gambaryan, the Head of Financial Crime Compliance for
Binance and a respected former US Government official, has
commenced legal proceedings against the Nigerian government after
he was detained on a business trip to the country to meet with
local authorities. Mr Gambaryan has lodged a motion with the Federal High Court in
Abuja, alleging a violation of his fundamental human rights and
that the government’s confiscation of his passport runs counter
to Nigeria’s constitutional protections.
Binance, along with other cryptocurrency exchanges, have come under intense scrutiny in Nigeria over
allegations of currency manipulation and tax evasion. Mr Gambaryan
was detained by the Nigerian authorities on a trip to the country
to meet with the Office of the National Security Advisor
(ONSA) and the Economic Financial Crimes
Commission (EFCC). It was understood that Mr
Gambaryan’s trip and subsequent detention arose initially from
the Nigerian government’s requests for information from
Binance, rather than any alleged personal wrongdoing on his
part.
Mr Gambaryan and his colleague Nadeem Anjarwalla, Binance’s
regional manager for Africa, were first detained by Nigerian authorities in
February. It has been reported that Mr Anjarwalla managed to escape custody earlier this week, utilising
his Kenyan passport to depart the country after surrendering his
British travel document. He has reportedly followed Mr
Gambaryan’s lead in filing a similar lawsuit against the
Nigerian government for wrongful detention.
Binance announced it would discontinue all services in
Nigeria on 8 March 2024. It also released a statement in mid-March noting that it
had complied with over 600 information requests from Nigerian law
enforcement agencies. The country’s Federal Inland Revenue
Service (FIRS) has since levied tax evasion
charges against Binance and the senior executives, in an apparent
attempt to justify their ongoing detention.
Mr Gambaryan is a well-known figure in the blockchain industry,
and one of the key protagonists in Andy Greenberg’s book, Tracers in the Dark. As a senior IRS
official, Mr Gambaryan was involved in probes into Silk Road, Russian crypto exchange
BTC-e and the infamous Mt. Gox hack, among many others. Mr
Gambaryan’s detention has gained significant media and public
attention in the United States. A change.org petition has been created by his
wife, petitioning for his release from custody.
Mr Gambaryan’s detention is a stark reminder of the
uncertain and shifting legal landscape for cryptocurrency in many
countries, and the importance of ensuring the safety and security
of personnel when they travel and represent businesses. In this
case, cryptocurrency’s success in serving the needs of
Nigerians battling a volatile currency seems to have attracted
scrutiny and political risk for exchanges like Binance, with
unfortunate consequences for its own staff. The authors hope that
the efforts of the blockchain industry and others will see the
swift release of Mr Gambaryan.
You can join the change.org petition and add your voice here if
you would like to support Mr Gambaryan.
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