Launchy Regulatory Roundup #10 - SEC Sues Cumberland DRW

FTX Reorg Plan Approved | $19B Settled

Marco Manoppo & Muhammad Reynaldi Ariananda Arkiang
October 13, 2024

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Good Morning.

Welcome to our tenth edition of the regulatory roundup. If you know anybody who would benefit from this content, please help us spread the word!

This week, the SEC has intensified its scrutiny, filing lawsuits against major players like Cumberland DRW for unregistered transactions and furthering its enforcement efforts across the industry.

Meanwhile, record settlements in 2024 have reached over $19B, underscoring the scale of regulatory repercussions faced by crypto companies.

In Today's Edition:

Headline: SEC Sues Cumberland DRW in Unregistered Crypto Deals 🚨
Global Legal Roundup: Legal Battles & Tightened Crypto Regulations ⚔️
Case Study: Record $19B Settled Between Crypto Firms & US Regulators 💸

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HEADLINE

SEC Sues Cumberland DRW

Cumberland

State of play: The US Securities and Exchange Commission (SEC) filed a lawsuit against Cumberland DRW on Oct. 10, accusing the company of operating as an unregistered crypto dealer.

Since 2018, Cumberland has allegedly conducted over $2B in unregistered crypto transactions.
The SEC claims Cumberland traded on both its own accounts and third-party exchanges.
The SEC claims also claim Cumberland is handling tokens the SEC previously identified as securities, including MATIC, SOL, ATOM, ALGO, and FIL.
Cumberland responded, stating it had tried to register as a dealer-broker in 2019 but only succeeded for Bitcoin and Ether.
Despite the SEC's action, Cumberland expressed its willingness to defend its business operations.

What’s Next: Cumberland DRW will likely enter a legal battle with the SEC, defending its position on crypto assets and their classification.

Why it Matters: This lawsuit underscores the SEC’s ongoing enforcement efforts in the crypto space, particularly its efforts to classify digital assets as securities.

Our Take: The company’s decision not to alter its operations suggests it is prepared for a lengthy court process.

GLOBAL LEGAL ROUNDUP

🇺🇲 Mango Labs Sues DAO Members Over $10M Embezzlement Scheme

Mango Labs has filed a lawsuit against its DAO members, John Kramer and Maximilian Schneider, accusing them of embezzling $10M from the Mango DAO.

The suit alleges that Kramer and Schneider secretly purchased MNGO tokens from FTX and tricked the DAO into buying them at inflated prices.
Mango Labs is seeking damages and the return of the funds.
This follows the recent conviction of Avraham Eisenberg for exploiting Mango DAO, along with investigations by the SEC and CFTC into Mango Markets.

🇺🇲 FTX Reorganization Plan Approved by Judge

A US bankruptcy judge approved FTX's reorganization plan on October 7, enabling the defunct crypto exchange to liquidate its assets and begin reimbursing users.

The plan aims to repay 98% of users around 119% of their claimed account value.
While hailed as a major milestone by FTX's restructuring officer, some critics argue the plan doesn't account for token gains since FTX's bankruptcy filing.
It's still unclear when reimbursements will begin.

🇺🇲 Four Crypto Market Makers Charged with Manipulation and Fraud

Federal prosecutors charged four crypto market makers—Gotbit, CLS Global, MyTrade, and ZM Quant—along with multiple individuals for manipulating crypto markets.

These firms allegedly engaged in wash trading to inflate token trading volumes and sold manipulated coins at artificially high prices.
The SEC also brought charges against several of the firms' employees and crypto promoters.
The DOJ has recovered $25M in fraudulent proceeds, with more expected to be returned to investors.

🇺🇲 Bitnomial and Crypto.com Sue SEC

Crypto exchange Bitnomial has sued the SEC, arguing that XRP is already regulated as a commodity by the CFTC, and the SEC’s claim that it’s a security creates redundant regulatory burdens.

Bitnomial seeks a declaratory judgment to block the SEC from asserting control over XRP futures contracts.

Separately, Crypto.com has also filed a lawsuit against the SEC, accusing the agency of overstepping its authority by regulating crypto assets as securities.

The exchange argues that the SEC’s enforcement actions are unjust and stifle the future of crypto in the US.

🇺🇲 SEC Delays Decision on Spot Ethereum ETF Options Until December

The SEC has postponed its decision on allowing Cboe Exchange to list options tied to spot Ethereum ETFs, delaying the ruling from October 19 to December 3, 2024.

This follows a similar delay in September regarding a request from Nasdaq to list options on BlackRock's iShares Ethereum Trust ETF.
The SEC previously approved options for Bitcoin ETFs in September, but Ethereum options remain under review.
This move highlights the slow regulatory progress toward offering spot crypto options in the U.S. financial markets.

🇺🇲 Jarretts Sue IRS Again Over Tax Treatment of Staking Rewards

Josh and Jessica Jarrett have filed a new lawsuit against the IRS in a Tennessee federal court, challenging the agency's tax treatment of tokens earned through staking on the Tezos network.

The Jarretts argue that their tokens should be classified as property, taxable only upon sale, rather than being taxed as income upon creation.
They seek a refund of $12,179 for taxes paid on their staking rewards in 2020. The case follows a previous lawsuit that was dismissed in 2022 after the IRS offered a $4,000 refund.
The Jarretts are supported by the think tank Coin Center.

🇺🇲 Fairdesk to Shut Down Amid Regulatory Issues

Fairdesk, a Singapore-based cryptocurrency exchange, announced it will cease operations on November 30, 2024, due to regulatory concerns.

The exchange launched in 2021 and served traders in the US and Canada.
Customers have until October 17 to close their accounts, after which only withdrawals will be available until the official shutdown date.
Despite previous favorable reviews for its security and fees, the exchange faced increasing compliance challenges that led to its closure.

🇰🇷 South Korea to Regulate Stablecoins & Investigate Upbit's Monopoly Concerns

South Korea's government plans to apply foreign exchange rules to cross-border transactions involving dollar-pegged stablecoins.

The Ministry of Economy and Finance is reviewing measures to ensure the stability of stablecoin transactions.
The Ministry will also consult with international regulators, including Japan and the EU.
The Financial Services Commission (FSC) aims to establish a legal framework for won-pegged tokens before addressing foreign currency stablecoins.

The Korean Financial Services Commission is also investigating Upbit, one of South Korea's largest crypto exchanges, over potential anti-monopoly breaches related to its relationship with K-Bank.

Concerns were raised during a parliamentary audit regarding Upbit’s significant contribution to K-Bank's deposits, which could pose a bank-run risk.
Upbit reportedly holds over 80% market share in the country.
The investigation follows ongoing scrutiny of its financial ties as K-Bank prepares for a major IPO.

🇦🇪 UAE Exempts Crypto Transactions from VAT and Takes Action Against Unlicensed Entities

The United Arab Emirates has announced that all crypto transactions will be exempt from value-added tax (VAT), aligning the virtual assets sector with traditional financial services.

This change takes effect on November 15, 2024.
The change also applies retrospectively to transactions dating back to January 1, 2018.
The exemption clarifies that a 5% VAT does not apply to digital asset exchanges and transfers, further legitimizing the crypto industry in the UAE.

Meanwhile, Dubai's Virtual Assets Regulatory Authority (VARA) has issued fines and cease-and-desist orders to seven unidentified crypto entities for operating without the necessary licenses and violating marketing regulations.

The fines range from 50,000 to 100,000 dirhams ($13,600 to $27,200).

🌐 WEF Advocates Regulatory Sandboxes for DeFi Innovation

In a recent report assessing nine major economies, including the US, US, Japan, and the UAE, the WEF emphasized the need for tailored regulations that foster DeFi development while managing associated risks.

The report highlighted that only 9% of jurisdictions have applied existing financial regulations to digital assets, with countries like the UK, Hong Kong, and Singapore leading in developing tailored frameworks.
The WEF advocates for regulatory sandboxes to facilitate controlled experimentation in the DeFi space, encouraging collaboration between regulators and DeFi platforms to ensure transparency and risk mitigation.
The WEF concluded that regulatory sandboxes could help build compliant ecosystems, promoting innovation while protecting consumers and maintaining market integrity.

More Regulatory Updates:

Mark Uyeda slams SEC’s crypto policy as a ‘disaster.’
Gary Gensler says crypto is not ‘gonna be a currency.’
Ripple co-founder donates $1M in XRP to Harris campaign.
Tom Emmer says overturned Chevron deference won’t impact crypto.
Sen. Hagerty introduces Clarity for Payment Stablecoins Act of 2024.
Thai SEC is proposing to allow crypto products in mutual, private funds.

CASE STUDY

Record $19B Settled Between Crypto Firms & US Regulators in 2024

Coingecko

State of play: In 2024, US regulators have received $19B+ in settlements from crypto companies, accounting for nearly two-thirds of all settlements since 2019.

A significant portion of this amount stems from FTX and its associated trading firm, Alameda, which alone contributed $12.7B in a settlement with the CFTC.
Overall, 2024 has seen an increase of 78% in settlement amounts compared to 2023.
The settlement amount in 2024 records an astounding 8,327% increase from 2022.
Major settlements this year include Terraform Labs' $4.47B settlement with the SEC related to the collapse of TerraUSD and Genesis’ $2B settlement with the Office of the Attorney General.
Since 2019, regulators have amassed approximately $31.92B in settlements from 25 crypto companies.

Our Take: With ongoing regulatory scrutiny, 2024 could surpass last year's total settlement values, as US regulators continue to intensify their enforcement actions in the crypto sector.

Take a peek at our referral reward at the bottom of this issue. Share this newsletter and receive our comprehensive database of crypto regulations around the world👇

NOTEWORTHY READS & MEME

Coincenter’s analysis on Tornado dev’s motion.
Cahill’s memo on broker-fealer crypto asset activities and best practices.
Amanda Tuminelli & Jake Cherivinsky’s read on SEC and securities debate.

Oh no, he's added a third button.
— Noah Spaulding (@noahspaulding)
8:08 PM • Oct 12, 2024

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