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Crypto Exchanges

The plaintiffs allege that they were deceived into buying securities and that Coinbase’s business model is illegal.

Stay up-to-date with the latest legal developments in the world of cryptocurrency. Find out how regulations impact the industry on Coinpaper.com.

Legal

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Coinbase and Its CEO Hit With New Class-Action Lawsuit

The chair of the United States Commodity Futures Trading Commission believes there will very likely be an uptick in enforcement actions from regulators over the next 6 to 24 months.

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SEC Issues Wells Notice to Robinhood Over Securities Violations

The SEC has been delaying decisions on spot Bitcoin options trading applications from major exchanges like the New York Stock Exchange, Nasdaq, and Cboe Global Markets.

Discover the latest news and insights on the world of cryptocurrency with Coinpaper.com. Stay up-to-date on the latest trends and developments in the crypto space.

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SEC Pressured by Lawmakers to Greenlight Spot Bitcoin Options Trading

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Coinbase and its CEO Brian Armstrong are facing a new class-action lawsuit alleging that  people were deceived into buying securities and that the exchange’s business model is illegal. The lawsuit was filed in a California district court and claims that Coinbase's digital asset sales violated state securities laws, with tokens like Solana and Polygon being considered as securities. 

Meanwhile, Alexander Vinnik, co-founder of the BTC-e exchange, pleaded guilty to money laundering conspiracy. Additionally, three former executives of the bankrupt crypto lender Cred were charged with wire fraud and money laundering.

 and its CEO Brian Armstrong. The lawsuit, filed in the United States District Court for the Northern District of California San Francisco Division, alleges that investors were deceived into buying securities and that Coinbase's business model is illegal.

The plaintiffs also claim that Coinbase's digital asset sales violated state securities laws since the company was started. They believe that tokens like 

 (SOL), Polygon (MATIC), Near Protocol (NEAR), Decentraland (MANA), Algorand (ALGO), 

 (UNI), Tezos (XTZ), and Stellar Lumens (XLM) are securities.

According to the lawsuit, Coinbase actually admitted to being a "Securities Broker" in its user agreement and implied that the digital asset securities sold by the exchange qualify as investment contracts or other securities. The plaintiffs pointed out that Coinbase Prime brokerage is functioning like a securities broker.

The plaintiffs want full rescission, statutory damages under state law, and injunctive relief through a jury trial. This is certainly not Coinbase’s first legal rodeo as this lawsuit is very similar to another class-action suit about consumer harm from Coinbase's sale of securities.

 crypto asset sales do not meet securities transaction criteria and questioned the relevance of securities regulations. 

Coinbase is also already involved in a very publicized legal battle with the U.S. Securities and Exchange Commission (

) about the classification of tokens sold on its platform as securities. Coinbase recently filed an interlocutory appeal in response to a judge's decision allowing the 

Despite the legal challenges, Coinbase reported an impressive rebound in the first quarter of 2024, driven by improved market performance and the launch of spot Bitcoin exchange-traded funds. The exchange posted $1.6 billion in total revenue and $1.2 billion in net income for the first quarter.

 is a process integral to understanding security tokens, and involves representing real-world assets or rights digitally. Essentially, anything can be tokenized, like  ownership and registration of a car. For instance, a token could signify ownership of a car by tokenizing its vehicle identification number (VIN) along with the owner's details, recorded on a 

. Security tokens are created through a very similar process, with a company inputting what the token represents and offering it to investors on exchanges or investment platforms. Ownership of these tokens is then recorded on the blockchain, associated with the owner's blockchain address.

The concept of tokenizing ownership isn't entirely novel, as paper stock certificates were previously issued by companies to investors. These certificates represented ownership or other rights and were very similar to digital security tokens, albeit in physical form. However, digital security tokens are stored and created on a blockchain, offering efficiency and transparency in ownership transfer.

While security tokens and cryptocurrencies share similarities, their fundamental difference lies in their intended use. Cryptocurrencies like Bitcoin and 

 are designed for use as decentralized currencies or transactional mediums. In contrast, security tokens mimic traditional investment assets like stocks or bonds and are intended for investment purposes.

Despite this distinction, certain cryptocurrencies, like Bitcoin and Ethereum, have been treated as 

 by investors because of their trading and investment potential, although they were not originally designed for these purposes. It is important to note that while they may function similarly in the market, they do not inherently meet the criteria to be considered securities by regulators like the SEC.

In other legal news, Alexander Vinnik, the co-founder of the 

 conspiracy after an investigation into the exchange's activities from 2011 to 2017.

The United States Department of Justice (DOJ) announced on May 3 that during Vinnik’s time at the exchange, BTC-e 

 more than $9 billion in transactions with a user base exceeding one million globally, including many users in the United States. The platform was allegedly used to launder money stolen through criminal activities like computer hacking, ransomware attacks, and drug trafficking.

According to the DOJ, BTC-e operated without any essential legal compliance measures, which made it very attractive to people who were looking for a way to conceal money transactions from law enforcement. It was also revealed that Vinnik established many shell companies and financial accounts around the world. This allowed him to facilitate the illicit transfer of funds through BTC-e, resulting in criminal losses totaling at least $121 million.

Vinnik has been dealing with legal battles for the past five years because of his alleged role in BTC-e. 

 in Greece in 2017 on money laundering charges, he was later extradited to France in 2020. In France, Vinnik was acquitted of ransomware allegations but convicted of money laundering charges and sentenced to five years in prison. Despite an unsuccessful appeal by his lawyers who claimed he was only an exchange employee with no involvement in illicit activities, Vinnik was extradited to the U.S. in 2022 after serving two years in a French prison.

As a Russian citizen, Vinnik attempted to secure a prisoner swap deal between Russia and the United States, but his attempt ended up being unsuccessful. This case is just one of many that proves that U.S. regulators are scrutinizing crypto exchanges at the moment. Very recently, the former FTX CEO Sam Bankman-Fried was 

Three former executives of the bankrupt crypto lender Cred have been 

 with engaging in wire fraud and money laundering before the firm's collapse in November of 2020. Daniel Schatt, the former CEO, and Joseph Podulka, former chief financial officer, face 13 charges each, while James Alexander, former chief commercial officer, is facing four counts. 

Mark Mosley, an acting special agent in the U.S. Internal Revenue Service, described the alleged scheme as predatory as it ended up defrauding victims of hundreds of millions of dollars in cryptocurrency.

 in 2020 caused some concerns among users about the safety of their funds. Prosecutors allege that the executives misled customers about Cred's lending and investment practices, falsely claiming collateralized or guaranteed lending and hedged 

. Despite the claims, prosecutors hold firm that Cred engaged in lending that was neither collateralized nor guaranteed.

Schatt and Podulka appeared in court on May 2 and are scheduled to enter a plea on May 8, while Alexander's court date has not been set yet.

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The U.S. Securities and Exchange Commission (SEC) has issued a Wells notice to Robinhood, signaling potential enforcement actions against the trading platform because of  alleged securities violations. Despite regulatory uncertainty, innovations continue to emerge in the digital finance sector, like Hermetica's introduction of USDh, a Bitcoin-backed synthetic dollar that is aimed at enhancing liquidity. and yield-generating opportunities in Bitcoin-native decentralized finance (DeFi). The synthetic dollar is scheduled to be released  in June and promises huge yield-generating capabilities of up to 25%. 

The United States Securities and Exchange Commission (SEC) recently 

, a widely-used trading platform. This notice is a formal indication that the SEC plans to possibly enforce action and was issued after an investigation into Robinhood's cryptocurrency listings and custodian services. The investigation pointed towards potential 

, despite Robinhood's attempts to comply with SEC regulations, including attempts to register its crypto services.

After the Wells notice was issued on May 4, Robinhood’s stock price experienced a drop of about 2.5% in pre-market trading, settling at $17.95. 

Responding to the SEC's actions, Dan Gallagher, Robinhood's chief legal, compliance and corporate affairs officer, shared his disappointment with the matter in a 

 on May 6. Gallagher, who is a former SEC commissioner, reiterated Robinhood's view that the cryptocurrencies listed on its platform do not qualify as securities. He also made sure to mention that the company is ready to contest any legal action by the SEC.

This Wells notice from the SEC comes despite the fact that Robinhood has a very selective approach to cryptocurrency offerings, avoiding certain tokens and services like crypto lending and staking, which the SEC had previously classified as securities in actions against other platforms. Gallagher also 

 for cryptocurrencies in the U.S. He compared it to the equities markets before the reforms of 1933. He believes that inconsistent state regulations and the absence of clear federal guidelines is hindering mainstream adoption and fair competition in the crypto market.

As of now, both the SEC and the Commodity Futures Trading Commission have not established definitive regulations 

 and commodities in the context of digital assets, leaving companies like Robinhood in a very tough position with regards to  compliance and operational clarity.

CFTC Chair Predicts More Crypto Enforcement

, the chair of the United States Commodity Futures Trading Commission (CFTC), believes there will be continued regulatory scrutiny on cryptocurrency firms as investor interest in the market remains high. Behnam spoke at the 2024 Global Conference on May 6 where he pointed out the resilience of the crypto market despite it having to deal with major downturns and bankruptcies in 2022. He did, however, share his beliefs that there will very likely be an uptick in enforcement actions over the next 6 to 24 months due to increasing asset values and retail investor engagement.

While Behnam did not directly specify whether the CFTC or the SEC would lead these efforts, he did share his thoughts on the necessity of a regulatory framework to curb potential fraud and manipulation in the absence of transparency and regulatory tools. The need for clear regulation was echoed by U.S. lawmakers, who are considering legislation that would define the 

 when it comes to overseeing digital assets. This legislation is currently awaiting a floor vote in the House of Representatives.

The SEC has been especially active recently. In fact, 2023 saw the highest number of 

 cases since 2013, according to a January report from Cornerstone Research. High-profile cases are also pending against major U.S. crypto firms like 

. The recent Wells notice to Robinhood proves that the SEC does not intend to stop its crypto crackdown any time soon.

The CFTC itself has also ramped up its enforcement actions, with a third of its total crypto-related actions taking place in 2023. These included cases against people like former FTX CEO Sam Bankman-Fried and former Celsius CEO Alex Mashinsky.

Central Banks Must Adapt with Digital Currencies

Despite the crypto industry having a regulatory target on its back at the moment, Joachim Nagel, president of the Bundesbank and a member of the European Central Bank (ECB), believes Central banks have to rethink their business models and swiftly embrace 

 at a panel during the Innovation Summit hosted by the Bank for International Settlements on May 6. Here, he shared some of his concerns about the evolving financial landscape and the decreasing allure of physical money.

Nagel pointed out that twenty years ago he would have never questioned the resilience of the central bank's business model. However, today, he actually sees potential vulnerabilities and believes there is the need for adaptation. He also specifically mentioned distributed ledger technology (DLT) and sees it as a crucial tool that could help central banks in revamping their operations.

Francois Villeroy de Galhau, another ECB member from France, also spoke about the issue at the same conference. Galhau wants to see the inclusion of digital currencies in both wholesale and retail banking sectors. He argued that updating the method of making central bank money available is essential for the 21st century and to ensure that it continues to serve as a stability anchor for the financial system.

The ECB is actively working on a digital euro and completed the investigative phase to finalize its design and technical specifications. The project is expected to be completed by October of 2025.

Hermetica Introduces Bitcoin-Backed Synthetic USD

Meanwhile, Hermetica has introduced USDh, the first Bitcoin-backed synthetic United States dollar that is set to revolutionize Bitcoin-native decentralized finance (

). The synthetic dollar is scheduled to be released in June and promises huge yield-generating capabilities  of up to 25%. 

Jakob Schillinger, the founder and CEO of Hermetica Labs, 

 that USDh is designed to allow Bitcoin enthusiasts to hold and earn yield on U.S. dollars without relying on traditional banking systems or engaging with non-Bitcoin financial products. Schillinger strongly believes that USDh will enhance liquidity and introduce new functionalities in the Bitcoin DeFi sector that will allow people to trade, lend, and transact in a dollar-denominated asset fully backed by Bitcoin.

The launch of USDh comes after the introduction of 

 USDe, which is another synthetic dollar that debuted with a 27.6% yield. This ended up raising some concerns about its long-term viability. USDh could encounter similar concerns, especially considering its high yield in comparison to past stablecoin offerings like TerraUSD, which famously collapsed in May of 2022.

However, Schillinger assures that the high yield offered by USDh is sustainable and is  supported by backtest data from January 2021 to March 2024, which shows an average annual yield of 11.71%. He attributes the robust yield performance to the structural demand for long leverage in the Bitcoin futures market, which peaked during the 2022 bull market at an annual return of 26.11%.

As Bitcoin DeFi continues to expand, driven by innovations like 

, Schillinger is very optimistic about its future. In fact, he predicts that Bitcoin DeFi could equal or surpass Ethereum DeFi in scale within the next five years. Just recently. trading volumes in Bitcoin Ordinals have already 

A synthetic dollar is a digital financial instrument that is designed to mimic the value of the US dollar without direct backing by physical dollar reserves. Instead, it maintains its dollar peg through financial derivatives like futures or algorithmic strategies, particularly in the crypto realm. 

This innovation is primarily used in international trade, investments, and DeFi platforms, allowing entities globally to access dollar liquidity effortlessly without the actual possession of USD. This is especially beneficial in regions where accessing USD is either restricted or challenging.

The utility of synthetic dollars extends beyond simple transactions. They are pivotal when it comes to providing stability and liquidity in diverse financial environments. They are also  crucial in hedging against local currency fluctuations, facilitating seamless international transactions, and boosting the growing digital finance ecosystem by acting as a stable medium of exchange. Their role is increasingly vital in supporting economic activities where traditional financial systems are inefficient or inaccessible.

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U.S. lawmakers are actively pushing the SEC to approve options trading on Bitcoin exchange-traded products (ETPs). Meanwhile, concerns about cryptocurrency's role in national security are also being raised, with Senators Elizabeth Warren and Angus King shedding light on the potential threats from Iranian crypto miners and their connection to government activities. In the realm of privacy, Alan Scott Jr. shared that he has seen a more positive attitude towards crypto privacy from U.S. senators and the FBI than most people assumed. 

Lawmakers Urge SEC to Approve Spot Bitcoin Options Trading

U.S. lawmakers are pushing the Securities and Exchange Commission (

) to greenlight options trading on Bitcoin exchange-traded products (ETPs). Representatives Mike Flood and Wiley Nickel 

, criticizing the unequal treatment of crypto funds compared to traditional ones. They also specifically pointed out the discrepancy between the already trading options for Bitcoin 

 and the yet-to-be-approved options for spot Bitcoin ETPs.

Flood and Nickel’s urgency comes as the SEC has been continuously 

 decisions on applications from major exchanges like the New York Stock Exchange, Nasdaq, and Cboe Global Markets, all of which submitted their applications in January. These applications include Nasdaq's proposal to list options on 

 iShares Bitcoin Trust and Cboe's plan to offer options trading on various Bitcoin funds. The NYSE is also interested in trading options on products like the Bitwise Bitcoin ETF and the 

The SEC has started another round of consultations to assess the potential impact of 

 options on the stability of the market, especially under volatile conditions. The agency is also reviewing whether existing market surveillance and enforcement mechanisms are actually good enough to handle the complexities introduced by Bitcoin options. Stakeholders and participants have until May 15 to submit their initial comments, with a follow-up period for rebuttal comments ending on May 29.

 are a type of financial derivative that allows investors to buy or sell Bitcoin at a predetermined price on a specific future date, without the obligation to do so. These options operate similarly to options contracts for stocks, indexes, or commodities, where the principal mechanics are the same, yet they are distinct in that their underlying asset is  Bitcoin.

Despite the technical similarities to more traditional options, Bitcoin options are relatively new and are less liquid compared to their conventional counterparts. This liquidity difference stems from the overall smaller size of crypto markets when compared to well-established financial markets like those for stocks or 

. This lack of depth can lead to greater price slippage, especially for options with longer durations.

One key aspect of trading Bitcoin options is the effect of time decay. As the expiration date of the option approaches, its value tends to decrease because of the diminishing time available to exercise the option. This makes trading Bitcoin options more complex than simple spot trading of the cryptocurrency. 

Spot Bitcoin Options are not the only issue on U.S. lawmakers’ minds. United States Senators 

 and Angus King have raised some serious concerns about  the potential national security threats posed by 

 to key members of the Biden administration, including National Security Advisor Jake Sullivan, Defense Secretary Lloyd Austin, and Treasury Secretary Janet Yellen, the senators pointed out possible connections between Iranian crypto miners and the government, and the use of digital assets to circumvent U.S. sanctions.

The letter shed some light on Iran's use of cryptocurrency to fund activities that threaten U.S. security, including supporting terrorist organizations like Hezbollah. Senators Warren and King even pointed to specific incidents, like the January 2024 drone strike in Jordan by Hezbollah that caused the deaths of three U.S. service members.

The senators requested detailed information on the revenue generated by crypto miners in Iran, potential involvement in money laundering activities, and the measures being taken to actually mitigate these risks to U.S. national security. They also shred their worry about reports that the Iranian government favors Bitcoin, specifically newly minted ones, as they have some traceability challenges. It is estimated that Iranian BTC miners may have generated up to $1 billion in 

Despite the legalization of crypto mining in 2019 after a brief government crackdown due to 

, Iran continues to face widespread sanctions imposed by the United States and other international entities since 1979. Senator Warren, who is notorious for her critical stance on cryptocurrencies and their association with 

, is gearing up for a re-election battle in November against Republican candidate and crypto lawyer 

Alan Scott Jr., a researcher and advocate for the privacy-focused crypto protocol Railgun, recently 

 some details from his talks with U.S. senators and the FBI. According to Scott, U.S. Lawmakers have a much less negative stance toward 

 in cryptocurrency than most people thought. At 

 in Sydney, Scott shared that his conversations with senators and the FBI revealed a willingness among top government officials to protect and understand the evolving crypto landscape.

The biggest concern from the FBI revolves around the challenges privacy technologies pose to law enforcement when it comes to tracking financial crimes, rather than an outright opposition to privacy itself. He also shared that agencies like the FBI have what he calls an  informed curiosity about crypto and 

More and more discussions about privacy are popping up due to the recent legal actions against other privacy-centric crypto services, like the arrests of the co-founders of Samourai Wallet on money laundering charges. However, Scott is still very optimistic about the future of privacy in crypto, as he believes it has an essential role in a decentralized financial system.

Meanwhile, regulators are experiencing some push-back from the crypto industry. Terraform Labs (TFL) and its co-founder 

 are currently in a legal battle with the SEC, fighting tooth and nail against the very hefty penalties proposed by the regulator. 

After a jury verdict that found them liable for fraud, a hearing is set for May 22 to discuss possible remedies. The SEC suggested imposing $5.3 billion in disgorgement, interest, and civil penalties on TFL and Kwon. However, Terraform's legal team believes that this massive financial penalty is unjustified, arguing that their token sales and operations were mainly conducted outside the U.S. and did not directly cause the losses central to the SEC's case.

Terraform's lawyers have pointed out that the SEC also does not have enough evidence to link the defendants' limited U.S. activities to the alleged financial damages. They also argued that claiming such a large disgorgement would give the SEC overly broad enforcement powers, amounting to a "territorially unlimited injunction." Instead, Terraform suggested that a much more reasonable penalty would be $1 million in civil fines.

 the SEC’s proposed penalties. He holds firm that his actions happened entirely outside the United States and should not be subject to U.S. jurisdiction.

During the upcoming court session, both parties will present their arguments on the appropriate remedies to Judge Jed Rakoff. 