Jump Crypto Enters Confidential Phase in SEC vs. Terraform Labs Case

Jump Crypto Holdings has been allowed to submit papers in a secret manner, which is a key milestone in the litigation that the Securities and Exchange Commission (SEC) is pursuing against Terraform Labs and its creator, Do Kwon. In the current legal procedures, this action, which was approved by Federal Judge Jed Rakoff, represents a significant turning point throughout the proceedings. Considering the sensitivity and complexity of the matter, the papers in issue have been submitted to the United States District Court for the Southern District of New York as part of the discovery process. These materials will be processed in a private manner with the intention of protecting their confidentiality.

The cryptocurrency known as Jump Crypto, which is a subsidiary of Jump Trading, is now being investigated for its alleged role in the events that led to the devaluation of the TerraUSD (UST) and the subsequent collapse of the Terra ecosystem. This event was a significant contributor to the decline in the cryptocurrency market in 2022. The manipulation of the price of UST is one of the allegations that have been made against Jump Crypto. According to the allegations, this manipulation resulted in around $1.3 billion in profits for the company and its CEO, Kanav Kariya. The gravity of the problem and the high stakes involved are supported by these claims, which are an essential component of the lawsuit by the Securities and Exchange Commission (SEC).

Over the course of many months, the proceedings in the case against Terraform Labs and Do Kwon have been developing. The Securities and Exchange Commission (SEC) filed charges against Terraform Labs and Kwon in February, accusing them of conducting a crypto asset securities scam that was worth several billions of dollars. In the context of a larger regulatory crackdown on cryptocurrency companies and their executives, this case represents a component of that crackdown. Furthermore, Kwon himself has been subjected to legal issues, such as his detention in Montenegro for using forged travel credentials and the ensuing four-month jail term that he received as a result of his arrest. It was recently decided by a court in Montenegro that Kwon should be extradited, which means that he may be brought before a court in either the United States of America or South Korea to face charges.

Within the context of any future motion practice or trial, the court has maintained the authority to decide whether or not to make any of the private papers available to the public. In the event that such a disclosure is being considered, the court will inform Jump Crypto’s legal counsel, giving them the chance to oppose to the revelation. By using this method, sensitive information is protected from public exposure while still being protected from revelation to the general public in the event that the court deems it appropriate to do so.

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Wallet of Satoshi Withdraws from the U.S. Market Amid Regulatory Challenges

The recent announcement by Wallet of Satoshi (WoS) to withdraw its app from the U.S. Apple and Google app stores and cease serving U.S. customers marks a significant shift in the Bitcoin wallet landscape. This decision reflects the increasingly challenging regulatory environment in the United States, which has affected not only WoS but other crypto service providers as well.

In a similar vein, GameStop, known for its video game retailing, terminated its crypto wallet service due to the uncertain regulatory climate in the U.S. Launched just a year prior, this service was integrated with Ethereum’s layer-2 scaling protocol and allowed users to hold, trade crypto, and access decentralized apps. However, unspecified regulatory uncertainties, likely related to the intensified scrutiny by U.S. authorities like the SEC and the Commodity Futures Trading Commission, led to its discontinuation​​.

Regulatory Pressures on Crypto

The U.S. federal government has been contemplating enforcing know-your-customer (KYC) rules on unhosted or self-hosted crypto wallets. This controversial proposal by the Financial Crimes Enforcement Network (FinCEN) requires crypto exchanges to collect detailed personal information for transactions involving private wallets. The crypto industry expressed concerns over the feasibility and burden of these rules, given the nature of certain wallets and individual privacy considerations​​.

Binance, the world’s largest cryptocurrency exchange, also faced regulatory hurdles. The SEC sued Binance and its U.S. operator for several allegations, including artificially inflating trading volumes and mismanaging customer funds. To ensure U.S. customer assets remain within the country, Binance.US reached an agreement with the SEC, restricting access to these assets to Binance.US employees only. This agreement is part of broader regulatory crackdown efforts in the U.S. crypto industry​​​​.

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SEC Accuses Kraken of Operating Without Registration, Alleges Mixing of Funds

The U.S. Securities and Exchange Commission (SEC) has filed a complaint against Payward Inc. and Payward Ventures Inc., collectively known as Kraken, for operating their cryptocurrency trading platform without the necessary registrations. The complaint, filed in San Francisco, alleges violations dating back to September 2018. Kraken is accused of functioning as an unregistered exchange, broker, dealer, and clearing agency, amalgamating the roles of these entities without proper registration. This reportedly deprived investors of crucial protections, such as SEC inspection and safeguards against conflicts of interest.

The SEC’s complaint outlines several concerns, including Kraken’s provision of a marketplace for securities transactions, effectively operating as an exchange; engaging in securities transactions for customers, thus acting as a broker; buying and selling securities for its own account, functioning as a dealer; and serving as an intermediary in settling transactions in crypto asset securities, thereby operating as a clearing agency. The complaint also alleges that Kraken’s business practices, including deficient internal controls and poor recordkeeping, pose risks to customers. Notably, Kraken is accused of commingling customer funds with its own, leading to potential loss risks.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the agency’s stance on Kraken’s preference for profits over investor protection. The SEC seeks injunctive relief, disgorgement of profits plus interest, and penalties. Earlier in February, Kraken agreed to a $30 million penalty and ceased offering crypto asset staking services.

This lawsuit is part of a wider SEC crackdown on cryptocurrency exchanges operating without proper registrations. Similar allegations were made against other exchanges like Binance and Coinbase. The SEC’s list of unregistered securities includes tokens like ALGO, MATIC, and NEAR. Kraken’s response, as expressed by CEO Dave Ripley, disputes the SEC’s claims and defends their position of not listing securities. The debate continues over the SEC’s approach to cryptocurrency exchanges and the absence of clear regulatory pathways.

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Celsius to Transition to Mining-Only NewCo following Bankruptcy Court’s Confirmation of Plan

Celsius Network LLC, a global cryptocurrency platform, is set to undergo a significant transformation following the confirmation of its Chapter 11 plan by the United States Bankruptcy Court for the Southern District of New York. This change comes after facing challenges with the U.S. Securities and Exchange Commission (SEC).

The restructuring plan initially involved creating a new company with Fahrenheit, LLC, focusing on various crypto business activities. However, the SEC’s request for more information about Celsius’ assets has led to a strategic pivot. Celsius is now planning to transition to a publicly traded Bitcoin mining company, owned by its customers, known as Mining NewCo​​​​​​.

Fahrenheit, an investment vehicle, had emerged as a key player in Celsius’ reorganization plans. The SEC’s involvement and requests for detailed information about Celsius’ assets and business operations have significantly influenced the new direction. There are ongoing discussions about the management and future of Mining NewCo​​.

Celsius had filed for Chapter 11 bankruptcy in July 2022, revealing a $2 billion deficit in its balance sheet. The plan included returning cryptocurrencies to its customers and creating a new company focused on Bitcoin mining. This pivot to mining is a response to the regulatory scrutiny, particularly from the SEC, which has been a significant factor in shaping the company’s post-bankruptcy trajectory​​​​​​.

The confirmation of Celsius’ restructuring plan marks a new chapter in the company’s journey. While the company initially faced a significant deficit and regulatory challenges, the transition to a mining-only model under NewCo represents a strategic shift. This shift aims to address regulatory concerns and set a path for recovery and growth in the evolving cryptocurrency landscape. Celsius’ focus on Bitcoin mining signifies its adaptation to the changing regulatory and business environment.

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Bittrex Global to End Trading on Dec 4, 2023

Bittrex Global, headquartered in Liechtenstein, has announced its decision to wind down operations. This process will begin with a cessation of all trading activities effective December 4, 2023. This announcement follows a period of regulatory challenges and legal proceedings that have impacted the company’s operations.

The wind-down process was detailed in an update published on the Bittrex Global website on November 20th. As per the announcement, from December 4th, the platform will restrict activities to withdrawals only, discontinuing all trading functions. Users holding U.S. dollar balances are mandated to convert these to euros or cryptocurrencies before the cessation date to enable withdrawals. This step is essential to ensure that customers can retrieve their funds from the platform.

This closure announcement comes approximately nine months after Bittrex, the U.S.-based subsidiary, started winding down operations due to ongoing regulatory issues. In April, the U.S. Securities and Exchange Commission (SEC) accused Bittrex of operating as an unregistered exchange and broker. Subsequently, Bittrex filed for Chapter 11 bankruptcy protection in May, followed by a settlement with the SEC in August, agreeing to pay $24 million in fines and interest.

Acknowledging the potential inconvenience to its customers, Bittrex Global emphasizes its commitment to a transparent and smooth transition. The company assures that all funds and tokens remain secure and accessible for withdrawal, adhering to their terms of service and applicable laws. The customer support team remains operational to assist with queries and concerns during this transition phase.

Bittrex Global has also cautioned its customers against potential scams. The company reiterates that official communication will only be through its verified channels, advising customers to be vigilant and trust only emails from Bittrex’s official domains.

The decision by Bittrex Global to cease operations is a significant event in the crypto exchange industry, reflecting the ongoing challenges faced by such platforms in navigating complex regulatory environments. The company’s strategic approach to winding down, prioritizing customer asset security and clear communication, underlines its commitment to responsible management during this transitional period.

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DOJ Seeks Over $4 Billion from Binance Amidst Years of Legal Challenges

According to Bloomberg, the United States Department of Justice is attempting to negotiate a settlement to a lengthy criminal investigation by requesting more than four billion dollars from Binance Holdings on behalf of the company.

Since at least 2018, the United States Department of Justice has been conducting an investigation into Binance, which is the biggest cryptocurrency exchange in the international market. A significant point has been reached in the federal investigation, which covers a variety of intricate legal and regulatory problems that are associated with Binance’s activities. Internal data about the company’s anti-money laundering activities and contacts involving Changpeng Zhao, the company’s founder, were demanded by federal prosecutors in December of the year 2020 after they were requested.

Binance is now facing a number of legal difficulties in the United States, and this investigation is one of them. During the month of June, the Securities and Exchange Commission (SEC) filed a lawsuit against Binance and Zhao, alleging that they were responsible for a complex plan to circumvent federal securities laws in the United States. Furthermore, the Commodity Futures Trading Commission filed a complaint against the exchange in March, accusing it of willfully evading U.S. commodities law. The lawsuit charges Binance and Zhao of running an unlawful exchange and a fake compliance programme. The action was filed against the exchange. These charges have been denied by Zhao, who referred to them as a “incomplete recitation of the facts.”

The conclusion of these discussions is expected to have a considerable impact on the mood of investors towards cryptocurrencies, which is a market that is already suffering from investigations and accusations brought against a variety of companies and people by the government. In the midst of these difficulties, Binance has seen a significant departure of its executives and a decrease in its market share. Significant executives have left the company in the last few months.

As the conversations between Binance and the Justice Department continue to progress, the chance of Changpeng Zhao being charged with a criminal offence in the United States is still a possibility. As early as the end of this month, there is a possibility that a statement may be made addressing the settlement of these problem areas. Nevertheless, there is still a lack of clarity about the particulars of the sanctions and the timing. Both Binance and the Department of Justice have abstained from making any kinds of statements on the current talks.

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Congressional Memo Challenges SEC’s SAB 121

A memorandum submitted by several U.S. Congress members, including chairs from key financial committees, has called into question the enforceability of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin 121 (SAB 121). This development follows a decision by the Government Accountability Office (GAO) characterizing SAB 121 as a rule under the Congressional Review Act.

Introduced on April 11, 2022, without consultation with major financial regulatory bodies, SAB 121 requires custodians to report customer custodial digital assets on their balance sheets, evaluated at fair value. This directive deviates from standard accounting practices, potentially misrepresenting custodians’ legal and economic responsibilities and escalating consumer risk.

The GAO, in October 2023, asserted that companies might alter their behaviors to align with the SEC’s interpretations in the Bulletin, due to the SEC’s role in monitoring public disclosures and enforcing compliance. Notably, the SEC did not submit SAB 121 to Congress or the GAO, nor did it publish it in the Congressional Record, as mandated by the Congressional Review Act.

The Congressional memo highlights concerns that enforcing this noncompliant rule would create a precedent for regulatory evasion of the Administrative Procedure Act (APA), effectively granting the SEC undue regulatory control over unauthorised entities. The Congress members have requested financial authorities to clarify, through guidance or action, that SAB 121 is not enforceable following the GAO’s determination.

SAB 121’s mandate for banks to record client cryptocurrency holdings on their balance sheets, with appropriate valuation and capitalization, has drawn criticism from industry representatives and U.S. politicians. They argue that it could deter regulated banks from acting as crypto custodians and treat crypto holdings differently from traditional assets.

The inquiry into SAB 121’s status as a rule stemmed from Senator Cynthia Lummis’s letter to the U.S. Comptroller General in August 2022. The Congressional Review Act necessitates that an agency rule be reported to both Congress and the comptroller general, with a provision for Congressional disapproval. In June 2022, five senators had already expressed opposition to what they termed “backdoor regulation” in a letter to SEC Chair Gary Gensler.

The memorandum signifies a significant moment in the oversight of digital asset regulation, emphasizing the need for clarity and adherence to established legislative procedures.

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US Bitcoin Corp-Hut 8 Merger Progresses Amid Celsius Plan Approval

U.S. Data Mining Group, Inc., doing business as US Bitcoin Corp (USBTC), today announced two pivotal developments: the progression of its merger with Hut 8 Mining Corp (“Hut 8”) and the court approval of the Celsius bankruptcy restructuring plan.

USBTC is advancing its all-stock merger (the “Transaction”) with Hut 8, a leading North American digital asset mining and high-performance computing infrastructure provider. The Securities and Exchange Commission (SEC) declared the registration statement for the merger effective on November 9. Asher Genoot, President and Co-Founder of USBTC, expressed enthusiasm about the merger, stating, “Joining forces with Hut 8 marks a new phase of growth for our shared company. This merger shows our ongoing dedication to operational excellence and provides a strengthened platform for our shared future.”

The merger is anticipated to be finalized by November 30, 2023, pending approval from USBTC stockholders and other customary closing conditions. Post-merger, the common stock of the new entity, Hut 8 Corp. (“New Hut”), is expected to be listed on the Nasdaq and the Toronto Stock Exchange under the proposed ticker symbol HUT.

In another significant development, USBTC, alongside consortium partners Arrington Capital, Proof Group, Steve Kokinos, and Ravi Kaza, acknowledges the court’s approval of the Celsius bankruptcy restructuring plan. This approval marks a crucial step for the consortium to begin managing Celsius’s assets and operations. The plan received overwhelming support from creditors, with a 95% approval rate.

The approved plan outlines a strategy for establishing and operating a new public, regulatory-compliant company to manage Celsius’ illiquid assets. This move signifies USBTC’s commitment to shaping the future of the cryptocurrency industry through operational excellence and innovative solutions.

USBTC, founded by visionary entrepreneurs and experienced executives, is a prominent North American mining company known for its efficiency, eco-friendliness, and large-scale operations. With campuses in New York, Nebraska, and Texas, USBTC aims to set industry standards.

Recently, Hut 8 Mining Corp has received the green light from the Canadian Supreme Court for the merger with USBTC. This approval further solidifies the merger’s progression and highlights Hut 8’s commitment to transparency and regulatory compliance in the cryptocurrency mining sector.

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ARK Invest and 21Shares Launch Innovative Digital Asset ETF Suite

ARK Invest, led by the pro-Bitcoin advocate Cathie Wood, and 21Shares, a renowned exchange-traded product (ETP) supplier, have announced the launch of a new suite of digital asset exchange-traded funds (ETFs). This collaboration marks a pivotal step in offering investors a comprehensive range of options for integrating digital assets into their investment portfolios.

The newly launched ETF suite is unique in its approach, combining on-chain insights with traditional investment indicators. This method aims to provide a more informed and robust investment strategy in the volatile world of cryptocurrencies. The suite includes the ARK 21Shares Active Bitcoin Futures Strategy ETF (ARKA), an actively managed ETF that targets 100% exposure to Bitcoin through futures contracts.

The suite, which is expected to start trading in the coming week, will be listed on the Chicago Board Options Exchange (CBOE). It comprises five different products, each designed to cater to various aspects of digital asset investment. Notably, the suite does not offer direct investment in spot Bitcoin, as highlighted in the firms’ disclaimer. Instead, it focuses on Bitcoin and Ether futures contracts and includes a product for investing in public stocks of blockchain-related companies, named the ARK 21Shares Blockchain and Digital Economy Innovation ETF. This product aims to provide investors with holistic exposure to the advancement of blockchain technology.

The launch has sparked discussions among experts, including Bloomberg analysts James Seyffart and Eric Balchunas, regarding the potential acceptance of Bitcoin ETF registrations by the United States Securities and Exchange Commission (SEC). While there is speculation that the SEC might approve all 12 ETF registrations, the analysts emphasize that this remains a hypothesis with no definitive evidence currently supporting it.

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SEC Chair Gensler Open to Lawful Revival of FTX

During a CNBC interview at DC Fintech Week, SEC Chair Gary Gensler discussed the potential revival of the bankrupt cryptocurrency exchange FTX, emphasizing the importance of operating within legal boundaries. The context for this comes in the wake of FTX founder Sam Bankman-Fried’s recent fraud conviction and the company’s bankruptcy last year.

FTX, founded by Sam Bankman-Fried, was once a cryptocurrency exchange titan, known for its innovative approach and rapid growth in the crypto world. However, its reputation nosedived following revelations of financial mismanagement and legal violations, leading to a bankruptcy filing in late 2022. This downfall highlighted the risks and regulatory loopholes in the burgeoning cryptocurrency market.

Gensler’s remarks followed reports of Tom Farley, ex-president of the New York Stock Exchange and founder of digital asset exchange Bullish, being a top contender in the bankruptcy auction to purchase FTX. Gensler advised anyone considering entering the crypto exchange market to focus on earning investor trust, ensuring proper disclosures, and avoiding conflicts of interest, such as trading against customers or misusing their assets.

The conversation pivoted to Sam Bankman-Fried’s conviction on charges including fraud and money laundering. FTX, once a leading crypto exchange, was revealed to have inappropriately channeled customer funds to its sister hedge fund, Alameda Research. Alameda, a market maker for FTX, enjoyed unfair advantages such as a significant line of credit without collateral and leniency in trading positions, unlike other customers. Sam Bankman-Fried, the young entrepreneur behind FTX, experienced a dramatic turn of events with his recent conviction on multiple counts, including fraud and money laundering. 

Gensler reinforced the SEC’s commitment to applying existing securities laws to the crypto industry, stating their compatibility and robustness. He highlighted the challenges of global compliance in the crypto space, particularly with entities like Binance facing allegations from U.S. regulators for evading rules. Gensler’s comments also touched on the need for stricter adherence to international sanctions and anti-money laundering laws in the cryptocurrency sector.

The SEC, under Gensler’s leadership, has been actively pursuing legal actions in the crypto space, with over 150 cases in the past six years. High-profile cases include those against Ripple and Grayscale. The SEC’s stance remains firm on the necessity for companies, including major players like Coinbase, to comply with U.S. laws, with Gensler asserting the undesirability of non-compliant or fraudulent actors in the market.

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