SEC - Page 45

The North American Securities Administrators Association (NASAA), a consortium of securities regulators from North America, recently expressed its stance on digital assets.

In a filing on October 10 in the United States District Court for the Southern District of New York, NASAA supported the U.S. Securities and Exchange Commission’s (SEC) assertion that digital assets should not receive any preferential treatment under securities laws.

This perspective emerges in the wake of a lawsuit filed by the SEC against Coinbase in June, in which the crypto exchange was accused of breaching federal securities regulations.

Coinbase retorted, asserting that its digital assets and related services shouldn’t be categorized as securities and accused the SEC of overstepping its boundaries.

However, NASAA’s general counsel, Vincente Martinez, defended the SEC’s stance, stating that it wasn’t “novel or extraordinary.”

He emphasized that the SEC’s viewpoint aligns with its longstanding public stance and remains well-grounded in existing laws.

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Central to the lawsuit is the Howey test, which determines what constitutes an investment contract. Coinbase contests that digital assets don’t meet the full criteria of this test.

Yet, Martinez believes the Howey test is versatile enough to account for technological progress in securities markets, such as securities traded on blockchains.

He urged the court to dismiss Coinbase’s attempt to misinterpret established laws to dodge regulatory responsibilities.

Furthermore, Martinez critiqued Coinbase’s reference to the “major questions doctrine,” which posits that the SEC requires congressional authorization on matters of substantial political or economic gravity.

Challenging Coinbase’s portrayal of the digital asset sector as a vital segment of the American economy, Martinez countered that most digital assets, barring a few exceptions, lack a practical economic purpose beyond speculation.

He remarked, “As a class of assets, digital assets are not economically useful.”

He also accused Coinbase of exaggerating the magnitude and relevance of the digital asset industry, especially the segment under securities regulators’ purview.

Concluding, NASAA, comprising 68 members including securities regulators from all U.S. states and several from Canada, Mexico, and U.S. territories, joined the SEC in urging the court to reject Coinbase’s motion to dismiss the lawsuit.

Martinez highlighted the significant interest of NASAA and its members in the case’s outcome.

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U.S. prosecutors have urged the court overseeing Sam Bankman-Fried’s trial to prevent his defense from raising arguments about the possible recovery of FTX customer funds invested in Anthropic.

Bankman-Fried directed $500 million into the AI startup, Anthropic, in April 2022. The U.S. government, however, intends to demonstrate that these funds were siphoned from FTX customer deposits.

Anthropic has recently been in the spotlight, aiming to secure new investment, with major companies like Amazon and Google showing interest.

This could boost the firm’s valuation to between $20-$30 billion.

Prosecutors stress that this surge in valuation could also amplify the worth of Bankman-Fried’s stake, which might facilitate the recovery of assets for those impacted by FTX’s bankruptcy.

A letter presented to Judge Lewis Kaplan reveals that the U.S. government and Bankman-Fried’s attorneys have debated issues likely to emerge during witness cross-examination.

The defense is prepping to introduce evidence about the present value of Bankman-Fried’s 2022 investment in Anthropic.

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Prosecutors argue that such evidence could be utilized to claim that FTX customers and other affected parties might be fully compensated.

This notion has been previously termed by the court as an “impermissible purpose”.

They further state, “Such evidence would… be wholly irrelevant, and present a substantial danger of unfair prejudice.”

The crux of the case against Bankman-Fried lies in accusations of wire fraud, involving the use of FTX customer deposits for various investments.

The prosecution holds that any successful investments Bankman-Fried made are ultimately inconsequential to the charges being examined.

While the government aims to present evidence of Bankman-Fried’s alleged misuse of customer funds leading to significant deficits for FTX, they do not plan to provide details on the final losses post the FTX bankruptcy completion.

The Bankman-Fried trial, reported by Cointelegraph’s Ana Paula Pereira from New York, commenced by exploring the disappearance of around $8 billion of FTX customer assets from the defunct crypto exchange.

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On October 5, the European Securities and Markets Authority (ESMA), the EU’s primary markets regulator, unveiled its second consultative paper focused on the Markets in Crypto-Assets (MiCA) mandates.

This comprehensive 307-page report is an invitation for stakeholders to share their perspectives on five specific MiCA areas.

At the core of the discussion is the proposal for sustainability indicators for distributed ledgers.

These indicators emphasize both quantitative metrics, such as energy consumption, greenhouse gas emissions, and waste production, and qualitative insights on the environmental consequences of using equipment by blockchain nodes.

Another pivotal aspect revolves around the disclosure of inside information, ensuring that relevant data stays transparent and accessible.

The ESMA has also pinpointed the necessity for technical prerequisites for white papers, which would guide the foundational design of crypto projects and their respective public presentations.

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Further, in a move to bolster trading transparency, the ESMA has recommended that Crypto-Asset Service Providers (CASPs) disclose crucial trading details.

This encompasses data like trading date and time, the specific crypto-asset involved, pricing details, transaction volume, execution location, and the unique transaction ID.

Notably, while CASPs would have flexibility in how they store transactional data, the ESMA mandates that they must be capable of converting this data into a predetermined format upon request by authorities.

As the ESMA continues to refine its approach towards regulating the burgeoning crypto market, stakeholders can anticipate another consultative paper in Q1 2024.

The culmination of these consultations will be a final report, which will serve as a foundation for the draft technical standards expected to be presented to the European Commission by June 30, 2024.

It’s worth noting that the ESMA had previously issued a consultation paper in July, where they highlighted the need for crypto companies registering under MiCA to furnish additional details to the national authorities of their registration country.

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The United States Securities and Exchange Commission (SEC) has initiated legal proceedings against accounting firm Prager Metis, which had previously provided services to the cryptocurrency exchange FTX before the exchange’s declaration of bankruptcy.

According to an official statement released on September 29th, the SEC alleges that Prager Metis failed to maintain the necessary independence while offering auditing services to its clients, which is in violation of the auditor independence framework.

To prevent conflicts of interest, accounting and audit functions are required to be kept separate.

The SEC claims that these intertwined activities took place over a span of nearly three years, constituting a significant breach of fundamental auditing principles.

The statement underscores the critical importance of auditor independence in safeguarding investor interests.

While the SEC’s statement does not explicitly mention FTX or any other specific clients, it highlights that there were allegedly “hundreds” of violations of auditor independence throughout the three-year period in question.

This suggests a widespread problem within Prager Metis’ practices.

A previous court filing disclosed that FTX Group had engaged Prager Metis to audit its subsidiaries, FTX US and FTX, at some point in 2021. Subsequently, FTX declared bankruptcy in November 2022.

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The filing argued that Prager Metis should have recognized that FTX would use their audit results to build public trust, especially after former FTX CEO Sam Bankman-Fried had publicly disclosed previous audit outcomes.

Concerns had been previously raised about the content presented in FTX’s audit reports.

On January 25th, FTX’s current CEO, John J. Ray III, expressed substantial concerns regarding the information presented in the audited financial statements during a bankruptcy court proceeding.

Senators Elizabeth Warren and Ron Wyden had also voiced concerns about Prager Metis’ impartiality, suggesting that the firm had operated more as an advocate for the cryptocurrency industry.

Meanwhile, another entity involved with FTX, U.S.-based law firm Fenwick & West, has recently faced legal challenges.

In a court filing dated September 21st, plaintiffs alleged that Fenwick & West should bear partial responsibility for FTX’s collapse due to its alleged excessive service offerings to the exchange.

However, Fenwick & West contends that it cannot be held accountable for a client’s misconduct as long as its actions remain within the bounds of its representation of the client.

This legal dispute further complicates the aftermath of FTX’s bankruptcy declaration and raises questions about the responsibilities of service providers in such cases.

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Paradigm, a prominent venture capital firm, has voiced strong criticism against the United States Securities and Exchange Commission (SEC) for what it perceives as a deviation from standard rulemaking procedures in its current legal action against the cryptocurrency exchange giant, Binance.

In a statement released on September 29th, Paradigm accused the SEC of attempting to reshape the legal landscape by leveraging the allegations in its complaint against Binance to effect changes in the law without adhering to established rulemaking processes.

Paradigm firmly contends that the SEC is overstepping its regulatory boundaries and vehemently opposes this unconventional approach.

The SEC initiated legal proceedings against Binance in June, alleging multiple violations of securities laws, including operating without the required registration as an exchange, broker-dealer, or clearing agency.

Paradigm emphasized that the SEC has been pursuing similar cases against various cryptocurrency exchanges lately, raising concerns that the SEC’s stance “could fundamentally reshape our comprehension of securities law in several critical aspects.”

Furthermore, Paradigm expressed reservations about the SEC’s application of the Howey test, a legal standard used to determine whether transactions qualify as investment contracts subject to securities regulations.

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Paradigm’s amicus brief argued that many assets are actively marketed, purchased, and traded based on their profit potential. Despite this, the SEC has consistently exempted them from being classified as securities.

Paradigm cited examples such as gold, silver, and fine art, underscoring that the mere potential for value appreciation does not inherently classify their sale as a security transaction.

In a related development, Circle, the issuer of USD Coin (USDC), has entered the fray of the ongoing legal dispute between Binance and the SEC.

Circle firmly contends that stablecoins should not be categorized as securities by the SEC.

They argue that individuals who acquire stablecoins are not doing so with the intention of deriving profits, thereby challenging the SEC’s attempt to regulate these assets as securities.

In summary, Paradigm’s criticism of the SEC centers on the agency’s unconventional approach to legal action against Binance, which they believe goes beyond established rulemaking procedures and could have far-reaching implications for the cryptocurrency and securities landscape.

Meanwhile, Circle has joined the legal dispute, asserting that stablecoins should not be treated as securities by the SEC due to their distinct nature and use cases.

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