State and federal crypto and NFT-related enforcement actions continue to occupy the regulatory landscape with an apparent uptick coinciding with the issuance of The White House’s Executive Order in March (we discussed the Biden Executive Order here). The following are some enforcement actions from state and federal regulators since the Executive Order.
- On March 8, the CFTC charged four individuals with fraud for operating a bitcoin Ponzi scheme on the basis that bitcoin is a commodity subject to the CFTC’s enforcement jurisdiction. The defendants allegedly fraudulently solicited more than $21 million of bitcoin by promising potential investors that professionals traders would manage their bitcoin portfolios, guaranteeing trading profits to be paid daily. Instead, the defendants misappropriated customers’ bitcoin or used it to pay alleged profits to customers that had signed up earlier.
- Also on March 8, the SEC charged two defendants with defrauding retail investors out of more than $124 million through unregistered securities offerings involving a digital token created by the defendants. The defendants allegedly sold the token through subscription packages solicited to investors on crypto trading platforms and falsely claimed the token was backed by a $250 million crypto mining operation producing $5.4 million to $8 million per month in mining revenues. The defendants also allegedly falsified a website to display a fake wallet containing more than $190 million in digital assets, even though the token wallets were worth less than $500,000.
- On March 24, the DOJ charged two individuals with conspiracy to commit wire fraud and conspiracy to commit money laundering in connection with a million-dollar NFT fraud. According to the complaint, the defendants promised that purchasers of their NFTs would be eligible for holder rewards, including giveaways, early access to a metaverse game, and exclusive mint passes for upcoming seasons. However, rather than providing the benefits advertised to the NFT purchasers, the defendants transferred the cryptocurrency proceeds of the scheme to various cryptocurrency wallets under their control. DOJ called the scheme an NFT “rug pull” and noted the scheme’s increasing popularity among criminal actors. As the term suggests, a rug pull refers to a scenario where the creator of an NFT and/or gaming project solicits investments based on the promise of building utility for the NFTs, but then abruptly abandons the project and retains the project investors’ funds.
- On April 13, Texas and Alabama regulators issued cease-and-desist orders against a group selling NFTs to fund the development of virtual casinos in the metaverse, saying the sales are in fact that of unregistered securities. The regulators allege that the NFTs entitle owners to various benefits, including a pro-rata share of profits generated by the internet and metaverse casinos. These facts, among others, allowed the regulators to conclude that this group sold unregistered securities.
- Finally, on April 13, the operator of dozens of unlicensed cryptocurrency kiosks who converted more than $5.6 million of customers' cash into bitcoin was charged with tax fraud and operating unlicensed ATMs across New York City, New Jersey, and Miami. According to the Manhattan District Attorney's Office, these Bitcoin ATMs attracted individuals with criminal records related to drug sales and credit card theft. The Bitcoin ATM operator also did not have the proper state or federal licensure and registration required for the operation of a virtual currency business. The owner of the ATMs also claimed only $3,000 in income on his 2017 tax returns and a loss of $140,000 on his 2018 tax returns, when more than $5.6 million was deposited into the ATMs in that same timeframe.
Putting It Into Practice: Crypto and NFT-related enforcement matters will likely increase at a faster pace than ever before. In addition to continuing to monitor signals from state and federal regulators in an effort to navigate the murky regulatory waters that are attracting the attention of an ever-increasing population of law enforcement agencies, it is crucial for market participants to ensure they have the proper state and federal licenses and registrations required to offer their products.