Weekly Fintech Focus

  • Treasury Releases National Risk Assessments
  • SEC Probing NFT Market
  • Russia/Ukraine Sanctions Overview
  • Summary of Industry Responses
  • BitConnect Founder Flees India After Being Indicted In $2B Ponzi Scheme
  • UK Government to Crackdown on Illegal Cryptocurrency Activity
  • Swiss City of Lugano to Make Bitcoin and Tether ‘De Facto’ Legal Tender

U.S. Developments


Treasury Releases National Risk Assessments

The U.S. Department of the Treasury (Treasury) issued the 2022 National Risk Assessments (NRAs) on (1) money laundering, (2) terrorist financing, and (3) proliferation financing, highlighting “the most significant illicit finance threats, vulnerabilities, and risks facing the United States.” Each of the three risk assessments included a section on virtual assets. As a general matter, the Treasury is concerned with an increasing number of incidents where terrorist groups and other criminals are soliciting funds in virtual assets, “usually through a social media platform or other internet-based crowdsource platform.” However, Treasury also explained that, while the use of virtual assets for terrorist financing and other criminal activity is growing, “such cases are still less prevalent than those involving traditional financial assets” and, particularly with respect to money laundering, use “remains far below that of fiat currency and more traditional methods.”

In addition to concerns related to the use of virtual assets to facilitate money laundering and other criminal activity, the risk assessments note that virtual asset service providers (VASPs) are themselves at risk of becoming the victims of criminal activity. For example, the proliferation financing risk assessment states that criminal networks “are increasingly exploiting the digital economy, including by engaging in the systematic mining and trading of virtual assets and the hacking of virtual asset service providers (VASPs).” The proliferation financing risk assessment used the Democratic People’s Republic of Korea (North Korea) as a specific example of an entity increasingly capable and willing to engage in “sophisticated malicious cyber activity, against both traditional financial institutions, such as central banks and private firms, and the virtual assets sector.”

SEC Probing NFT Market

The SEC has begun scrutinizing creators of non-fungible tokens (NFTs) and the cryptocurrency exchanges where they are traded to determine if some of these assets fall under SEC jurisdiction. According to Bloomberg, the agency has sent subpoenas over the last few months that demand information about the NFT offerings. The probe focuses on whether some of these NFTs are being used to raised money like traditional securities. The SEC would also like to better understand “fractional” NFTs, which involve breaking down the assets into units that can easily be bought and sold on a secondary market.

The SEC has not commented on the ongoing probe, but the agency will very likely be examining a key legal question: Are NFTs securities? The agency will apply the four-pronged Howey test to determine if these assets can be considered securities. Hester Peirce, the SEC’s most crypto-friendly commissioner, has stated some NFTs will likely be subject to SEC jurisdiction. On CoinDesk TV in December, Peirce stated, “[g]iven the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction.”

Russia/Ukraine Sanctions Overview

Regulators and legislators including Elizabeth Warren and Jerome Powell have warned that individuals who have been sanctioned as a result of Russia’s invasion of Ukraine could use cryptocurrency to avoid said sanctions. In a letter to Janet Yellen, Warren and other senators asked Yellen to explain how the Treasury Department plans to work with foreign governments to ensure cryptocurrency is not used to avoid sanctions and requested that the Treasury provide the legislators with requests for additional tools the department might need to ensure cryptocurrency participants are not able to help Russia or other sanctioned states avoid sanctions. Along the same vein, in his testimony before the House Financial Services Committee, Jerome Powell said that the Ukraine-Russia conflict underscores a need for congressional action on cryptocurrencies. “We have this burgeoning industry which has many parts to it, and there isn’t in place the kind of regulatory framework that needs to be there.”

In state regulation, New York’s Department of Financial Services (DFS) will ramp up sanctions enforcement efforts against Russia. Governor Kathy Hochul said on Wednesday that DFS will be adding blockchain analytics technology to help track down any uses of cryptocurrencies to dodge sanctions. Rather than using the Ukraine-Russia conflict as a springboard for pushing cryptocurrency regulation, New York’s DFS sees this as an opportunity to utilize the capabilities of blockchain technology tools to enforce anti-money laundering and BSA laws in this immediate crisis and beyond.

Summary of Industry Responses

  • MetaMask, Infura Block ‘Certain Areas’ Amid Crypto Sanctions Fury: MetaMask and Infura restricted user access in “certain jurisdictions” due to legal compliance.
  • Major Crypto Exchanges Won’t Ban All Russian Transactions: Some of the largest exchanges stated that they will not issue blanket bans on Russian addresses but will implement all of the sanctions that have been imposed.


BitConnect Founder Flees India After Being Indicted In $2B Ponzi Scheme

Last Friday, a San Diego, California federal grand jury indicted the founder of the now defunct BitConnect for his alleged role in duping investors with a $2 billion cryptocurrency “lending program,” according to the Department of Justice. According to court documents, Satish Kumbhani misled investors by touting BitConnect’s “BitConnect Trading Bot” and “Volatility Software” as being able to generate guaranteed returns and substantial profits by using investors’ money to take advantage of the volatility of cryptocurrency markets. Per the indictment, BitConnect operated as a Ponzi scheme by paying its earliest investors with the money obtained from its latest investors. The indictment also alleges that Kumbhani artificially propped up the price of BitConnect’s native digital currency, BitConnect Coin (BCC). Kumbhani also failed to comply with registration requirements imposed on money transmitters by the Financial Crimes and Enforcement Network (FinCEN). Kumbhani is charged with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodity price manipulation, operation of an unlicensed money transmitting business, and conspiracy to commit international money laundering.

Since the indictment, Kumbhani has fled India, according to the SEC. The SEC’s filing states that the commission believes Kumbhani “has likely relocated from India to an unknown address in a different foreign country.” Since November, the SEC has been unable to locate Kumbhani’s address.

International Developments

UK Government to Crackdown on Illegal Cryptocurrency Activity

The United Kingdom’s Financial Conduct Authority (FCA), a key financial regulator within the United Kingdom, issued a press release announcing that it aims to take “assertive action to tackle harm in the consumer investment market[s]” caused by scams reported to the FCA, including those related to “cryptoasset[s].” Specifically, the FCA revealed that, over a period of six months, it initiated more than 300 cases related to “possible cryptoasset businesses not registered with the FCA, many of which may be scams.” The FCA also stated that it is involved in 50 ongoing investigations, “including criminal probes, into unauthorised businesses.” Additionally, the Financial Times reported that the U.K. government has drafted a package of reforms tied to enhancing the U.K.’s money laundering and “economic crime” enforcement, which, among other things, will grant the “government greater powers to seize crypto assets to tackle the growing threat from the use of online currencies for money laundering.”

Swiss City of Lugano to Make Bitcoin and Tether ‘De Facto’ Legal Tender

The city of Lugano, Switzerland has “formed a relationship” with Tether “to establish bitcoin, Tether and Lugano’s own LVGA Points token as ‘de-facto’ legal tender in the city of Lugano.” The development, as reported by CoinDesk, was announced at an event hosted by the mayor of Lugano, Michele Foletti, and through a tweet from the Tether company account.

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Photo of Donald Mills Donald Mills

DJ Mills is an associate within the firm’s Financial Services practice group and centers his practice on emerging and established fintech companies, with an emphasis on the digital asset custody space. He assists clients with a broad range of regulatory and transactional matters…

DJ Mills is an associate within the firm’s Financial Services practice group and centers his practice on emerging and established fintech companies, with an emphasis on the digital asset custody space. He assists clients with a broad range of regulatory and transactional matters, including those that implicate money services, securities, and banking law.