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The SEC obtained a cease-and-desist order against Loci Inc.

The SEC obtained a cease-and-desist order against Loci Inc. and its CEO John Wise
The SEC obtained a cease-and-desist order against Loci Inc. and its CEO John Wise for violating the U.S. securities law while selling LOCIcoin in August 2017 – January 2018. LOCIcoin was used as an instrument to raise capital to support the company’s software platform InnVenn, which provided intellectual property search to inventors and other users. During its investigation, the SEC determined that LOCIcoin was a security. Under the U.S. securities law, offering and sale of securities has to be registered with the SEC or qualify for an exemption. This procedure was not followed by Loci Inc., in violation of the registration provisions of the Securities Act of 1933.

In addition, the SEC alleged that Mr. Wise made numerous materially false statements to investors about Loci Inc.’s revenues, number of employees, and Inn Venn’s user base. Moreover, according to the order, Mr. Wise misused close to $40,000 of the invested funds for his personal expenses.

Loci Inc. and Mr. Wise settled the charges with the SEC and agreed to delist and destroy all LOCIcoins. In addition, Loci Inc. agreed to pay a $7.6 million civil penalty, while Mr. Wise agreed to an officer and director bar.



Summarized by Katrina Arden, Esq.
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The receiver is appointed in the case against Coinseed Inc.

The receiver is appointed in the case against Coinseed Inc.
The New York Attorney General Office continues its litigation against Coinseed, Inc., a cryptocurrency trading platform operating out of New York and its two top executives Delgerdalai Davaasambuu and Sukhbat Lkhagvadorj. In June, the Office of Attorney General obtained a court order continuing a mandated pause of the Coinseed Inc. operations and putting a receiver to oversee and protect the investors’ funds.

The newly appointed receiver Michelle Gitlitz, the global head of Crowell & Moring LLP’s Blockchain and Digital Assets practice, will have special powers granted by the court to safeguard the investors’ funds and oversee all assets traded through Coinseed. In addition, the temporary restraining order previously secured by the Attorney General continues to block Coinseed Inc. and its CEO from making unauthorized trades while the lawsuit proceeds.



Summarized by Katrina Arden, Esq.
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Ripple Lab secures a small but important win for its case

Ripple Lab secures a small but important win for its case
One of the very important decisions had been made in the case of SEC v. Ripple Lab. As part of the ongoing litigation, the agency sought to introduce to evidence the past communication between Ripple Lab and its attorney to prove that the company knew that its token sale could be considered an unregistered securities offering in violation of the U.S. securities law.

Earlier, the SEC filed a Motion asking to strip the attorney-client privilege from certain communication between Ripple Lab and its attorneys and compel the company to produce memos discussing the sale of XRP token with the company’s attorneys. The Judge denied this Motion based on the rationale that the privilege “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.”

Although the Ripple Lab’s battle with the SEC is far from being over, this is a very important interim decision for the case and the industry overall, showing that the communication between clients and their lawyers is protected and cannot be used against clients.



Written by Katrina Arden, Esq.
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SEC brings charges against BitConnect and five promoters

SEC brings charges against BitConnect and five promoters
While everyone’s eyes are on the Ripple’s case, the SEC continues to enforce the U.S. securities law and bring charges against individuals and companies, who violate such law. In May, the SEC filed a complaint with the U.S. District Court Southern District of New York against BitConnect and five promoters for conducting an unregistered offering and sale of securities.

According to the complaint, Trevor Brown, Craig Grant, Joshua Jeppesen, Ryan Maasen, and Michael Noble acted as promoters and together with BitConnect raised approximately 2 billion dollars from investments into the BitConnect “lending program.” In exchange, the promoters received a percentage of the invested funds each of them raised. At the same time, none of these promoters were registered with the SEC by broker-dealers in violation of the U.S. securities law.

BitConnect promised investors as high as 40% monthly return from the company’s Bitcoin trading operations. In addition, BitConnect offered referral commissions to existing investors who referred new investors to the lending program. The referral commissions ranged between 0.2% and 7% depending on the referrer’s level. Many may remember a very aggressive marketing campaign of BitConnect filled with a large number of testimonials from investors with referral links to the BitConnect lending program.

For their promotional efforts, five promoters listed in the SEC’s complaint together received over 5.5 million dollars. The SEC's complaint charges the promoter defendants with violating the registration provisions of the federal securities laws, and Jeppesen with aiding and abetting BitConnect's unregistered offer and sale of securities. The complaint seeks injunctive relief, disgorgement plus interest, and civil penalties.



Summarized by Katrina Arden, Esq.
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FBI reports an increase of email crimes involving crypto

FBI reports an increase of email crimes involving crypto
In April, the FBI issued an interesting report about the rise in the use of cryptocurrency in business email compromise schemes. Although the scams involving compromised emails had been around for decades, the use of cryptocurrency in such scams became a rapidly increasing trend in recent years.

The scammers operate in a similar manner to the wire transfers frauds when business or personal email accounts get compromised through social engineering or computer intrusion with the request to transfer funds to the scammers’ bank account. But with the growing acceptance and wider use of cryptocurrencies in business and personal transactions, the scammers direct the victims to transfer crypto funds to the scammers’ wallets.

It is understandable why these crimes become more and more common. Although most crypto transactions can be traced on blockchain, there is no mechanism to identify the owner of the wallet. Crypto transactions are much faster than the bank wires and they cannot be reversed. Being a more efficient alternative to the bank transactions, unfortunately, crypto transfers are also used by criminals in all kinds of scams, including the email related.

According to the FBI report, the mentioning of cryptocurrencies in the business email compromise complaints was minimal before 2018 but since then the numbers more than doubled every year. Just last year alone there were 20 crimes reported with an average monetary loss exceeding 10 million dollars. It is anticipated that this number will continue to rise, therefore, the FBI warns people to be extra cautious when receiving requests for crypto funds transfers over an email.

If you received a suspicious email or became a victim of the email fraud, you can file an online complaint with the FBI's Internet Crime Complaint Center IC3 at www.ic3.gov.



Summarized by Katrina Arden, Esq.
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Canada officially approved bitcoin exchange-traded funds (ETF)

Canada officially approved bitcoin exchange-traded funds (ETF)
Over the last few days, the Ontario Securities Commission (OSC) approved not just one but two bitcoin ETFs. First was the Purpose Investment’s ETF followed by Evolve’s ETF. Both to trade on the Toronto Stock Exchange.

ETF investment model allows investors to receive income from the bitcoin’s increase in value without directly owning any crypto. This should attract more investors into the crypto market making the investment process more familiar and eliminating the risks of operating a crypto wallet. But it does not eliminate the volatility risks associated with the BTC and other cryptocurrencies. Therefore, investment into the bitcoin ETFs is considered “high risk.”

Canada joined Europe on the list of jurisdictions, which now allow such ETFs. The United States is not on this list yet. Although several companies filed with the SEC over the past few years, there have been no approvals issued to this date. Considering certain similarities between the U.S. and Canadian security market’ regulations, the OSC’s decision gives hope that the SEC may finally approve a bitcoin ETF in the near future.



Written by Katrina Arden
Attorney and founder of Blockchain Law Group
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Three individuals are charged with fraud by the SEC

Three individuals are charged with fraud by the SEC
In its complaint filed on February 1st, the SEC alleged that Kristijan Krstic, founder of Start Options and Bitcoiin2Gen, and John DeMarr, the primary U.S.-based promoter for these companies, with the assistance from Robin Enos, fraudulently induced investors to buy worthless B2G tokens. The conduct refers back to the end of 2017 – beginning of 2018.

According to the SEC, Mr. Krstic and Mr. DeMarr raised over $11 million through two fraudulent ICOs. The complaint references a large list of violations by these three individuals, including misrepresentations of the investors, sham business activities, misappropriation of millions of dollars of investor funds for personal benefit, and others.

The SEC's complaint charges Mr. Krstic and Mr. Demarr with violating the antifraud and registration provisions of the federal securities laws, and Mr. Enos with aiding and abetting the antifraud violations. The complaint seeks injunctive relief, disgorgement plus interest, penalties, and an officer-and-director bar against Mr. Krstic and Mr. DeMarr. In addition, Mr DeMarr is also facing criminal charges.



Written by Katrina Arden
Attorney and founder of Blockchain Law Group
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The SEC issues a statement and request for comment

SEC issues a statement and request for comment
On December 28, 2020, the SEC issued a very important statement and request for comment to potentially allow broker-dealers to handle digital securities, such as tokens issued to raise capital and other crypto related securities. In its statement, the SEC recognized existing issues, including technical limitations and risks, which are setting digital securities apart from the traditional investment instruments. At the same time, the SEC suggests a number of steps that could be taken by broker-dealers to minimize the risks to investors and other market participants.

At the end of its statement, the SEC asks public to provide comments to the following specific questions:

1. What are industry best practices with respect to protecting against theft, loss, and unauthorized or accidental use of private keys necessary for accessing and transferring digital asset securities? What are industry best practices for generating, safekeeping, and using private keys? Please identify the sources of such best practices.

2. What are industry best practices to address events that could affect a broker-dealer’s custody of digital asset securities such as a hard fork, airdrop, or 51% attack? Please identify the sources of such best practices.

3. What are the processes, software and hardware systems, or other formats or systems that are currently available to broker-dealers to create, store, or use private keys and protect them from loss, theft, or unauthorized or accidental use?

4. What are accepted practices (or model language) with respect to disclosing the risks of digital asset securities and the use of private keys? Have these practices or the model language been utilized with customers?

5. Should the Commission expand this position in the future to include other businesses such as traditional securities and/or non-security digital assets? Should this position be expanded to include the use of non-security digital assets as a means of payment for digital asset securities, such as by incorporating a de minimis threshold for nonsecurity digital assets?

6. What differences are there in the clearance and settlement of traditional securities and digital assets that could lead to higher or lower clearance and settlement risks for digital assets as compared to traditional securities?

7. What specific benefits and/or risks are implicated in a broker-dealer operating a digital asset alternative trading system that the Commission should consider for any future measures it may take?

If you want to get involved and provide a valuable input, you can do so by completing the online comment form at https://www.sec.gov/rules/submitcomments.htm or sending an email to rule-comments@sec.gov.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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SEC filed a complaint against Ripple and its two executives

SEC charged Ripple and its executives with $1.3 billion unregistered securities offering
In its complaint, the SEC alleged that Ripple Labs, Inc. and its two executives Bradley Garlinghouse and Christian Larsen sold over 14.6 billion tokens called XRP from 2013 to present, for which they received over $1.38 billion dollars. During its investigation, the SEC determined that the XRP tokens meet the legal definition of securities; therefore, requiring the XRP sale to be registered with the SEC or be exempt from the registration.

Ripple never filed any registration statements. Instead, as alleged by the SEC, Ripple created an information vacuum and publicly shared information that was beneficial for Ripple, Mr. Garlinghouse and Mr. Larsen, who were the largest holders of the XRP tokens. The SEC found that Mr. Garlinghouse and Mr. Larsen personally profited by approximately $600 million from their unregistered sales of the XRP tokens, while engaging in touting, which is illegal under the U.S. securities law.

The complaint describes in details how Ripple and its executives had been violating the U.S. securities law for a number of years. The SEC’s main concern that the company and its two executives continue to hold a substantial amount of the XRP tokens and can continue to monetize their holdings while using the “information asymmetry they created in the market” for personal gain, while placing the investments of others at substantial risk.

The SEC is seeking injunctive relief, disgorgement with prejudgment interest, and civil penalties. Interesting to note that the SEC did not bring any fraud charges against the two executives.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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SEC published its fiscal year 2020 annual report

SEC published its fiscal year 2020 annual report
On November 2nd, the SEC published an annual report summarizing its enforcement efforts taken during the fiscal year 2020.

Overall, in the fiscal year 2020, the SEC brought 715 enforcement actions, including 405 standalone actions. Cases included a variety of violations such as the issuer disclosure and accounting violations; foreign bribery; investment advisory issues; securities offerings; market manipulation; insider trading; and broker-dealer misconduct. Besides, this year the SEC had to face the new COVID-19 related wrongdoings.

As a result of its efforts, the SEC obtained judgments and orders totaling approximately $4.68 billion in disgorgement and penalties and returned more than $600 million to harmed investors. In addition, the SEC awarded a record $175 million to 39 whistleblowers. It is both the highest dollar amount and the highest number of individuals awarded in any fiscal year.

Among all enforcement actions, there was a number of cases that the SEC brought against the blockchain companies; all of them related to the unlawfully conducted ICO. You can find more information about them in our monthly review published in Crypto World Journal.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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