SEC under fire for its custody rule: Law Decoded, May 8–15

May 15, 2023

Last week was harsh for the United States Securities Exchange Commission (SEC), with industry figures and officials publicly criticizing the regulator.

May 8 was the deadline for feedback on the SEC’s proposed custody rule, and there was feedback aplenty. Andreessen Horowitz’s general counsel Miles Jennings called the proposal a “misguided and transparent attempt to wage war on crypto.”

The Blockchain Association claimed the rule exceeds the SEC’s authority, would inhibit advisers from transacting with crypto exchanges and leave investors’ assets at more risk. The chair of the United States House of Representatives Financial Services Committee, Representative Patrick McHenry, wrote that the SEC was exceeding its authority in the proposed rule, known as the registered investment adviser rule.

Another reason for criticizing the SEC was its “legal threat” to Coinbase in late March, accusing it of “possible violations of securities laws.” The U.S.-headquartered crypto exchange filed a complaint, supported by a U.S. Chamber of Commerce amicus brief last week.

The Chamber of Commerce threw its full weight behind Coinbase, accusing the SEC of deliberately creating a precarious and uncertain landscape for crypto companies operating in the country. Paradigm — the crypto investment firm led by Coinbase co-founder Fred Ehrsam — has also filed an amicus brief. According to the firm, regulatory uncertainty could lead to a “de facto ban on digital asset trading platforms” without a clear path to register with the SEC.

Finally, watchdog group Empower Oversight Whistleblowers and Research (EMPOWR) has filed suit against the SEC to force it to comply with a Freedom of Information Act request for access to communications between former Commission officials and their former and future employers.

EMPOWR claimed in its suit that the former SEC officials had a potential conflict of interest regarding cryptocurrency. The lawsuit specifically mentioned former SEC chair Jay Clayton, former enforcement division director Marc Berger and former director of corporate finance William Hinman.

Texas votes to add crypto to state’s Bill of Rights

State legislators in Texas have voted to amend the state’s Bill of Rights by adding a provision recognizing the right of individuals to possess, retain and utilize digital currencies. Bill HJR 146 — introduced by State Representative Giovani Capriglione — declares that individuals have the right to use a medium of exchange that is mutually agreed upon, which includes digital currencies, cash, coin, bullion, or scrip, for trading and contracting goods and services, and that this right cannot be violated.

Terra Luna founder Do Kwon’s bail terms officially accepted by Montenegro court

Montenegro has approved the bail terms proposed by lawyers for Terra founder Do Kwon, who was charged with the criminal offense of document forgery under Montenegrin law.

The court has accepted the proposed bail offer for Kwon and Terraform Labs chief financial officer Han Chang-Joon of 400,000 euros ($436,000) each. This is in addition to being put under house arrest instead of being taken into custody. According to the documents, if the house arrest is compromised, the bail will be entered into a “special section” of the court’s working budget. The current criminal trial in Montenegro is anticipated to start on June 16.

FTX founder Sam Bankman-Fried urges court to dismiss charges

FTX founder and former CEO Sam Bankman-Fried seeks to have up to 10 criminal charges against him dismissed in court, months ahead of his scheduled criminal trial in October. In court documents filed in the U.S. District Court for the Southern District of New York on May 8, Bankman-Fried’s legal team pushed to dismiss everything apart from three counts of conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering.

Bankman-Fried was initially extradited to the U.S. from the Bahamas to face eight criminal charges of alleged fraud and money laundering. However, his legal team argues that four of the five additional charges, which have since been added, “violates the Treaty’s rule of specialty provision.” Under the “rule of specialty,” the requesting state (the U.S.) is generally bound to trial the extradited offender only for the offense for which they were extradited.

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