Shalini Nagarajan

The Securities and Exchange Commission (SEC) sought to revise its fine against blockchain-based content-sharing platform LBRY after taking into account the marketplace’s inability to afford the substantial $22 million penalty.



Additionally, considering LBRY’s “lack of funds and near-defunct status,” the agency chose to withdraw its request for disgorgement, or forfeiture of ill-gotten gains.



In a <a href="https://www.courtlistener.com/docket/59774584/107/us-securities-and-exchange-commission-v-lbry-inc/" target="_blank" rel="noreferrer noopener">filing</a> dated May 12, the Commission has now requested the US District Court of New Hampshire to impose a fine of $111,614.



In March 2021, the SEC filed a <a href="https://www.docketalarm.com/cases/New_Hampshire_District_Court/1--21-cv-00260/US_Securities_and_Exchange_Commission_v._LBRY_Inc/1/" target="_blank" rel="noreferrer noopener">lawsuit</a> against LBRY, accusing them of offering LBRY Credit tokens (LBC) without registering them as securities. LBRY CEO Jeremy Kauffman expressed concern this decision could potentially endanger the entire US crypto industry, as it would establish a precedent that could classify “almost every cryptocurrency” as security.



Although LBRY did not conduct an initial coin offering (ICO) or a similar public token sale, the SEC alleged that LBRY’s team retained tokens for themselves through a “pre-mine” process and subsequently released them on secondary exchanges to generate funds for their operations.



The SEC <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">secured victory in the case</a> through a summary judgment in Nov. 2022, when a federal judge recognized that the tokens incentivized LBRY’s team to develop the network, creating the perception among investors that investing in LBC on secondary markets would yield profits.



LBRY in Dec. <a href="https://www.courtlistener.com/docket/59774584/100/us-securities-and-exchange-commission-v-lbry-inc/" target="_blank" rel="noreferrer noopener">hit back</a> at the SEC’s request for $22 million in disgorgement, saying the amount was “not a reasonable approximation of profits causally connected to the violation.”



Now, the SEC has also sought an injunction to prevent LBRY from violating Section 5 of the Securities Act of 1933, which prohibits unregistered offerings of crypto securities. This injunction will continue until LBRY meets two requirements: disposing of its LBC holdings and dissolving the company, as it has expressed intent to do in court.



The SEC argued that LBRY’s possession of LBC tokens indicates the potential for additional unregistered sales, which supports the necessity of an injunction.



“LBRY satisfies the factors for injunctive relief and there is a reasonable likelihood it will violate Section 5 again,” the agency said. Blockworks has reached out to LBRY for comment.&nbsp;



Meanwhile, LBRY contended in Dec. 2022 that an injunction is unnecessary since it’s already in the process of shutting down operations and burning existing LBC tokens, according to the filing. The SEC pointed out that these actions have not been taken yet.



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SEC Lowers LBRY Fine Significantly Due to ‘Near-Defunct’ Status

Cryptocurrency lending platform Nexo was engaged in drawn-out a dialogue with US regulators that saw it eventually decide to leave the US market. But that didn’t mean its legal woes were over.&nbsp;



On Thursday, the SEC <a href="https://www.sec.gov/news/press-release/2023-11" target="_blank" rel="noreferrer noopener">charged</a> Nexo with failing to register its Earn Interest Product (EIP), which promised investors annual interest of as much as <a href="https://support.nexo.io/s/article/earn-high-yielding-annual-interest-on-crypto-assets-explained" target="_blank" rel="noreferrer noopener">20%</a>.



In response, Nexo has agreed to stop offering the product and will pay a $45 million settlement.&nbsp;



The SEC alleged that Nexo began offering the product in the US around June 2020, and the firm used customers’ cryptoassets, in part, to make interest payments to other investors. By September, the lender faced several <a href="https://blockworks.co/news/california-regulator-files-desist-and-refrain-order-against-nexo">cease-and-desist actions by eight state regulators</a> including California, New York and Washington.



Eventually, in December, Nexo said it would <a href="https://blockworks.co/news/nexo-crypto-lending-platform-to-cease-us-operations">wind down its US operations</a> after hitting a “dead end” in attempts to gain clarity from dialogue with US regulators.&nbsp;



According to the SEC, Nexo’s product should have been registered as it considers the EIP a “security” and therefore wasn’t exempt from the registration process.



“The order finds that the EIP is a security and that the offer and sale of the EIP did not qualify for an exemption from SEC registration. Therefore, Nexo was required to register its offer and sale of the EIP, which it failed to do,” it said.



SEC Chair Gary Gensler said compliance with the agency’s policies isn’t a choice. “Where crypto companies do not comply, we will continue to follow the facts and the law to hold them accountable,” he said.



In its <a href="https://nexo.io/media-center/nexo-reaches-landmark-resolution-with-us-regulators">blog</a> published on Thursday, Nexo said the settlement was made on a no-admit-no-deny basis, meaning the firm is allowed to pay up without admitting to the SEC’s allegations.



“We are content with this unified resolution which unequivocally puts an end to all speculations around Nexo’s relations to the United States. We can now focus on what we do best — build seamless financial solutions for our worldwide audience,” said Nexo co-founder Antoni Trenchev.



Thursday’s settlement only added to the lender’s headaches.



Earlier this week, Nexo’s <a href="https://blockworks.co/news/nexo-office-in-bulgaria-raided-in-sanctions-probe">local offices in Bulgaria were raided</a> by officials for alleged money laundering, tax evasion and fraud. The investigations were reportedly carried out as part of a broader probe focused on international financial sanctions against Russia. 



“We are confident that a clearer regulatory landscape will emerge soon, and companies like Nexo will be able to offer value-creating products in the United States in a compliant manner, and the U.S. will further solidify its position as the world’s engine of innovation,” Nexo co-founder Kosta Kantchev said.



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Nexo Axes Earn, Calls $45M Fine to Regulators ‘Landmark Resolution’

The still-nascent cryptocurrency industry has attracted many bad actors, including some company insiders or executives. Finding the best way to regulate the industry while leaving room for innovation is of paramount concern to lawmakers across the globe, including in the US.



The <a href="https://blockworks.co/tag/sec">Securities and Exchange Commission</a> (SEC) has often been accused of pursuing “<a href="https://blockworks.co/news/crypto-industry-eyes-secs-regulation-by-enforcement-ramp-up">regulation by enforcement</a>” rather than <a href="https://blockworks.co/news/sec-ftt-complaint-is-yet-another-case-of-regulation-by-enforcement">setting clear guidelines</a>, and in 2022 the agency issued 30 enforcement actions against 79 digital asset market participants, Cornerstone Research said in a <a href="https://www.cornerstone.com/wp-content/uploads/2023/01/SEC-Cryptocurrency-Enforcement-2022-Update.pdf" target="_blank" rel="noreferrer noopener">report</a> published Wednesday. Of those, 56 were individuals and 23 were firms.



That represents a 50% jump from 2021 and the highest number of actions taken by the SEC since 2013. Total fines imposed came to about $2.6 billion since 2013, out of which settlements amounted to $242 million as of Dec. 2022.



Among the enforcement actions in 2022, the most recurrent infractions were related to fraud and unregistered securities offerings.&nbsp;



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="600" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg" alt="" class="wp-image-44259" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=2048 2048w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=445 445w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=374 374w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/SEC-enforcement-graph-1024x600.jpg?w=80 80w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption class="wp-element-caption">Note: The figure focuses on the total of 127 SEC cryptocurrency enforcement actions (both litigations and administrative proceedings under Section 8A of the Securities Act and/or Section 21C of the Exchange Act). An enforcement action may be associated with more than one allegation. “Other Allegations” include claims that have been alleged in only a few litigations or administrative proceedings, such as violations of restricted period, failure to register as an investment company, fraudulent transactions by investment advisers, failure to maintain internal controls, and falsification of internal controls. | Source: Cornerstone Research</figcaption></figure>



Separately, the SEC has engaged in 82 crypto-related lawsuits over the last 9 years, 43% of which were litigated in New York federal courts.



Since <a href="https://blockworks.co/tag/gary-gensler">Gary Gensler</a> was sworn in as chairman of the SEC in April 2021, the agency has upped its focus on crypto lending and DeFi platforms, Cornerstone said.&nbsp;



The SEC was open about increasing its scrutiny on the crypto industry and decided to establish a <a href="https://blockworks.co/news/sec-plans-new-office-of-crypto-assets-to-find-soft-targets">specific Crypto Assets and Cyber Unit</a> to scan digital asset players.



“As Chair Gensler has noted, the ‘runway is getting shorter’ for crypto intermediaries to register with the SEC. This could lead to more enforcement actions coming from the SEC’s Crypto Assets and Cyber Unit, which recently expanded its workforce to investigate securities law violations in the crypto markets,” Simona Mola, principal at Cornerstone Research, said in a statement.



BlockFi faced the largest monetary penalty by the SEC in 2022, having to pay <a href="https://blockworks.co/news/crypto-lender-blockfi-to-pay-100m-in-fines-to-us-regulators">$100 million</a> for failing to register its crypto lending product. The most recent <a href="https://blockworks.co/news/sec-charges-sam-bankman-fried-with-defrauding-investors">charge</a> was against Sam Bankman-Fried in December for his alleged role in operating a scheme to defraud investors in <a href="https://blockworks.co/tag/ftx">FTX</a>.



Critics point out that the SEC’s actions have generally failed to protect consumers, either focusing on cases without obvious victims, such as <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">the LBRY case</a>, or, as most clearly illustrated by the latest pursuit of FTX, far too late to do consumers any good.



The SEC’s approach also may have the consequence of pushing startup activity overseas, due to uncertainty and high costs of doing business in the US, <a href="https://blockworks.co/news/house-republican-sec-commissioner-partner-on-token-sales-policy">members of Congress have observed</a>.



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SEC Crypto-related Fines Hit $2.6B Through 2022

Sebastian Sinclair

Coinbase’s settlement with regulators on Wednesday has marked the industry’s largest in almost a year and one of the largest to date.



The New York State Department of Financial Services (NYDFS) found the exchange <a href="https://blockworks.co/news/coinbase-stock-up-after-settlement">violated anti-money laundering</a> laws in 2018 and 2019 by allowing customers to open accounts without complete background checks.



As such, Coinbase has agreed to pay a $50 million fine as well as a further $50 million that will go towards its compliance practices, per the agreement laid out in the settlement.



Coinbase’s latest regulatory snafu follows a previous <a href="https://www.cftc.gov/PressRoom/PressReleases/8369-21" target="_blank" rel="noreferrer noopener">$6.5 million settlement</a> in a civil penalty with the Commodities and Futures Trading Commission in March 2021. 



The exchange was accused of delivering false, misleading, or inaccurate reports relating to transactions on a trading platform it operated known as GDAX.



The settlement amount is similar to NYDFS previous money laundering-related fines of financial giants such as Deutsche Bank (<a href="https://www.dfs.ny.gov/system/files/documents/2020/07/ea20200706_deutsche_bank_consent_order.pdf" target="_blank" rel="noreferrer noopener">$150 million</a> in 2020) and Wells Fargo (<a href="https://www.latimes.com/business/la-fi-wells-fargo-new-york-fine-20181022-story.html" target="_blank" rel="noreferrer noopener">$65 million</a> in 2018).



What follows is a roundup of the industry’s most significant settlements with US regulators in relation to dollar amounts and terms laid out in the legal agreements stretching back to 2019.



<h3 class="wp-block-heading">BlockFi Fined $100 Million over interest-bearing products</h3>



In February of last year, now-bankrupt crypto lender <a href="https://blockworks.co/news/crypto-lender-blockfi-to-pay-100m-in-fines-to-us-regulators">BlockFi was ordered to pay $50 million</a> in fines to the Securities and Exchange Commission and a further $50 million to various state regulators.



It was alleged at the time the lender had illegally offered a high-interest yield product, known as BlockFi Interest Account (BIA), which had allowed users to lend out their crypto for up to 9.25% in annual percentage yield.



US customers were prohibited from opening any new interest-yielding accounts, and existing accounts were converted to “BlockFi Yield” under an existing regulatory-compliant framework.



BlockFi later <a href="https://blockworks.co/news/blockfi-bankruptcy-highlights">filed for Chapter 11 bankruptcy</a> on Nov. 28 following the collapse of FTX.



<h3 class="wp-block-heading">Bitfinex parent pays $18.5 million over alleged $850 million cover-up</h3>



Roughly one year before BlockFi’s settlement, crypto exchange Bitfinex’s parent <a href="https://www.reuters.com/world/americas/bitfinex-tether-owner-pays-185-mln-fine-settle-nyag-cryptocurrency-cover-up-2021-02-23/" target="_blank" rel="noreferrer noopener">agreed to pay</a> an $18.5 million fine to the New York Attorney General&#8217;s office to settle charges it had engaged in a cover-up to hide the loss of hundreds of millions in client funds.



Hong Kong-based iFinex Inc, also the parent of stablecoin issuer Tether, was required to halt trading activity with New Yorkers as part of the deal.&nbsp;



Bitfinex was accused of having sent $850 million to Panama-based payments processor Crypto Capital Corp without first telling clients. After funds went missing, it was alleged the exchange siphoned $700 million from Tether’s stablecoin reserves to cover the shortfall.



As part of the agreement to settle, Bitfinex and Tether did not admit or deny wrongdoing.



In October, 2021, Tether <a href="https://blockworks.co/news/tether-settles-with-cftc-for-42-5m">settled with the CFTC for $42.5 million</a> over the agencies allegations that Tether misrepresented the reserves backing of USDT.



<h3 class="wp-block-heading">Block.One pays $24 million to settle charges over unregistered ICO</h3>



Block.One, the company behind the EOS cryptocurrency, reached a settlement with the Securities and Exchange Commission in October 2019, <a href="https://www.sec.gov/news/press-release/2019-202" target="_blank" rel="noreferrer noopener">agreeing to pay</a> a $24 million fine for conducting an unregistered securities sale



Its initial coin offering of 900 million EOS tokens first began way back in June 2017, and is considered the largest ICO in history, having raised some $4.1 billion.



As per the legal agreement, Block.One later settled the charges without admitting or denying the findings by the federal regulator.



<h3 class="wp-block-heading">Telegram fined $18.5 million, forced to repay $1.2 billion from ICO sale</h3>



Also in October 2019, the SEC filed a complaint against the parent of social media platform Telegram, alleging the company raised more than $1.2 billion from the illegal securities sale of 2.9 billion Grams — a proposed utility token.



At the time, the SEC alleged Grams had been sold via an initial coin offering to some 171 initial purchasers around the globe and sought to restrain Telegram from any further sales.&nbsp;



The US Southern District Court of New York later agreed with the SEC’s findings in March 2020 and issued an injunction barring any further sale of Grams. Without admitting or denying the allegations, Telegram agreed to pay $18.5 million in a civil penalty.



Up until last year, Telegram was also required to notify the SEC before embarking on any further issuance of digital assets. Telegram was also forced to repay the $1.2 billion back to investors.



Although Telegram was prohibited from pursuing its centralized blockchain development plans, the underling open-source code was used to launch <a href="https://blockworks.co/news/ton-standout-in-rocky-crypto-markets">the community-driven TON project</a>. The team behind Telegram’s Messenger app is now building upon the same technology it previously developed in-house.



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Bitfinex

Coinbase’s $100M Settlement, Largest Since BlockFi

Jacquelyn Melinek

<div id="highlights-block_615390e37ef13" class="highlights">
 <ul>
 <li>The charges against the second-largest spot cryptocurrency exchange in the US are “for illegally offering margined retail commodity transactions in digital assets, including bitcoin, and failing to register as a futures commission merchant (FCM),” the CFTC stated</li>
 <li>Kraken told Blockworks, &#8220;We are committed to working with regulators to try to ensure the rules governing digital assets create a level playing field globally&#8230;&#8221;</li>
 </ul>
 
</div>



The Commodity Futures Trading Commission issued a $1.25 million penalty fine against Kraken to settle charges against the crypto-exchange company after it allegedly offered illegally margined digital asset services, among other violations, according to a CFTC press release on Tuesday. 



The charges against the second-largest spot cryptocurrency exchange in the US are “for illegally offering margined retail commodity transactions in digital assets, including Bitcoin, and failing to register as a futures commission merchant (FCM),” the CFTC stated.&nbsp;



The total number of assets staked on Kraken has reached $10.8 billion, as of Sept. 20, and <a href="https://cms.blockworks.co/kraken-clients-earned-100-million-in-staking-rewards-in-first-half-of-2021/" target="_blank" rel="noreferrer noopener">$100 million in rewards</a> has been paid out to clients as of late July, Blockworks previously <a href="https://cms.blockworks.co/kraken-is-building-out-staking-consumer-capabilities-and-monitoring-nft-space/" target="_blank" rel="noreferrer noopener">reported</a>.



Kraken must pay the “civil monetary penalty” and must cease and desist from further violations from the Commodity Exchange Act (CEA), an act that regulates the trading of commodities in the US.



In an email to Blockworks, Kraken shared the following statement, “We appreciate that today’s settlement acknowledges our cooperation and engagement on the issue. We are committed to working with regulators to try to ensure the rules governing digital assets create a level playing field globally — one that allows the crypto space in the U.S. to flourish, while protecting the interests of individuals and the integrity of the industry.” 



“As a firm committed to reasonable regulation, we engaged with the CFTC about its proposed margin trading guidance and sought clarity about what the guidance would permit. In June of this year, we started limiting our margin products in the U.S. to eligible clients prior to entering into this settlement with the CFTC,” Kraken added.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“The Commission finds that Kraken violated CEA Section 4(a) because it engaged in retail commodity transactions that are prohibited by the CEA unless traded on or subject to the rules of a DCM — a registration designation that has neither been requested by nor granted to Kraken,” according to a separate <a href="https://www.theblockcrypto.com/linked/118961/cftc-levies-1-25-million-penalty-against-kraken-and-commissioner-stump-weighs-in-on-settlement" target="_blank" rel="noreferrer noopener">statement</a> by CFTC Commissioner Dawn Stump.</blockquote>



For context, the CFTC said that from June 2020 to July 2021, Kraken violated the CEA by offering margined crypto assets unlawfully because the transactions were required to take place on a designated contract market and they didn’t.&nbsp;



“According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all assets purchased using margin for the duration of a customer’s open margined position,” the CFTC stated. Additionally, “Kraken illegally operated as an unregistered FCM,” it said.



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