With 2022 now fading into the background and 2023 underway, a review of some of the 2022 highlights in cryptocurrency provides an opportunity to look at the developments of the past year with a fresh perspective – and to identify some patterns that could impact the coming year. Despite increasing interest in and acceptance of cryptocurrency, 2022 served as a wakeup call for many crypto enthusiasts who previously viewed crypto as the “wild west.” Massive market value loss, notable, high-profile project failures and lawsuits, and new regulatory scrutiny combined to make 2022 a fascinating year in crypto, but one with meaningful ramifications for the entire industry – in 2023 and beyond.
Here is some of the top activity from 2022 that should shape the 2023 crypto market:
Increased Cryptocurrency Regulation
Authorities throughout the world – but especially in the United States – stepped up cryptocurrency regulation in 2022. And, in the search for a comprehensive and clear rulebook, President Biden issued an executive order directing federal agencies to come up with a comprehensive plan for cryptocurrency regulation and enforcement.
As many in the industry anticipated, traditional cryptocurrency appears to be fast-tracked towards “security” classification, with elements of traditional banking oversight. Some examples from the past year include:
- The New York Department of Financial Services (“DFS”) brought its first enforcement action against a DFS-licensed “virtual currency business” – resulting in a $30 million settlement with cryptocurrency investing platform Robinhood Crypto, LLC
- The U.S. Securities and Exchange Commission charged 11 people in an alleged crypto pyramid and Ponzi scheme called Forsage.
- The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned and banned currency mixer Tornado Cash, alleging that the platform laundered more than $7 billion in virtual currency since launching in 2019.
- The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and OFAC settled enforcement actions with Washington state-based Bittrex. In the two settlements, Bittrex agreed to pay $29 million for allowing clients of its digital asset – or cryptocurrency – exchange to evade U.S. sanctions in places such as Syria, Iran, and Cuba.
- The Department of Justice charged a former Coinbase employee with insider trading, wherein the SEC made the near-unprecedented move of labeling nine different crypto tokens as securities, a move signaling significant change to how crypto may be treated going forward.
- DOJ criminally charged six people in four separate cases of alleged cryptocurrency fraud, including the largest known Non-Fungible Token scheme to date.
- Earlier in the summer, DFS published its first guidance on stablecoins, requiring them to be fully backed by a reserve segregated from the issuers’ operational funds and attested to regularly by an auditor.
- Celebrity spokesperson Kim Kardashian agreed with the SEC to a fine of over $1 million and a three-year ban on promoting cryptocurrency related to her promotion of EthereumMax.
More enforcement is virtually guaranteed: SEC announced in May it would increase its Crypto Assets and Cyber Unit by 20 positions, to a total of 50 positions dedicated to protecting investors from crypto and cyber threats.
In addition, President Biden called for a national policy, focused on six priorities:
- consumer and investor protection
- financial stability
- illicit finance
- U.S. leadership in the global financial system and economic competitiveness
- financial inclusion
- responsible innovation
Congress also held at least 15 hearings in 2022 focused on cryptocurrency and blockchain policy. Two major bills – the Responsible Financial Innovation Act of 2022 and the Digital Commodity Consumer Protection Act of 2022 – propose a regulatory framework for the industry. These bills and the presidential order suggest continued, accelerated crypto regulation in 2023.
While wider macroeconomic factors certainly impacted cryptocurrency values and crypto-related stocks and companies, that is certainly not true of all of the crypto losses in 2022. Major players such as Terra and Three Arrows Capital suffered devasting losses not directly related to the larger economic climate.
Of the controversial crypto collapses, perhaps none is as well-known, publicized, and talked about as former industry darling FTX, the third largest crypto exchange at the time. FTX was known for flashy ads, A-list spokespeople, large political and charitable donations, and purchasing or otherwise financially supporting distressed crypto entities. FTX founder Sam Bankman-Fried was a crypto celebrity in his own right, frequently testifying before Congress on crypto and industry-wide issues.
In November, however, FTX effectively collapsed due to liquidity problems, kickstarting an almost unprecedented series of events. Losses are expected to exceed $8 billion, with John J. Ray III, who oversaw the Enron liquidation, stepping in to oversee the FTX liquidation.
In addition to attempts to recover losses, the FTX collapse also led to lawsuits related to spokesperson accountability and liability, entangling A-list celebrities such as Tom Brady, Gisele Bundchen, and Larry David in the controversy over the collapse of FTX.
The FTX celebrity endorsements were not the only ones that faced scrutiny; despite some apparent misgivings by the court, Kim Kardashian and Floyd Mayweather, spokespeople for EthereumMax, averted class action lawsuits for their promotion of that project, in a decision that may impact the liability of FTX spokespeople (though, as noted above, Ms. Kardashian did come to terms with the SEC).
Cryptocurrency is no stranger to boom and bust cycles, but 2022 was especially dramatic: the entire asset class lost roughly 70% of its value. Bitcoin, for example, started the year trading near $42,000, peaked at a little over $46,000 a few months in, and then plummeted to a low near $16,000 at the end of the year. No doubt many of the related regulatory and legal entanglement are tied to the overall collapse of the market.
2022 was a particularly wild ride for crypto. 2023 will likely be somewhat more stable as the markets, regulators, and lawyers continue to address the some of the outstanding drama from 2022, but the biggest lesson from 2022 will endure: be prepared for anything!
Harris Beach’s Blockchain and Digital Assets Industry Team is closely following industry developments. If you have questions about this subject or other related matters, please reach out to attorney Peri A. Berger at (212) 912-3574 and firstname.lastname@example.org, or to the Harris Beach attorney with whom you most frequently work.
This alert is not a substitute for advice of counsel on specific legal issues.
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