Blockchain and Digital Assets: 2022 in Cryptocurrency | Harris Beach PLLC

With 2022 now in the background and 2023 under way, a review of some of the 2022 cryptocurrency highlights provides an opportunity to look at the past year’s developments with a fresh perspective – and identify some patterns that could influence the coming year. Despite growing interest and acceptance of cryptocurrency, 2022 served as a wake-up call for many crypto enthusiasts who previously viewed crypto as the “Wild West.” Massive losses in market cap, 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 are some of the top activities from 2022 that would shape the 2023 crypto market:

Increased regulation of cryptocurrency

Authorities around the world—but especially in the United States—stepped up cryptocurrency regulation in 2022. And in pursuit of a comprehensive and clear rulebook, President Biden issued an order directing federal agencies to come up with a comprehensive plan for cryptocurrency regulation and enforcement.

As many in the industry predicted, traditional cryptocurrency appears to be fast-tracking toward “security” classification, with elements of traditional banking supervision. Some examples from the past year include:

• The New York Department of Financial Services (“DFS”) took its first enforcement action against a DFS-licensed “virtual currency business” – resulting in a $30 million settlement with cryptocurrency investment platform Robinhood Crypto, LLC
• The US Securities and Exchange Commission charged 11 people in an alleged crypto pyramid and Ponzi scheme called Forsage.
• The US Department of 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 its launch in 2019.
• The US 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 to allow clients to exchange their digital assets — or cryptocurrency — to avoid U.S. sanctions in places like Syria, Iran and Cuba.
• The Justice Department charged a former Coinbase employee with insider trading, with the SEC making the almost unprecedented move of labeling nine different crypto tokens as securities, a move that signaled significant change in how crypto may be treated going forward.
• The DOJ charged six people in four separate cases of alleged cryptocurrency fraud, including the largest known Non-Fungible Token scheme to date.
• Earlier this summer, DFS published its first guidance on stablecoins, which requires them to be fully backed by a reserve separate from the issuers’ operating assets and regularly certified by an auditor.
• Celebrity spokesperson Kim Kardashian agreed with the SEC to a fine of over $1 million and a three-year ban from promoting cryptocurrency related to her promotion of EthereumMax.

More enforcement is virtually guaranteed: The SEC announced in May that it would increase its Crypto Assets and Cyber ​​Unit by 20 positions, for 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
• illegal finance
• US leadership in the global financial system and economic competitiveness
• financial inclusion
• responsible innovation

Congress also held at least 15 hearings in 2022 focusing 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 hint at continued, accelerated crypto regulation in 2023.

Crypto controversies

While broader macroeconomic factors certainly affected cryptocurrency values ​​and crypto-related stocks and companies, that is certainly not true of all crypto losses in 2022. Major players such as Terra and Three Arrows Capital suffered devastating losses that were not directly related to the larger economic climate.

Of the controversial crypto collapses, perhaps none is as well known, publicized and talked about as the 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 buying 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 issues.

In November, however, FTX collapsed due to liquidity problems, setting off an almost unprecedented series of events. Losses are expected to exceed $8 billion, and John J. Ray III, who oversaw the Enron liquidation, steps in to oversee the FTX liquidation.

In addition to efforts to recover losses, the FTX collapse also led to lawsuits related to spokesperson liability and liability, and embroiled A-list celebrities such as Tom Brady, Gisele Bundchen, and Larry David in the controversy surrounding the collapse of FTX.

The FTX celebrity endorsements weren’t the only ones scrutinized; despite some apparent misgivings from the court, EthereumMax advocates Kim Kardashian and Floyd Mayweather fended off a class-action lawsuit over their promotion of this project, in a decision that could affect the liability of FTX spokespersons (but, as noted above, Ms. Kardashian came to the agreement of the SEC).

Cryptocurrency collapse

Cryptocurrency is no stranger to boom times, but 2022 was particularly dramatic: the entire asset class lost roughly 70% of its value. Bitcoin, for example, started the year trading near $42,000, peaked at just over $46,000 a few months in, and then plunged to a low near $16,000 at the end of the year. Arguably, many of the related regulatory and legal entanglements are linked to the general collapse of the market.

2022 was a particularly wild ride for crypto. 2023 is likely to be somewhat more stable as markets, regulators and lawyers continue to address some of the unprecedented drama of 2022, but the biggest lesson of 2022 will endure: be prepared for anything!