Author: Neil Humphrey

Press Release 

FOR IMMEDIATE RELEASE 

Washington, D.C. – [6/28/24] – Today marks a significant turning point in the regulatory landscape with the Supreme Court’s decision to strike down Chevron Deference. Chevron Deference allowed federal agencies considerable leeway in interpreting ambiguous statutes, it being overturned today establishes a new era of regulatory clarity and judicial oversight. 

The Digital Chamber (TDC) welcomes this decision as a monumental step toward fair and transparent regulation in the digital assets space. For years, the industry has grappled with inconsistent and overly broad interpretations by the Securities and Exchange Commission (SEC) as Congress debates the regulatory treatment of digital assets. The removal of Chevron Deference paves the way for a more balanced and judicially scrutinized approach to regulation. 

“This decision is a game-changer for the crypto industry,” said Cody Carbone, TDC Chief Policy Officer. “It promises a future where regulations are more predictable and grounded in clear legislative intent, rather than shifting interpretations by regulatory agencies and unelected policy leaders.” 

TDC is committed to providing resources and guidance to our members on navigating this new regulatory environment and working with Congress to create legislative clarity.  

We urge all stakeholders in the digital asset ecosystem to stay informed and engaged as we enter this new phase of regulatory oversight. 

For more information, please contact: press@digitalchamber.org 

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The Digital Chamber recently submitted crucial feedback on the IRS draft Form 1099-DA. The proposed Form 1099-DA for digital asset transactions, is designed for taxpayers to report gains and losses from digital assets. The current proposal requests excessive and potentially intrusive information. There must be a clear and streamlined reporting process to reduce audit risks.

What is happening:

1. The Current Draft Form 1099-DA: The Draft Form 1099-DA requests excessive information beyond what is necessary for tax reporting, including fields like sale transaction IDs and digital asset addresses, which raises privacy concerns.
2. Administrative Burdens: The current draft imposes administrative burdens on taxpayers and digital asset brokers, particularly smaller firms and startups, who must update systems to accommodate the new reporting requirements.
3. Recommendations for Final Form: The Digital Chamber has submitted recommendations to the Internal Revenue Service (IRS) to streamline the final version of Form 1099-DA by including only essential information needed for tax reporting purposes, with additional details retained by brokers for potential examination needs.

Why it is important:

1. Balancing Reporting Burdens: Streamlining the form helps digital asset brokers by reducing unnecessary reporting tasks and privacy concerns. It also makes sure that regulatory requirements are practical and cost-effective.
2. Accuracy and Audit Readiness: Accurate reporting and specifying different tax treatments for items like non-fungible tokens (NFTs) or Qualified Opportunity Fund interests on the final form can reduce audit issues and help the IRS maintain efficient processes.

The Digital Chamber’s Action:

1. The Digital Chamber is pushing the IRS to provide detailed instructions to ensure accurate reporting. The form should account for different tax treatments for assets like NFTs. It’s necessary to get this right to avoid audit issues.
2. TDC is working with the IRS and Treasury to shape fair rules that support both innovation and compliance.

View the full Comment Letter here.

For media inquiries, please contact press@digitalchamber.org. 

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The Digital Chamber, in partnership with Willkie Farr & Gallagher LLP, has released a joint white paper detailing why Filecoin (FIL) should not be regulated as an “investment contract” under U.S. federal securities laws. This comprehensive analysis aims to provide a clear argument against the classification of Filecoin as a security, advocating for a regulatory framework that supports innovation while ensuring investor protection. 

Why We’re Doing This: 

The SEC’s misguided attempts to label FIL as a security in certain actions highlight the urgent need for clear regulatory guidance. Such clarity can enhance industry confidence and facilitate the broader adoption of blockchain technologies, supporting their integration into mainstream applications and services. We specifically chose Filecoin for this analysis because it is so clearly not a security. This case serves as a broader illustration of the SEC’s failure to provide clarity, which is detrimental to the adoption of real-world uses for this technology. 

What’s Happening: 

1. Overview of Filecoin: Filecoin is a decentralized blockchain network designed for peer-to-peer cloud storage, offering economic incentives for reliable file storage since its public release in 2017 by Protocol Labs.
2. Key Components of Filecoin: FIL serves as the native cryptocurrency used within the Filecoin network, essential for purchasing cloud storage and participating in network operations without reliance on external currencies.
3. Storage and Retrieval Services: The network operates through providers who offer storage and retrieval services to users, facilitated by cryptographic proofs and structured through negotiated deals published on-chain.
4. Regulatory Framework: Under U.S. securities laws, assets like FIL could potentially be classified as securities under the “investment contract” definition established in SEC v. Howey, which determines whether transactions involve investments with profit expectations from others’ efforts. FIL should not be considered an investment contract due to its primary role being facilitating decentralized data storage and retrieval – this is a functional, non-speculative use that distinguishes it from assets that can be offered and sold as part of investment contracts. 

Why It Matters: 

1. Legal Clarity for Crypto Assets: Defining FIL’s regulatory status is crucial as it sets a precedent for how decentralized cryptocurrencies are treated under securities laws, impacting their market accessibility and operational compliance.
2. Impact on Innovation: If classified as a security, Filecoin and similar tokens might face regulatory hurdles that could stifle innovation and development within the blockchain and decentralized storage sectors.
3. Investor Protection vs. Market Access: The classification decision affects both investor protection and market access, balancing the need for regulatory oversight with fostering an environment conducive to technological advancement.
4. Global Implications: The outcome could influence global regulatory approaches to decentralized technologies, potentially shaping international standards for blockchain and cryptocurrency governance. 

For media inquiries, please contact press@digitalchamber.org. 

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On Wednesday, May 29, the U.S Treasury Department released the “Illicit Finance Risk Assessment of Non-Fungible Tokens.” The Risk Assessment, required under Treasury’s 2022 “Action Plan to Address Illicit Finance Risks of Digital Assets,” provides a comprehensive overview of the Non-Fungible Token (NFT) market structure, delving into the specific illicit finance threats and vulnerabilities associated with NFTs. It outlines mitigation actions to combat criminal activities and concludes with recommended actions. Treasury risk assessments do not carry any legal weight and are not official executive regulation but can serve to guide the regulatory and policy discussions and debates of the future. Their primary goal is to analyze potential harm posed to consumers, industry participants, and the general public from the threats outlined. These assessments are crucial for maintaining the stability and integrity of our financial systems. 

Analogous to Treasury’s Illicit Finance Risk Assessment for Decentralized Finance (DeFi), the report explicitly states that illicit finance activities utilizing NFT products and markets, including terrorist financing, money laundering, and proliferation financing, are uncommon in the space and that these activities primarily take place in traditional finance. 

NFT Illicit Finance Concerns 

However, the Risk Assessment did highlight prevalent issues of fraud, scams, and theft in the NFT space. It noted that between July 2021 and July 2022, $100 million worth of NFTs were stolen through scams, with $24 million stolen in May 2022 alone. Key types of scams include: 

• Rug Pulls: Creating fake projects to attract investment, then shutting down the project and stealing funds. “Slow rug pulls” involve using funds from an initial project to fund a second scam. 
• Market Manipulation: Deceptive behavior to mislead investors about an asset’s value. 
• Fake and Counterfeit Sales: Misrepresenting an NFT’s value, brand association, or access rights. This includes “sleepminting,” where hackers mint an NFT to appear as if created by a legitimate source, then sell it as authentic. 
• Fraudulent NFT Platforms: Scammers may fail to honor NFT exchange agreements or create fake platforms to steal NFTs. 
• Theft: Criminals can spread malware through social media links, fake advertising, or airdropped NFTs, draining victims’ digital asset wallets, and often use fake NFT creator accounts with phishing links to ask victims to connect their wallets. Vulnerabilities and bugs in smart contracts allow criminals to steal NFTs or buy them at reduced prices, and due to the immutability of many smart contracts, developers often cannot fix or recover funds from these exploits. 

NFT Vulnerabilities 

NFTs have vulnerabilities due to their nature, referenced assets, and regulatory gaps. Criminals exploit cyber vulnerabilities, trademark and copyright challenges, and market hype. Non-compliance with U.S. regulations and foreign regulatory gaps also present risks. 

• Copyright and Trademark Protection: Criminals misrepresent NFT rights, violating copyright and trademarks, inflating prices, and selling counterfeit NFTs. Identifying infringers is challenging due to anonymity and jurisdictional issues. 
• Hype and Fluctuating Pricing: Scammers use time-sensitive offers to pressure victims, and fluctuating prices can mask price manipulation and money laundering. 

Mitigation Measures 

The report outlines several mitigation efforts considered effective against these threats, including: 

• Industry Tools: Tools include scam databases, transaction controls, and blockchain analytics. These can identify scams, prevent wash trading, and flag risky users. Enhanced software reviews and cybersecurity measures are also recommended. 
• Applicability of Law Enforcement Authorities, Public Announcements: NFTs are considered property for asset recovery. Victims can report fraud to the FBI or IC3.gov. Public announcements raise awareness and guide users on preventing fraud. 

• Public Blockchain Transparency: Public blockchains allow tracking of pseudonymous transactions, aiding investigations. However, anonymity-enhancing technologies and off-chain activities limit this transparency. 
• Involvement of Covered Financial Institutions and Other Sources of Government Information: NFT buyers, sellers, and traders often rely on traditional financial institutions to purchase NFTs. Compliance with AML/CFT and sanctions obligations by these institutions can mitigate risks. Non-compliance, especially by foreign VASPs, poses additional risks. 

Recommendations 

• Regulation and Enforcement: Authorities should consider specific regulations and guidance for NFTs, clarify existing obligations, and raise awareness among NFT platforms. Regulatory agencies should continue to enforce current laws and take action against non-compliant entities in the NFT sector. 
• Engagement and Education: The U.S. government should continue engaging with the private sector to monitor NFT developments, promote innovation to mitigate scams and fraud, and educate consumers on NFT rights. Additionally, collaborating with foreign partners to assess and address illicit finance risks in the NFT ecosystem is crucial. 

For media inquiries, please contact press@digitalchamber.org. 

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