On March 2, 2023, Deputy Attorney General Lisa Monaco delivered Remarks at American Bar Association National Institute on White Collar Crime and crypto crime remains an enforcement priority for the DOJ. Lisa Monaco delivered Remarks at American Bar Association National Institute on White Collar Crime

"And we’re doubling down on the successful strategies we have deployed to attack cyber and crypto crime, to harness all tools across government to pursue prevention, deterrence and accountability." 

The recent announcement by Blur that it has removed all third-party “flag restrictions” on NFTs is coming at a time when we are seeing a tremendous surge in NFT collateralized loans on digital asset liquidity platforms. This begs the question, what are the legal implications for traders and decentralized lending platforms when it comes to collateralizing loans with “flagged” NFTs. Digital asset lending services allow traders to collateralize cryptocurrency loans with NFTs they hold in their wallets. A simple wallet transaction is often all that is necessary for a borrower to obtain a loan on an NFT. Crypto Criminal Defense Lawyer

Collateralizing any loan with property that one knows, or has reason to believe is stolen, presents risk to both the borrower and the lender. If for example, the lender discovers that the property is stolen, they could pursue civil or criminal legal action against the borrower. Could the lender also take action to recover damages against the borrow? And if so, how would legal action impact the pending loan and ownership rights to the underlying digital asset? 

An additional question to consider in this hypothetical scenario is what, if any, “know your customer” (“KYC”) information did the lender collect from the borrower at the time the loan was processed? If the lender failed comply with applicable KYC laws, then they may have a difficult time brining legal action against an “anon” borrower who knowingly obtained the loan on a stolen “flagged” NFT. Exactly what legal risks this sort of a digial asset loan possess to both the borrower and the lender will no-doubt continue to be hotly debated in the space. This is especially the case as the decentralized world of finance continues to evolve and confront enforcement and regulatory challenges.
As always, this blog-post is strictly for information purposes only and should in no way be considered legal or financial advice.

There has been an ongoing controversy brewing between marketplaces about how to deal with the problem of stolen NFTs. Through social engineering and phishing scams, bad actors can easily trick a user into signing a fraudulent contract link that instantly transfers their NFTs to a scammer’s wallet. Scammers then typically resell those stolen NFTs on secondary marketplaces like OpenSea, LooksRare and Blur. Given the immutable nature of blockchain transactions, there is nothing that can done to reverse the original theft of these NFTs. Crypto Criminal Defense Lawyer

As I’ve previously discussed, the resale of flagged NFTs comes with its own unique set of risks. Knowingly selling stolen “flagged” NFTs can potentially expose traders to criminal prosecution and/or civil lability. In response to this problem, OpenSea attempted to stop the resale of stolen NFTs to secondary buyers by way of a flagging mechanism. Basically, if an NFT holder filed a written report with OpenSea that the NFT was stolen, then OpenSea would flag that NFT and prevent any further resale of the token. The problem of course was that without an immediate freeze of the NFT, these stolen tokens would be bought and sold several times over before being flagged. This created a scenario in which bona fide purchasers were innocently buying NFTs, without any knowledge they were previously stolen, and then getting stuck holding “flagged” NFTs in their wallets.


Yesterday we discussed the jury verdict in the #Hermes v. #Metabirkins trial. Here’s a link to the podcast! LexLine Podcast 

"Ishan Wahi, a former product manager at Coinbase Global, Inc. (“Coinbase”), pled guilty to two counts of conspiracy to commit wire fraud in connection with a scheme to commit insider trading in cryptocurrency assets by using confidential Coinbase information about which crypto assets were scheduled to be listed on Coinbase’s exchanges." 

U.S. Attorney Damian Williams said: “Ishan Wahi – a former Coinbase product manager – admitted in court today that he tipped others regarding Coinbase’s planned token listings so that they could trade in crypto assets for a profit." "Wahi is the first insider to admit guilt in an insider trading case involving the cryptocurrency markets." DOJ Press Release  Williams added: Whether it occurs in the equity markets or the crypto markets, stealing confidential business information for your own personal profit or the profit of others is a serious federal crime." 

Wahi is the same defendant who this week filed a motion to dismiss the SEC's concurrent civil lawsuit alleging that he engaged in insider trading.The SEC alleges that Wahi used information he gained at Coinbase to tip off his brother and his college friend about tokens that were about to be listed on Coinbase. Wahi's counsel argues that the SEC's lawsuit should be dismissed because "[n]owhere has the SEC alleged that the Defendants traded tokens with the mental state necessary to establish federal securities fraud." To the contrary, nobody—neither the SEC nor the legion of sophisticated counsel advising Coinbase—considered the tokens at issue to be securities before the SEC filed this suit. Because the SEC cannot establish that the Wahi had the culpable state of mind necessary to commit securities fraud, the Amended Complaint must be dismissed." SEC Suit