Yuga Labs and Bittrex Under Scrutiny in Latest Regulatory Crackdown

In Brief

• The SEC is reportedly looking into potential non-disclosures by BAYC creator Yuga Labs.
• According to U.S. Treasury Department, Bittrex has agreed to settle a $29 million fine for violating Bank Secrecy Act.
• These actions follow hard on the heels of other federal enforcements in 2022.

The next crypto market bull run has encountered another hurdle as the U.S. Securities and Exchange Commission and the Treasury Department target two pillars of the crypto ecosystem, Bored Ape Yacht Club and Bittrex.

The SEC is reportedly investigating Yuga Labs, the company behind BAYC, for possible violations of investor disclosure rules surrounding sales of its non-fungible tokens, while the Treasury Department’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) fines crypto exchange Bittrex for sanctions violation.

Yuga Labs not sued by SEC (yet)
The SEC is still in the early stages of its probe into Yuga Labs. This company launched the hugely successful Bored Ape Yacht Club NFT collection and its associated metaverse elements. According to an individual familiar with the matter, the rub of the SEC’s investigation is whether certain NFTs resemble stocks and hence should follow similar disclosure rules. The federal agency is also looking into the distribution of ApeCoin, a crypto asset launched by Yuga Labs in March 2022, designed to be a spendable asset in the company’s Web3 ecosystem.

“It’s well-known that policymakers and regulators have sought to learn more about the novel world of web3. We hope to partner with the rest of the industry and regulators to define and shape the burgeoning ecosystem. As a leader in the space, Yuga is committed to fully cooperating with any inquiries along the way,” Yuga Labs told Bloomberg.

The SEC investigation may not lead to a lawsuit.

The Bored Ape Yacht Club is a collection of 10,000 algorithmically-generated simian profile picture NFTs that live on the Ethereum blockchain and grant owners membership to an exclusive club. It was launched in Apr. 2021 and boasts celebrity owners like Justin Bieber, Jimmy Fallon, Gwyneth Paltrow, and Snoop Dogg.

Universal Music Group recently enlisted top-tier producers to shape the sound for its upcoming virtual rock band Kingship based on the BAYC NFT collection.

Meanwhile, OFAC and FinCEN have issued two separate enforcement actions against the crypto exchange, Bittrex. According to a press release by the U.S. Treasury Department, Bittrex onboarded customers from countries sanctioned by the U.S. through lax customer screening during the sign-up process. The sanctioned entities then went on to transact over $250 million in digital assets between Mar. 2014 and Dec. 2017. Bittrex has agreed to pay roughly $24 million to settle the civil liability.

Bittrex has agreed to pay around $29 million for violating tenets of the Bank Secrecy Act related to money laundering. According to FinCEN, the exchange reneged on its responsibility to provide appropriate transaction monitoring and failed to address the risks posed by privacy-centric cryptocurrencies being traded on its platform. It also failed to submit any suspicious activity reports between Feb. 2014 and May 2017. FinCEN will credit the $24 million paid to OFAC, meaning that Bittrex will only pay around $29 million.

Founded in 2013 by three cybersecurity engineers, Bellevue-based Bittrex has never experienced a hack, except for users whose account security had been compromised.

“Since inception, Bittrex has strived to comply with all government requirements diligently and in good faith. [Bittrex] is pleased to have fully resolved this matter,” the company told the New York Times.

U.S. Treasury and DoJ crackdown
Even as companies forge new alliances and redeploy capital to survive the crypto bear market, recent enforcement actions may put a damper on hopes for a market recovery.

In May, the U.S. Department of Justice opened a criminal case against an American citizen for sending $10 million in crypto to an entity in an OFAC-sanctioned country.

In Aug. 2022, the U.S. Treasury Department banned Americans from using Tornado Cash, a cryptocurrency mixer that obscures the link between deposited crypto and its source. The move sparked outrage from privacy advocates.

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