[co-author: Stephanie Kozol]*
On March 24, cryptocurrency investment firm Galaxy Digital Holdings (Galaxy) entered into an assurance of discontinuance (AOD) with New York Attorney General (AG) Letitia James to resolve allegations that Galaxy engaged in misrepresentations when it promoted the failed algorithmic cryptocurrency Luna from 2020 to 2022.
According to the AG, in 2020 Galaxy and its owner began promoting Luna — a cryptocurrency token issued by Terraform Labs (Terraform) to support a related stablecoin, TerraUSD — and continued promoting the token through 2022. Galaxy allegedly entered into a deal with Terraform to purchase Luna at a discount and then promote the token, thereby increasing its value. According to the AOD, Galaxy’s owner began promoting the token on social media shortly after his firm had purchased it using gimmicks. For example, Galaxy’s owner promised to get a Luna tattoo if the token’s price reached $100, which it did in December 2021, leading to Galaxy’s owner getting the promised tattoo.
In May 2022, both Luna and TerraUSD collapsed, wiping out more than $40 billion in market value and leading to a significant downturn in the crypto market. After the collapse, Terraform entered into an approximately $4.5 billion settlement with the U.S. Securities and Exchange Commission for allegedly orchestrating one of the largest securities frauds in U.S. history and deceiving investors regarding its crypto assets. Terraform’s owner, Do Kwon, is currently awaiting trial in the U.S. for fraud and securities violations.
With respect to Galaxy, James alleged that while it was promoting Luna it was also selling the token without disclosing its sale or its intent to sell, and that by doing so the firm engaged in market manipulation in violation of New York’s Martin Act and New York Executive Law Section 63(12). The AOD states that, prior to the May 2022 collapse, Galaxy had “sold millions of tokens into the market at many multiples of its initial cost without disclosing that it was selling” and that it made hundreds of millions of dollars doing so.
The AOD describes Luna as a security and commodity, making it subject to the Martin Act’s prohibition on fraudulent practices related to (i) the issuance, exchange, purchase, sale, promotion, negotiation, advertisement, investment advice, or distribution of any securities and (ii) the advertisement, investment advice, purchase, or sale of any commodities. The AOD concludes that, regardless of the firm’s intent, Galaxy’s purchase, promotion, and sale of Luna — without disclosing the sale — violated the Martin Act’s prohibition on fraudulent practices and the Executive Law’s prohibition on repeated fraudulent or illegal acts.
Galaxy agreed to a monetary penalty of $200 million to be paid out over a period of three years. It has also agreed to implement various policy changes to prevent conflicts of interest, particularly with respect to its promotion of and investment in digital assets, and to conduct legal analysis on all token deals. Galaxy has neither admitted nor denied the AG’s allegations.
Why It Matters
While the federal government appears to be retreating from its previous efforts to regulate cryptocurrency through enforcement, now favoring a more open and less regulated approach to the industry, state AGs still wield significant enforcement powers under existing state laws. The recent action taken by the AG against Galaxy serves as a reminder to any entity involved in or considering involvement in crypto-related activities that enforcement threats remain. Entities should stay vigilant and informed about developments in this ever-evolving regulatory landscape.
*Senior Government Relations Manager
