Blockchain Week in Review: Week of January 7-11, 2019

U.S. Developments

Regulatory Updates

Texas Clarifies that Stablecoins Backed by Sovereign Currency Qualify as “Money” Under Money Transmission Statute

The Texas Department of Banking recently issued a Supervisory Memorandum clarifying how its money transmission statute applies to stablecoins backed by sovereign currency. The Department reiterated—consistent with its 2014 guidance—that Texas’s money transmission statute only regulates “money” or “monetary value” and that most virtual currencies fall outside the statute’s scope. But the Department stated that stablecoins backed by sovereign currency, such as Tether, qualify as “money” or “monetary value.” Under Texas’s statute, money or monetary value includes either sovereign-issued currencies or claims that can be converted into such currencies. The Department concluded that, unlike most virtual currencies, stablecoins backed by sovereign currency are money or monetary value because they represent claims that can be redeemed for currency. The Department explained that, as a result, entities doing business in Texas that hold stablecoins backed by sovereign currency for third parties—such as custodial wallet providers or intermediated exchanges—will most likely need a Texas money transmission license.

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Takeaways on the Regulation of Crypto Assets from Late 2018 Comments of Several SEC Officials

On Wednesday, December 12, 2018, the D.C. Bar hosted a panel to discuss current developments in the world of crypto.  Among the panelists were two senior SEC officers: Jonathan Ingram, Deputy Chief Counsel, Division of Corporation Finance, and Jennifer Leete, Assistant Director, Division of Enforcement.  Also participating on the panel was Era Anagnosti, a former senior manager in the Division of Corporation Finance of the SEC who in part oversaw the process relating to, among other things, various crypto-related registration filings.  The following is a summary of certain topics discussed at the panel regarding both corporate finance and enforcement as well as some key takeaways.

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Blockchain Week in Review: Week of December 21-27, 2018

U.S. Developments

Congressmen Introduce Legislation to Define “Digital Token” Under the Securities Laws

On December 20, 2018, two congressmen introduced the “Token Taxonomy Act” (H.R. 7356) before the 115th Congress in an effort to define “digital token” under the federal securities laws.  H.R. 7356 was introduced by Rep. Warren Davidson (R-Ohio) and Rep. Darren Soto (D-Florida) and seeks to clarify that the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) would not apply to cryptocurrencies if they meet a new definition of “digital token” that H.R. 7356 would add to the Securities Act.  H.R. 7356’s definition of “digital token” encompasses decentralized tokens that are not a representation of a financial interest in a company (i.e., equity, debt, or revenue share).

H.R. 7356 also makes several changes related to the custody of “digital tokens.”  For instance, H.R. 7356 adds the phrase “provides custodial services” to the definition of “bank” under both the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 , which in turn could affect potential “qualified custodians” for digital tokens under the Custody Rule (Rule 206(4)-2) of the Advisers Act.  H.R. 7356 also instructs the U.S. Securities & Exchange Commission (“SEC”) to amend Exchange Act Rule 15c3-3, which addresses the custody of securities by broker-dealers, by asserting that a broker-dealer’s requirement to maintain a satisfactory control location for clients’ digital assets is fulfilled through public key cryptography and following commercially reasonable cybersecurity practices.  Finally, H.R. 7356 would direct the Internal Revenue Service to address the taxation of cryptocurrencies resulting from certain exchanges of virtual currencies.

H.R. 7356 has been referred to both the House Committee on Financial Services and the House Ways and Means Committee; however, the 115th Congress will formally come to a close on January 2, 2019 and any legislation still pending would need to be reintroduced before the 116th Congress for renewed consideration.

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French Data Protection Authority Issues Guidance on Application of Blockchain to the GDPR

On September 24, 2018, the French data protection authority, Commission Nationale de l’Informatique et des Libertés (CNIL), became the first data protection authority to issue written guidance on the intersection of the use of blockchain technology and the General Data Protection Regulation (GDPR).  Due to the decentralized and permanent nature of the blockchain, there is an inherent tension between blockchain technology and the GDPR, particularly with respect to data subject rights and data storage limitation principles.  Therefore, the CNIL guidance provides some welcome clarification on how it views these inherent tensions, although the CNIL left open certain important issues that will require deeper analysis and explanation in the future.  The summary below has been updated to reflect the English translation of the CNIL guidance released on November 8, 2018. Our high-level takeaways based on the CNIL guidance are as follows:

  • The legal analysis of whether the GDPR applies to a blockchain must be conducted on a participant-by-participant basis. Some participants on a blockchain may be subject to the GDPR while others may not.
  • The greater the ability of a participant to intervene and influence blockchain transactions, the more likely such a participant is subject to the GDPR.
  • Whether a participant is a controller or a processor as such terms are defined under the GDPR is a determination based on the particular facts and circumstances, influenced by the architecture of the blockchain and the types of users who engage with it.
  • Data minimization principles apply to some but not all aspects of blockchain technology. Notably, there is no data minimization requirement for public addresses and public keys.

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Update: The SEC and Digital Assets—A Busy Year End

Through their recent actions and statements, the Securities and Exchange Commission (SEC) has further clarified their position with respect to digital assets and ICOs. Following on from earlier enforcement efforts throughout 2017 and 2018, the SEC Enforcement Division settled cases with AirFox and Paragon, two issuers of unregistered securities in tokenized form, in addition to a settlement with the founder of a purported decentralized exchange, EtherDelta.

The SEC Policy Divisions released a rare joint statement affirming their agreement with the actions of the Enforcement Division and emphasizing the potential applicability of the federal securities laws to fundraising efforts, regardless of the form of technology used. In addition, SEC Chairman Jay Clayton also made numerous public appearances to reinforce this message. Some key developments include the following:

  • For the first time, the SEC has required an issuer of an unregistered security in tokenized form to register the security and notify purchasers of their rescission rights.
  • The SEC has clarified that its approach to digital assets is a cohesive one among all divisions.
  • Chairman Clayton discussed his understanding of how an asset could convert from being a security to a non-security (i.e., ‘mutability’).

In this update, we provide background on the AirFox and Paragon cases, detail the SEC Policy Divisions’ joint statement and Chairman Clayton’s comments, and look at next steps for participants in the digital asset arena.

Blockchain Week in Review: Week of December 3-7, 2018

U.S. Developments

SEC Remarks on International Virtual Currency Enforcement

On December 5, 2018, Steven Peikin, Co-Director of the Division of Enforcement at the U.S. Securities and Exchange Commission (“SEC”), gave a speech at the IOSCO/PIFS-Harvard Law School Global Certificate Program for Regulators of Securities Markets on the topic of international cooperation in the enforcement of the US securities laws. In his remarks, Mr. Peikin described the SEC’s recent enforcement activities related to cryptoassets and initial coin offerings (“ICOs), and the importance of international assistance in reaching ICO sponsors in foreign jurisdictions.

In his remarks, Mr. Peikin stated that the Division of Enforcement sees two separate types of securities law violations in the ICO space. “First, we see ICOs that meet the definition of a security, but are being sold, brokered, or traded to U.S. investors without complying with the registration requirements of the federal securities laws. Second, we see ICOs that appear to be outright frauds -where the issuers are using excitement around the cryptoasset space to simply rip off money from investors.” Mr. Peikin commented that international cooperation has been essential to the SECs enforcement efforts because the sponsors of ICOs are often located outside the United states.

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Treasury Identifies Iranian Nationals and Their Digital Currency Addresses Used to Facilitate Ransomware Attacks

On November 28, 2018, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), announced an action against two Iranian citizens, Ali Khorashadizadeh and Mohammad Ghorbaniyan, who facilitated the exchange of bitcoin ransom payments on behalf of Iranian malicious cyber actors.  This client update provides an overview of the OFAC action and identifies certain key issues raised by OFAC’s addition of digital currency addresses as associated information for the listings of Khorashadizadeh and Ghorbaniyan on the OFAC Specially Designated Nationals and Blocked Persons List (SDN list).

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2018 Recap: Tokens, Coins, Cryptocurrencies, and Other Digital Assets under the Federal Securities Laws

The following was posted on the Perkins Coie’s Asset Management ADVocate, to read the full post, please click here.

2018 Recap: Tokens, Coins, Cryptocurrencies, and Other Digital Assets under the Federal Securities Laws

By Michael S. Didiuk on November 13, 2018 Posted in Compliance

In this post we discuss where things stand regarding the treatment of tokens, coins, cryptocurrencies, and other digital assets under the federal securities laws.  This post reviews significant enforcement actions and statements this year prior to the recent Coburn enforcement action. Read more here.

Blockchain Week in Review: Week of November 5-9, 2018

U.S. Developments

Regulation

Upcoming Bitcoin exchange-traded funds (“ETF”) Decisions

On January 4, 2018, NYSE Arca filed a proposed rule change to list 9 Bitcoin ETFs. Subsequently, the time for the Security Exchange Commission (“SEC”) to approve or disapprove was pushed back in March, April, July, and September. On August 22, 2018, the SEC disapproved the listings and the rule change. The following day, the SEC notified NYSE that it would be reviewing the ETFs pursuant to Rule 431 and staying the August 22 order. The ETF applications came from ProShares, Direxion, and GraniteShares.

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EtherDelta Founder Sanctioned for Operating an Unregistered Securities Exchange

The following was posted on the Perkins Coie’s Asset Management ADVocate, to read the full post, please click here.

EtherDelta Founder Sanctioned for Operating an Unregistered Securities Exchange
By Michael S. Didiuk and Conor O’Hanlon on November 9, 2018 Posted in Compliance
In this post we discuss how on November 8, the SEC announced an enforcement action charging the founder of a digital “token” trading platform for operating as an unregistered national securities exchange. Read more here.

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