Blockchain Week in Review: Week of September 6, 2019

U.S. Developments

VanEck and SolidX to Offer Bitcoin ETF to Qualified Institutional Buyers

On September 3, 2019, VanEck Securities Corp. and SolidX Management LLC announced that they are seeking to use Rule 144A of the Securities Act to issue shares in the VanEck SolidX Bitcoin Trust to qualified institutional buyers. According to a joint statement by the companies, the shares would be the first Bitcoin product for institutional investors that are cleared and would feature the same creation and redemption process common to traditional exchange-traded funds (“ETFs”).

Under the proposal, SolidX will be the sponsor of the Bitcoin Trust while VanEck will market the fund. BNY Mellon will be the daily fund accountant, administrator, and transfer agent. A syndicate of underwriters has provided $125 million of insurance according to the head of VanEck’s ETF products. From September 5, 2019 the shares will be quoted on OTC Link ATS, a Securities and Exchange Commission (“SEC”)–regulated alternative trading system. Continue Reading

Blockchain Week in Review: Week of August 30, 2019

U.S. Developments

Enforcement and Litigation Developments

Craig Wright Faces Sanctions

Craig Wright, the self-proclaimed inventor of Bitcoin, has been tied up in litigation since February 2018 related to his partnership with the late David Kleiman.  The case alleged that Wright worked to seize bitcoin owned by Kleiman after his death.  On August 27, 2019, in response to plaintiffs’ motion to compel, a magistrate judge ordered sanctions against Wright for his “continued non-compliance” with court orders to provide information about Wright’s bitcoin holdings. Continue Reading

Blockchain Week in Review: Week of August 19-23, 2019

U.S. Developments

Veritaseum Founder Provides Response to Asset Freeze Order

Responding to an emergency application filed by the Securities and Exchange Commission, Judge LaShann DeArcy Hall of the United States District Court for the Eastern District of New York issued an order on August 12, 2019, freezing Veritaseum accounts and digital assets and ordering founder Reggie Middleton to provide a response to the SEC’s allegations. On the day of the filing, defense counsel asked for permission to file a response prior to a ruling being issued. The Court ruled the same day. On August 19, Mr. Middleton filed a response with the court defending against the SEC’s claims of securities fraud stating among other things that the SEC did not have any evidence that he was attempting to hide company funds by transferring digital assets from one account to another, which Mr. Middleton claimed was done to fund Veritaseum operations. Continue Reading

You Received One of the IRS Crypto Letters—What’s Next?

Taxpayers should take prompt action to assess their situation, yet move carefully before making representations or filings to the IRS.

Over the past month, the Internal Revenue Service (IRS) has sent letters to over ten thousand taxpayers that it believes may have failed to report virtual currency transactions (primarily Bitcoin-related) or may have omitted income derived from virtual currency transactions. These letters continue to receive significant press coverage from major financial outlets and may be just the beginning of the government’s notification, collection and enforcement efforts. For example, the IRS has also recently sent notices to certain virtual currency investors informing them that the investors’ reporting does not match other records in the IRS’s possession.

Taxpayers who receive an IRS letter, receive an investor notice, or have questions about reporting their past virtual currency transactions (e.g., sales of tokens or exchanges of one token for another) should consider the following advice: Continue Reading

Blockchain Week in Review: Week of August 9, 2019

U.S. Regulatory

Kik Files Answer to SEC Complaint

On August 7, Canadian messaging company Kik Interactive Inc. (“Kik”) filed its answer to the U.S. Securities and Exchange Commission’s (“SEC”) complaint filed in the Southern District of New York.  In its 131-page answer, Kik argues for a narrow reading of the Howey test and maintains that the SEC has taken quotes out of context and misrepresented documents and testimony in its treatment of the facts in the complaint.

Kik responds to each of the allegations asserted by the SEC in its complaint, in turn, denying those that support the view that Kin tokens constitute securities under the Howey test and that Kik violated the securities laws in any way.  Kik maintains that, although the Howey test is a “flexible” standard, it is “far from limitless” and should not be broadly interpreted by the court.  In addition, Kik argues that the DAO Report should not be considered fair warning to Kik as a digital currency issuer because the facts are meaningfully distinguishable as a community currency. Continue Reading

Blockchain Week in Review: Week of August 2, 2019

U.S. Developments

Regulatory Developments

Commissioner Hester Peirce Speaks Before the SUSS Convergence Forum: Inclusive Blockchain Finance, and Emerging Technologies

On August 1, 2019, Securities and Exchange Commission (“SEC”) Commissioner Hester Peirce gave a speech before the Singapore University of Social Sciences Convergence Forum: Inclusive Blockchain, Finance, and Emerging Technologies. In her remarks, she discussed the challenge U.S. regulators are facing in trying to address the cross-border trading of digital assets. She emphasized that this problem is not unique and raises the same concerns as other cross-border asset trading—“the fear that we [the U.S. Government] will not be able to examine foreign entities registered to operate in our markets and, more generally, that our [the SEC’s] ability to enforce domestic rules will be stymied by our [the SEC’s] inability to regulate outside our borders.” However, she also stated that due to the current diverse landscape of jurisdictional specific regulation combined with the many different use cases for digital assets (and therein legal considerations), these concerns are exacerbated. Continue Reading

Blockchain Week in Review: Week of July 26, 2019

U.S. Developments

Regulatory Developments

SEC Issues Second No Action Letter for Blockchain-Based Project

On July 25, 2019, the staff of U.S. Securities and Exchange Commission (SEC) issued its second ever no-action letter to a company planning to issue blockchain-based tokens. The letter was issued to Pocketful of Quarters (PoQ), a gaming start-up. PoQ seeks to issue an Ethereum-based ERC-20 stablecoin, “Quarters,” for use within its gaming platform.

No action-letters are public letters from the SEC staff to specific projects, stating that the agency will not recommend enforcement if the project follows and meets certain requirements and commitments stated in the letter. They can be useful for other companies seeking to set up similar projects, laying out the perimeters that the SEC desires from blockchain projects. Continue Reading

Blockchain Week in Review: Week of July 19, 2019

U.S. Developments

Legislative Updates

Facebook’s David Marcus Testifies Before Congress on Libra

David Marcus, the Facebook blockchain chief in charge of its planned Libra cryptocurrency and Calibra-branded digital wallet, testified for two days before Congress last week to answer questions about the social media giant’s plans for a cryptocurrency. U.S. Senator Mike Crapo, Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, delivered remarks at the hearing entitled “Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations.” In the hearing, Marcus described how Congress asked Facebook for more information about how the Libra system would work, how it would access and use consumer financial information, and the privacy implications for consumers. Marcus stated that the Libra Association, a nonprofit based in Switzerland, would be tasked with managing the Libra network, and added that Facebook would be one of many members of the association involved with the project. It is not yet clear whether Facebook will implement a moratorium on Libra’s development pending the government’s probe into the proposed cryptocurrency. Despite Marcus’s extended testimony before Congress, there have been calls from congressional members to have Facebook CEO Mark Zuckerberg testify on Capitol Hill to provide lawmakers with additional information about how Libra and Calibra will work and how they could be regulated. Continue Reading

Blockchain Week in Review: Week of July 12, 2019

U.S. Developments

Regulatory Developments

SEC and FINRA Issue Joint Statement on Digital Asset Custody Issues

On July 8, 2019, the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) (collectively, “the Staffs”) issued a joint statement addressing questions each has received from market participants regarding proper custody of digital assets under both federal securities laws and FINRA’s rules.

The joint statement highlights the importance of the Customer Protection Rule to protect investors from loss of assets and to help the SEC monitor for potential fraud. The joint statement discusses both broker-dealers seeking to have custody of digital assets and broker-dealers seeking to conduct noncustodial activities. For the latter, the Staffs mention several noncustodial models and note in the statement that generally these noncustodial activities “do not raise the same level of concern among the Staffs, provided that the relevant securities laws, SRO rules, and other legal and regulatory requirements are followed.” Continue Reading

Blockchain Week in Review: Week of June 28, 2019

U.S. Developments

Regulatory Developments

CFTC Announces Two Events Designed to Encourage FinTech Innovation

On June 27, 2019, the Commodity Futures Trading Commission (“CFTC”) announced two events designed to encourage fintech innovation. First, the agency announced the launch of LabCFTC Accelerator. According to the press release, “LabCFTC Accelerator is a component of the broader CFTC’s LabCFTC initiative, focused on deploying a variety of tools, including internal pilots and tests, market research, and innovation competitions in order to drive better understanding and potential adoption of emerging technologies.”

Second, the CFTC announced that it will hold its second annual FinTech Forward 2019 conference—dedicated to exploring the latest in fintech developments—on October 24, 2019. The agency hopes to bring together innovators, regulators, and the general public to examine the impact of developments in such areas as digital assets, commodities, exchange platforms, machine learning and AI, RegTech, and algorithmic trading. Registration for FinTech Forward 2019 will be open to the public early this fall. Continue Reading

LexBlog