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


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.

On October 4, the SEC issued a corrected order saying that the window for filing statements of support or opposition to the disapproval of the Bitcoin ETFs would close on November 5. A final decision has not been made, but now that the November 5 deadline has passed, a decision could come at any time.

This set of applications is separate from the listing application for the VanEck SolidX Bitcoin Trust, which has been under scrutiny since the SEC originally rejected its listing in March 2017. A proposed rule change by Cboe BZX Exchange, Inc. in June 2018 to list and trade shares of SolidX Bitcoin Shares is currently under SEC consideration.

Please click here for the August 23 order. Please click here for the October 4 order.

Upcoming Plain English initial coin offering (“ICO”) Guidance

On November 5, SEC director William Hinman spoke to the D.C. Fintech Week conference about upcoming SEC “plain English” guidance on planning an ICO. The goal will be to allow token developers to determine on their own whether a potential token offering will be classified as a security. Hinman noted that this was a starting place, and that more rigorous guidance would be forthcoming. Additionally, the SEC’s new FinHub portal will continue to provide a deeper dive into SEC FinTech regulations and guidance.

Speaking to whether or not tokens will be classified as securities, Hinman noted that, based on one of the Howe factors, “If someone’s offering an instrument for money or other consideration to a third party, and that third party expects the offeror to generate a return or … something that will increase the value of the coin or token or whatever they want to call it, and there’s that expectation of return, we’re generally going to see that as a securities offering.” This could signal that the SEC will be taking a broad view of what makes certain tokens “securities,” if indeed investor expectation of a return will weigh heavily in the analysis.

CFTC Chairman Address at FinTech Conference

On November 7, CFTC Chairman J. Christopher Giancarlo spoke at George Washington University Law School during FinTech Week. He spoke about the need for the CFTC to be more agile in utilizing quantitative data analysis to pioneer what he called “quantitative regulation.”

More advanced trading markets can mean more efficiency and lower costs. Chairman Giancarlo noted that, “when paired with systems inspired by [distributed ledger technology] that standardize and distribute data to market actors—and even regulators—we begin to see a world where the majority of standard tasks are managed by machines.”

Distributed ledgers and smart contracts also have a home with regulators. “We can also envision the day where rulebooks are digitized, compliance is increasingly automated or built into business operations through smart contracts, and regulatory reporting is satisfied through real-time [distributed ledger technology] networks.”

With respect to usable “big data,” Chairman Giancarlo added: “Indeed, the forced standardization of data formats and fields and collective use of the system by multiple actors may prove to be some of the most compelling aspects of [distributed ledger technology]. . . . In many ways, [distributed ledger technology] and blockchain-inspired database systems may help move us to a 2.0 version of back-office computing infrastructure that paves the way for advances in automation and machine learning.”

Please click here for the transcript of the speech.


SEC Charges EtherDelta with Operating Unregistered Exchange

On November 8, the SEC announced an enforcement action charging Zachary Coburn, founder of EtherDelta, for operating an unregistered national securities exchange. The SEC has previously brought enforcement actions against unregistered ICOs and unregistered broker-dealers.

EtherDelta is an online platform for secondary market trading of ERC20 tokens, which are tokens designed for the Ethereum platform. EtherDelta used a smart contract system to validate order messages, confirm terms, execute orders, and direct the distributed ledger to be updated. From July 2016 to December 2017, EtherDelta handled 3.6 million orders.

The SEC explained that Coburn caused EtherDelta to violate Section 5 of the Exchange Act because he “[1] wrote and deployed the EtherDelta smart contract to the Ethereum Blockchain, and [2] exercised complete and sole control over EtherDelta’s operations, including over the operations constituting the violations described [in the order].” The EtherDelta website “had features similar to online securities trading platforms” and provided a marketplace “for bringing together the orders of multiple buyers and sellers in tokens that included securities.”

Importantly, Zachary Coburn was charged under Section 21C(a) of the Exchange Act for causing EtherDelta to violate Section 5 of the Exchange Act by not registering as a national securities exchange. Charging under Section 21C(a) carries a lower burden of proof than, for example, aiding and abetting under Section 10(b), which generally requires proof of intent.

Please click here to read the order. Further analysis can be found here.

International Developments

UK Cryptoassets Taskforce: Final Report

The UK’s Cryptoassets Taskforce was formed in May 2018 with the goal of exploring the impact of cryptoassets, potential benefits and challenges of applying distributed ledger technology to financial services and assessing the need for regulatory responses. The Taskforce includes members from HM Treasury, the Financial Conduct Authority (“FCA”), and the Bank of England. They will be convening every 6 months to continue considering developments and review the UK’s approach to cryptoassets.

The Taskforce broke down its, and the UK government’s, response to cryptoassets into several categories:

  • To help prevent financial crime, the UK government intends to broaden its application of the EU Fifth Anti-Money Laundering Directive (“5MLD”) so that cryptoasset-to-cryptoasset exchanges, peer-to-peer exchanges, cryptoasset ATMs, and wallet providers fall within Anti-Money Laundering/combating the financing of terrorism (“AML/CTF”) regulations. The UK government is also considering requiring firms outside of the UK to comply with these regulations when providing services to UK customers.
  • With respect to cryptoasset derivatives, the FCA will consider prohibiting the sale to retail consumers of all derivatives referencing exchange tokens such as Bitcoin, including contract for differences (“CFD”), futures, options and transferable securities. However, this prohibition would not cover cryptoassets that are considered securities. The FCA also plans to not authorize or approve the listing of a transferrable security or fund that references exchange tokens unless the FCA is confident in the integrity of the underlying market.
  • With respect to security tokens (or utility tokens), the FCA plans to consult on new guidance by the end of 2018. And with respect to Initial Coin Offerings (“ICOs”), the UK government will issue a consultation in early 2019, and it stands ready to draft legislation to put ICOs within FCA regulations.
  • In early 2019, the UK government will issue a consultation about exchange tokens (e.g., Bitcoin) and related service providers (e.g., exchanges and wallets). Furthermore, the Taskforce emphasizes that it wants to take an international approach and coordinate with other jurisdictions.
  • Finally, the Bank of England will continue to monitor linkages between cryptoassets and systematically important financial institutions in the UK, so that it can identify implications for financial stability in the future. Importantly, the Bank of England is working with HM Treasury to the widen regulatory reach of non-interbank payment systems (e.g., distributed ledger payment systems).

Please click here to read the report.

Swiss Risk Weighting for Bank Crypto Trading

A confidential letter from the Swiss Financial Market Supervisory Authority (“FINMA”) to EXPERTsuisse, a specialist association for Swiss trustees and accountants, has revealed the regulator’s internal view on cryptoassets risk. Although FINMA has not yet taken a public view on merging cryptoassets into Basel III capital requirements, they suggested in the October letter that financial institutions assign a flat risk weight of 800% to cryptoassets to cover risks. FINMA also wants a cap on crypto trading activities of 4% of total capital.

Although it makes clear that FINMA is wary of the stability of cryptoassets, it also means that Swiss banks are starting to broaden client services to include cryptoassets. In February, FINMA published guidance on ICOs. The Basel Committee met in September and discussed, among other things, banks’ exposures to cryptoassets and the risks such assets may pose. As the next Basel Committee meeting is scheduled for November 26 and 27, there may be more concrete guidance at that point.

Taiwan Amends Anti-Money Laundering Act to Regulate Virtual Currencies

On November 2, Taiwan’s Legislative Yuan passed an amendment to the country’s Money Laundering Control Act and the Terrorism Financing Prevention Act, giving Taiwan’s Financial Supervisory Commission (“FSC”) the power to require operators of virtual currency platforms to implement a “real-name system” requiring users to register their real names. Banks will also be required to report suspicious anonymous transactions to regulators. These rules are similar to those implemented earlier this year in South Korea and they follow the trend of weaving cryptocurrencies into regular financial regulations. In October, the chairman of the FSC announced the intention to draft regulations by mid-2019 to simplify the initial coin offering process.

Implementation of a real-name system has already happened at Bitoex, a crypto exchange that claims to control the lion’s share of the Taiwanese market. Importantly, the real-name requirements only apply when fiat currency is part of a transaction. Crypto-to-crypto transactions do not fall under the new rules.

Further amendments may come after evaluation by the Asia/Pacific Group on Money Laundering, which is reviewing Taiwan’s laws through November 16.

The above is a summary of one of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.  

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.

2017 Recap: Tokens, Coins, Cryptocurrencies, and Other Digital Assets under the Federal Securities Laws – Facts and Circumstances

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

2017 Recap: Tokens, Coins, Cryptocurrencies, and Other Digital Assets under the Federal Securities Laws – Facts and Circumstances

By Michael S. Didiuk on November 12, 2018

This post focuses on the Securities and Exchange Commission’s (“SEC”) recent action against a digital trading platform illustrates the continued uncertainty surrounding the treatment of tokens, coins, cryptocurrencies, and other digital assets under the federal securities laws. Senior SEC officials have expressed concern that a significant amount of activity in this industry may not comply with federal securities laws and increasing SEC enforcement activity evinces these concerns. Read more here.


Blockchain Week in Review: Week of October 22-26, 2018

U.S. Developments

Regulatory Updates

FATF Issues Virtual Currency Guidance

On October 19, the Financial Action Task Force (“FATF”) published the outcomes of its Plenary meeting.  Included in the outcomes of the meeting were new recommendations related to the regulation of virtual currency (the “2018 Virtual Currency Recommendations”).  In addition to the 2018 Virtual Currency Recommendations, FATF announced that it will be publishing rules for international cryptocurrency regulation in June 2019 to encourage countries to “take coordinated action to prevent the use of virtual assets for crime and terrorism.”  In 2015, FATF had issued a set of recommendations (the “2015 Virtual Currency Recommendations”) for a risk-based approach to virtual currencies related to money laundering and terrorism financing risks.  The upcoming guidance will clarify how to apply the 2015 Virtual Currency Recommendations.  While the future guidance is in development, FATF recommends that all jurisdictions should “urgently take legal and practical steps to prevent the misuse of virtual assets,” to include applying risk-based Anti-Money Laundering/Combating the Financing of Terrorism (“AML/CFT”) regulations to virtual asset service providers and risk-based monitoring and supervision of these entities.  Virtual asset service providers, according to the 2018 Virtual Currency Recommendations, include crypto-crypto and crypto-fiat exchanges, the transfer on behalf of a person of a virtual asset from one virtual asset address or account to another, the safekeeping or administration of virtual assets, and the participation in and provision of financial services related to the offer and sale of a virtual asset.  FATF also noted that, for those jurisdictions that have already implemented the 2015 Virtual Currency Recommendations, the clarifications coming out of the Plenary meeting are “largely compatible” with what the jurisdiction likely already has in place.

The complete update to FATF’s Recommendations for International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, which incorporates the 2018 Virtual Currency Recommendations, is available here.

Coinbase Approved to Offer Crypto Custody Services in New York

On October 23, the New York Department of Financial Services (“NYDFS”) announced that it had granted Coinbase’s limited purpose trust company charter application for the Coinbase Custody Trust Company LLC and approved the Coinbase Trust to offer custody services for Bitcoin, Bitcoin Cash, Ethereum, Ether Classic, XRP and Litecoin.  Coinbase joins Paxos Trust Company and Gemini Trust Company as New York State limited purpose trust companies that are authorized to offer crypto custody services.

The NYDFS’s announcement is available here.

SEC Suspends Trading in Company for False Cryptocurrency Claims

On October 22, the U.S. Securities and Exchange Commission (“SEC”) temporarily suspended trading in securities of Nevada-based American Retail Group, Inc. (OTC:ARGB), also known as Simex, Inc., due to concerns about the accuracy of two August 2018 press releases that claimed the company was partnering with an SEC-qualified cryptocurrency custodian and that the company would be conducting a token offering that was “officially registered in accordance [with] SEC requirements.”  This suspension follows closely behind an October 11, SEC investor alert that cautioned that fraudsters may use false claims about SEC or Commodity Futures Trading Commission endorsements to lure investors.  The suspension will terminate on November 2, 2018.

The SEC’s press release is available here.  The SEC’s suspension order is available here.

FCC Chairman Discusses the Regulation of Blockchain Technology

On October 25, Federal Communications Commission (“FCC”) Chairman Ajit Pai spoke at the India Mobile Congress 2018 conference.  His speech was titled “The Evolving Regulatory Landscape in the New Digital Ecosystem.”  In general, his speech cautioned against preemptive regulation of new and emerging technologies because “a careful, case-by-case approach to regulating dynamic markets is more likely to benefit consumers and secure technological progress.”  After his speech, Chairman Pai sat for an interview with the Indian Express newspaper.  In the interview, he noted that numerous dynamic industries are developing, including “artificial intelligence, machine learning, blockchain, [and] quantum computing,” which “will have significant impact on how communications networks operate.”  He noted that the FCC does not “have jurisdiction over these firms but that’s one of the thing[s] we are trying to learn about.  What are the emerging technologies that will have an effect on this space and how should our thinking about regulation evolve.”

You can read the Indian Express interview here.

Litigation Updates

Court Dismisses Bitcoin Cash Market Manipulation Case Against Coinbase

On October 23, the Northern District of California granted Coinbase’s motion to dismiss a lawsuit that alleged that Coinbase hurt investors through market manipulation, including permitting insider trading, when it listed Bitcoin Cash (“BCH”) on the exchange.  The court dismissed all but one of the plaintiff’s claims without prejudice but also ruled against Coinbase’s interpretation of its own arbitration clause in the Coinbase User Agreement.

The plaintiff had alleged that when Coinbase listed BCH, “those who had been tipped off . . . swamped Coinbase and the GDAX with buy and sell orders, thinning the liquidity but obtaining BCH at fair prices,” which had the effect of driving up the price of BCH for others once it was made available on Coinbase’s exchange.  The court held that the plaintiff’s complaint did not sufficiently articulate the legal bases for his claims.  Although not detailing each allegation in the complaint, the court noted that with regard to the plaintiff’s negligence claim, the court could not determine what Coinbase should have done differently when listing BCH or “why the rollout of Bitcoin Cash would have gone more smoothly had Coinbase done whatever [the plaintiff] thinks is appropriate.”  The court permitted the plaintiff to file an amended complaint within 21 days of the order.

The court dismissed with prejudice only one of the plaintiff’s claims.  The plaintiff had included a claim under the Commodity Exchange Act (“CEA”) in his complaint.  In dismissing this claim, the court noted that the plaintiff could maintain a private right of action under the CEA only if the plaintiff had used Coinbase to make a futures contract.  The plaintiff purchased BCH on the Coinbase exchange rather than making a contract to purchase BCH at a specific date in the future, so the claim failed.

Finally, the court ruled against Coinbase’s interpretation of the arbitration clause in its User Agreement, holding that the arbitration clause does not “clearly and unmistakably” delegate arbitrability to the arbitrator.  The clause states: “If a court decides that any provision of this section 7.2 is invalid or unenforceable, that provision shall be severed and the other parts of this section 7.2 shall still apply.”  Coinbase argued that this should be interpreted to mean that if a court determines that arbitrability is a question for the court despite AAA rules and the court decides that a portion of the arbitration provision is invalid, then that portion should be severed.  Instead, the court held that the arbitration clause “suggests the opposite.”  After reviewing case law, the court explained that the delegation provision in Coinbase’s agreement is found only in the AAA rules, which is sufficient to show that sophisticated parties intended to delegate arbitrability but is not necessarily sufficient for consumer contracts.  The plaintiff’s claims of market manipulation did not “arise under” the agreement because assessing Coinbase’s role in market manipulation or other unfair business practices did not require reference to the User Agreement.

The case before the Northern District of California was Berk v. Coinbase, Inc., No. 18-cv-01364-VC.

The complaint is available here, and the court’s ruling on the motion to dismiss is available here.

International Developments 

South Korea Warns Investors About Cryptocurrency

South Korea’s Financial Services Commission (“FSC”) issued a note to investors warning about certain risks of investing in cryptocurrency.  The note tells investors that cryptocurrency funds are structured similarly to mutual funds, which may lead investors to believe that such funds are legal investments.  Importantly, however, cryptocurrency funds may be subject to violations of South Korea’s Capital Markets Act.

The FSC’s note is available here.  The FSC’s note is not yet available in English.

Japan Contemplating a Cap for Margin Trading of Cryptocurrencies

The Japanese press reported that Japan’s Financial Services Agency announced that it is considering leverage caps for margin trading of cryptocurrencies to restrain speculative trading and curb exposure to volatility risks.  Leverage caps of as low as 2 to 1 are being considered.

You can read the Nikkei Asian Review’s report here.

Japan Regulators Approve Virtual Currency Exchange Self-Regulatory Association

On October 24, the Japan Financial Services Agency announced that it had approved the Japanese Virtual Currency Exchange Association (“JVCEA”) as a “certified fund settlement business association.”  This designation will allow the JVCEA to operate as a self-regulatory body to set and enforce rules for Japan’s virtual currency exchanges.  The JVCEA is composed of sixteen licensed virtual currency trading platforms in Japan.

You can read the Japan Financial Services Agency announcement here.  The announcement is not yet available in English.

Chinese Arbitration Tribunal Considers Bitcoin to Be Property

On October 25, the Shenzhen Court of International Arbitration published an analysis of a recent case where the tribunal ruled on a business contract dispute that involved the transfer of cryptocurrency assets, including Bitcoin, Bitcoin Cash, and Bitcoin Diamond.  This arbitration case centered on an equity transfer agreement dispute involving a claim that the respondent, who was entrusted to manage the applicant’s cryptocurrency assets, refused to return such assets to the applicant as required by the agreement.

The respondent argued that it could not return the cryptocurrency assets because the circulation and delivery of digital currency in China was illegal, thus rendering the agreement invalid.

The tribunal disagreed with the respondent, required the respondent to return the cryptocurrency at issue, and held as follows:

  1. An agreement to return cryptocurrency does not violate the law. The court explained that there was no law that prohibited the holding and private transfer of cryptocurrency.  China had prohibited the trading of cryptocurrency in September 2017, but this prohibition was directed at stopping the financing of entities through the issuance of tokens in initial coin offerings.  Accordingly, the cryptocurrency in this private contract is protected under contract law.
  2. Bitcoin and other cryptocurrencies have the characteristics of property. The court noted that Bitcoin “has property attributes that can be dominated and controlled by manpower, have economic value, and can bring economic benefits to the parties” just like property.
  3. Cryptocurrency is not money. The court stated that cryptocurrency is not money or currency, given that it is not issued by the monetary authorities.
  4. Interest does not need to be paid on the disputed cryptocurrency. Because cryptocurrency is not money or currency, the court stated that no interest is required to be paid under the agreement. Even if the applicant claims interest in the equivalent of money for the withheld cryptocurrency, the value of the property would be determined on the date specified in the agreement, and no interest would need to be paid on the property.

You can read the arbitration court’s analysis here. The analysis is not yet available in English.

The above is a summary of one of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest. 

Chinese Court Recognizes Blockchain-Verified Evidence for the First Time

On June 27, 2018, the Chinese Hangzhou Internet Court announced its decision on a case regarding the infringement of the right of communication through an information network. In a first for Chinese courts, the court accepted electronic data that was stored using blockchain technology as legal evidence. The court also clarified the examination standards for such electronic data.

Factual Background:

This case was filed by the plaintiff, Hangzhou Huatai Yimei Culture Media Co., Ltd. (“Huatai”) against the defendant, Shenzhen Daotong Technology Development Co., Ltd. (“Daotong”). On July 24, 2017, a newspaper published an article discussing an incident and granted Huatai an exclusive right of communication through information networks to the article. However, the same article was then published on a website owned by Daotong without permission.

Although Huatai subsequently requested Daotong to stop the infringement, Daotong ignored the request. As a result, Huatai initiated legal proceedings against Daotong in the Hangzhou Internet Court. Huatai submitted evidence of the alleged infringement, including webpage screenshots and website source code, which were all uploaded to Factom and Bitcoin blockchains through Baoquan.com, a third-party evidence preservation platform based on the blockchain technology.

Court Examination:

To confirm whether Huatai’s approaches to storing evidence complied with Chinese laws and regulations regarding electronic data and to prove the validity of the evidence, the court took the following aspects into consideration: (1) the qualification of the evidence preservation platform; (2) the credibility of the technical method to obtain the evidence on the infringing website; and (3) the integrity of blockchain electronic evidence preservation.

Regarding the first aspect, the court recognized that Baoquan.com is neutral with regard to Huatai and is qualified as a third-party electronic evidence preservation platform.

Regarding the second aspect, the court ascertained that Baoquan.com captures images from target webpages by automatically invoking Puppeteer (a Google open source program). Meanwhile, Baoquan.com also obtains the source code of the target webpages by invoking the curl command. The whole system is open to the public equally, and the operational process is automatically completed. Therefore, the court concluded that the source of the electronic data obtained via this system was highly reliable. In this case, the screenshots captured through Puppeteer indicate that the above-mentioned article published on the website of Daotong in 2017 was exactly the same as the article at issue.

Finally, with regards to the third aspect, through analyzing the theory of the blockchain technology, the court confirmed that the distributed database of blockchain makes it difficult to tamper with or delete the data stored on the blockchain. Accordingly, if the electronic data at issue can be proved to have been saved to a blockchain, this method of maintaining the integrity of contents should be reliable.

For this case, the court further examined the two following aspects to confirm that the electronic data had been uploaded to the blockchain: (i) whether the electronic data had truly been uploaded; and (ii) whether the uploaded electronic data is the electronic data at issue. The court calculated and compared the hash value of the contents contained in the block node in the Bitcoin blockchain, the contents stored in the Factom blockchain, and the file that packaged and compressed the webpage screenshots, source code, and invocation information downloaded from Baoquan.com. Since all the values were confirmed to be consistent, the court found that the electronic data had been actually uploaded into the Factom blockchain and Bitcoin blockchain, and such electronic data had been preserved completely without any change since being uploaded.

In summary, the court concluded that the electronic data stored and secured with blockchain and other technologies should be analyzed and determined on a case-by-case basis. The standard for determining the validity of electronic evidence should not be raised because the relevant technologies are novel, nor should it be lowered because of the difficulty of tampering with or deleting the electronic data. The effectiveness of evidence should be determined in a comprehensive manner according to relevant laws and regulations, where the emphasis should be on the examination of the data source and content integrity, security of the technical method, etc.

Based on the above analysis, the court recognized the reliability and integrity of the blockchain-based electronic data at issue, finding that the action of Daotong infringed Huatai’s right of communication through an information network.


Virtual Currency / FinTech Week-in-Review

Week of October 15-19, 2018

 U.S. Developments

Regulatory Updates

SEC Launches FinHub to Facilitate Public Engagement on FinTech Issues

On October 18, the SEC launched FinHub, a new “Strategic Hub for Innovation and Financial Technology.” The SEC envisions that the hub will provide the public with a singular resource for engaging with the SEC on emerging FinTech issues. The FinHub website consolidates the SEC’s speeches, publications, and regulatory actions on four key emerging technologies and issues: blockchain technology, digital marketplace financing, automated investment advice, and artificial intelligence/machine learning. Additionally, FinHub provides a portal through which the public can request assistance from SEC staff on securities issues raised by emerging financial technologies. Continue Reading

SEC Launches FinHub for Engaging with Fintech and Blockchain Companies

On October 18, 2018, the U.S. Securities and Exchange Commission (SEC), announced the launch of the agency’s Strategic Hub for Innovation and Financial Technology (FinHub).[1]  FinHub is a resource for industry engagement between financial technology companies (fintechs), market participants, the public, and the SEC.  This client update provides a high-level overview of the FinHub initiative and how the SEC envisions industry participation.

FinHub is designed to serve as a focal point for the SEC to engage with fintech companies.  Led by Valerie A. Szczepanik, Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC’s Division of Corporation Finance, FinHub provides a portal where the public can engage directly with SEC staff, request a meeting, and receive updates and information about upcoming initiatives.  The SEC’s expectation is that FinHub will provide a clear path for entrepreneurs, developers, and their advisers to engage SEC staff, seek input, and test ideas.  The FinHub portal covers various fintech topics, such as distributed ledger technology (including digital assets), automated investment advice, digital marketplace financing, and artificial intelligence/machine learning.  FinHub also offers a detailed request form, accessible here, that allows submission of background information and supporting documents for a meeting request or request for other assistance.

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FinCEN Advisory Emphasizes Importance of U.S.-Iran Sanctions and AML/CFT Compliance for Virtual Currency Businesses

On October 11, 2018, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released an advisory (the Advisory) intended to help money services businesses (MSBs) and foreign financial institutions better understand how U.S. sanctions on Iran affect their compliance obligations under the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) rules and under the U.S.-Iran sanctions enforced by the U.S. Department of the Treasury’s Office of Foreign Asset Controls (OFAC).[1]

While Iran has historically relied upon, among other things, precious metals, such as gold, to evade sanctions and to market Iranian goods abroad, FinCEN views virtual currency as another commodity that Iranians may rely on to avoid sanctions.  Since 2013, Iranians have participated in more than $3.8 million in bitcoin-denominated transactions annually.  As a result, companies subject to U.S. regulation that participate in the virtual currency markets should pay careful attention to the Advisory.

To confirm the importance of the Advisory, OFAC separately issued the Advisory to all persons who subscribe to OFAC updates and listed the Advisory on its website.  This, together with the discussion of OFAC obligations within the Advisory, demonstrates that FinCEN and OFAC may cooperate on enforcement of these obligations.  As a reminder, U.S. sanctions prohibit U.S. persons and U.S.-owned or -controlled foreign entities from entering into transactions involving Iran, the Government of Iran, or Iranian financial institutions.[2]

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Cryptocurrencies: Matching insurance to risks and exposures

While cryptocurrencies and digital tokens — also known as “digital assets” — have disrupted traditional notions of commerce, capital and investing, there is another asset which any company engaged in this space will need: insurance. Given the rapidly-evolving nature of this new technology and the uncertainties surrounding applicable laws and regulations, it can be challenging to figure out the types of insurance products that should be considered. Any company engaged in this space should ask itself the following questions to help determine which lines of insurance it should consider.

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