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.
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.
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:
- 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.
- 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.
- Cryptocurrency is not money. The court stated that cryptocurrency is not money or currency, given that it is not issued by the monetary authorities.
- 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.