Cryptocurrency Platform Provider Seeks No-Action Relief from CFTC: Two Observations

On October 18th, a cryptocurrency platform provider (Poloniex, Inc.) issued a press release announcing that it filed a request for no-action relief with the Commodity Futures Trading Commission (the “CFTC”) seeking request with respect to the CFTC’s laws as they relate to margin and lending transactions. To our knowledge, this is first time that a cryptocurrency platform provider has publicized the submission of such a request and, for that reason alone, the development is noteworthy. A detailed review of the request or underlying law is beyond the scope of this posting. Rather, in this posting we focus on what we consider to be two practical and fundamental observations regarding the potential scope of any hypothetical relief granted in response to such request. Hypothetically speaking, if the CFTC granted the requested relief in the manner presented by the platform provider, then such relief would seem to support the following two interpretations of section 2(c)(2)(D) of the CEA:

1.A platform provider could facilitate a leveraged, margined or financed transaction in respect of a commodity, as long as the underlying commodity is delivered to the purchaser within 28 days. Under such an interpretation, the leverage, margin or financing could arguably remain in place subsequent to the delivery of the commodity without the transaction being subject to regulation by the CFTC. In considering this hypothetical interpretation, we note that section 2(c)(2)(D)(i) of the Commodity Exchange Act (the “CEA”) appears to give the CFTC with jurisdiction to regulate the offer of a retail commodity transaction without regard to whether or not the contract is entered into by the parties; and

2.A platform provider would be able to facilitate the ultimate settlement of leveraged, margined or financed cryptocurrency transactions into the platform provider’s digital wallet in a manner that constitutes “actual delivery” for purposes of the exception under section 2(c)(2)(D)(ii)(III)(aa) of the CEA, as long as: a) the platform provider establishes a sub-account on behalf of each platform subscriber; and b) records ownership of the cryptocurrency by the subscriber in that sub-account. We note that this hypothetical interpretive position would appear to be a different approach to the application of the requirements of section 2(c)(2)(D) to settlement into digital wallets from the approach that was presented in a June 2016 CFTC enforcement matter involving Bitfinex. Please see our posting, Making Sense of the CFTC’s Enforcement Order and Settlement with Bitfinex. In particular, in that June 2016 order and settlement, the CFTC took a position that, in the facts and circumstances of that matter, the accounting for individual customer interests in the bitcoin held in an omnibus settlement wallet in platform provider’s own database was insufficient to constitute “actual delivery” for purposes of the exemption from regulation as a retail commodity transaction under section 2(c)(2)(D). In this regard, it is also noteworthy that the CFTC indicated that actual delivery would not occur if a platform provider retained control over the private keys to individually enumerated multi-signature wallets in a situation in which the platform customer lacked a contractual relationship with the third-party firm that established the wallets. Finally, it should also be noted that there appear to have been liens recorded against the wallets that contained the bitcoin under the facts of the June 2016 enforcement order, whereas the platform provider that requested the current no-action relief does not appear to have a lien against the bitcoin in the customer’s account. Although, there is still margin posted by that customer subsequent to the transfer of the bitcoin to the purchaser and, presumably, there is a lien against that margin. In closing, it is readily acknowledged that factual considerations may distinguish a digital wallet offered by one platform provider relative to the digital wallet offered by another platform provider, and that such considerations are important to consider as part of any regulatory analysis.

Obviously, a request for relief does not obligate a regulatory agency to issue the requested relief. So, the impact of the request is largely an “unknown” at this point. Nevertheless, the requested relief presents an opportunity for significant regulatory “navel gazing” should the CFTC choose to grant the requested no-action relief.

Good day. Good “regulatory navel gazing”? DR2

ETF Corner: SEC Requests Comment on listing of Bitcoin ETF

On October 12, 2016 the Securities and Exchange Commission (“SEC”) issued an order instituting proceedings to determine whether or not to approve or disapprove a proposed rule change filed by Bats BZX Exchange, Inc. (“Exchange”) that would permit Winklevoss Bitcoin Shares (“Shares”) issued by the Winklevoss Bitcoin Trust (“Trust”) to be listed and traded on the Exchange. The SEC is instituting proceedings “in the view of the legal and policy issues raised by the proposed rule change” and stated that such proceedings “does not indicate that the Commission [SEC] has reached any conclusions with respect to any of the issues involved.” As further noted below the SEC is encouraging “interested persons to provide comments on the proposed rule change.” Continue Reading

Bitcoin Week in Review – 10.01.16 – 10.14.16

Below is a summary of some of the significant legal, regulatory and industry 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.

U.S. Developments

Regulatory Developments

CFPB Declines to Make Definitive Statement on Virtual Currencies in Final Prepaid Account Rule

On October 5th, after more than four years of anticipation by the financial services community, the Consumer Financial Protection Bureau (CFPB) issued its final rule concerning prepaid accounts, declining to make any definitive statement as to whether Bitcoin and other virtual currencies fall within the scope of Regulation E. Regulation E implements the Electronic Fund Transfer Act and provides certain consumer protections by law, such as those relating to lost or stolen cards and restricting liability for unauthorized transactions. For the time being, this is welcome news for digital currency advocates who feared the negative impact of regulating “virtual currencies” as a prepaid financial account. Nonetheless, fiat prepaid accounts and digital wallets are in scope, and such platforms are advised to confer with counsel as to its applicability to their particular business. The final rule will take effect on October 1, 2017.

SEC Delays Decision on Bitcoin ETF

The SEC has further delayed a decision on approving the SolidX bitcoin exchange-traded fund (ETF). The proposed fund, if approved, would be the first exchange-traded product available on U.S. markets to hold a digital asset such as bitcoins. Instead, the SEC has implemented another three-week comment period to seek additional feedback on: the stability, resilience, fairness and efficiency of bitcoin markets; the potential for losses via computer hacking and manipulation; the product’s valuation method; and whether bitcoin’s “novel and unique properties” make it “an appropriate underlying asset for a product that will be traded on a national securities exchange.” The new deadline for the SolidX bitcoin ETF decision is October 31, 2017. We encourage participation on the proposal, and thus far the SEC has only received six letters for and against bitcoin ETF.

Industry Developments

Credit Unions Turn to Blockchain

Faced with increasing competition and declining numbers across the credit union industry, Credit union service organizations (CUSOs) are joining more than 60 credit unions in the CU Ledger blockchain initiative, in an attempt to develop applications for distributed ledger technology (DLT) in the industry. The initiative is primarily focused on utilizing smart contracts and developing a user-centric digital identity that could enable faster authentication while minimizing fraud, and is funded by participant fees with a minimum investment of $10,000 required to participate. CU Ledger has the support of the system’s largest CUSOs and is working with Salt Lake City-based start-up Evernym in the hopes of having a prototype up and running by early next year.

Central Banks Look to Blockchain

Central banks are paying increasing attention to distributed ledger technology (DLT) and its potential to make the financial system faster and more efficient, transparent and secure. In a speech on October 7th, Federal Reserve governor Lael Brainard acknowledged the technology’s potential to transform the financial system, saying, “We are paying close attention to [DLT], recognizing this may represent the most significant development in many years in payments, clearing and settlement.” Her speech came just three days after the Fed announced the launch of a major new study on digital payment technologies, bitcoin, and fintech more broadly, to be led by the Fed’s Faster Payments Task Force. The study will focus primarily on the security and implementation of faster payments technology in order to encourage widespread adoption by businesses and consumers when the technology becomes available. The Fed’s effort is also designed to catch up to other countries who are further along in bringing their payments systems into an increasingly digital landscape — notably, the Bank of England, the People’s Bank of China, the Monetary Authority of Singapore and the Reserve Bank of Australia. The Bank of Russia also recently announced that it was testing Masterchain, an Ethereum-based blockchain prototype.

International Developments

Virtual Currency Regulation Takes Effect in “Bitcoin Isle”

Light touch regulation of virtual currency exchanges have come into effect on the autonomous island of Jersey in the UK. The new laws make virtual currency exchange a supervised business and require exchange businesses with an annual turnover threshold of £150,000 or more to register with the Jersey Financial Services Commission (JFSC). Digital currency service providers will be sanctioned if they fail to register within three months of crossing that threshold.  The new laws are designed to encourage experimentation, innovation and testing of new virtual currency products, services, business models and delivery mechanisms, while balancing the need for regulation.  They also build on prior Jersey governmental efforts to attract companies involved in Bitcoin and other fintech services.  In 2014, for instance, the island became home to the first ever regulated Bitcoin fund, Global Advisors Bitcoin Investment Fund (GABI), which was certified by the JFSC and allows traditional investments such as pensions to be invested in Bitcoin and secured by the same security features in commonly used financial products.  And today, according to a local Bitcoin advocacy group, sixteen establishments on the tiny island accept Bitcoin as a method of payment.

Dubai Aims to Have All Documents on a Blockchain by 2020

On October 5th, the Crown Prince of Dubai announced a strategic plan to have all government documents secured on a blockchain by 2020, as part of a larger initiative known as the Dubai Future Agenda, whereby Dubai aims to set the standard for “smart cities” of the future. The plan, known as the Dubai Blockchain Strategy, has three main pillars: government efficiency, industry creation, and global leadership, and is a joint project between the Dubai Future Foundation and Dubai Smart City Office. The Dubai government estimates its blockchain strategy has the potential to generate 25.1 million hours of economic productivity each year in savings, while reducing CO2 emissions. If successful, individuals would only need to enter their personal data or business credentials once, after which the information would be updated and verified in a timely manner through the blockchain network across all government and private entities, including banks and insurance companies. The Crown Prince also announced plans to open the platform to other cities and nations in the hopes of international collaboration in the future.

For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.

Bitcoin Week in Review

Below is a summary of some 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.

U.S. Developments

OCC Proposes Rollout of a Limited-Purpose FinTech Charter
Earlier this month, the Office of the Comptroller of the Currency (OCC) released a notice of proposed rulemaking, which among other things, paves the way for the OCC’s rollout of a special purpose financial technology (FinTech) banking charter.  See  81 Fed. Reg. 62835 (proposed Sept. 13, 2016).

Under this proposed rulemaking, the OCC would be able to act as a receiver for national banking institutions that are not insured by the Federal Deposit Insurance Corporation (FDIC) (uninsured banks).  The OCC supervises very few uninsured banks, and currently, all such banks are special purpose trust banks whose operations focus on fiduciary and custodial operations.  But under federal law, the OCC may also charter other special purpose banks, so long as they conduct at least one of the three core banking functions (receiving deposits, paying checks, or lending money).   As part of its initiative on responsible banking innovation, the OCC is expressly considering “whether a special purpose charter could be an appropriate entity for the delivery of banking services in new ways,” which may include use of financial technology.  With the prospect of “fintech” special purpose banks in mind, the OCC is seeking comment on whether its proposed receivership rule would work for such banks.

The OCC invites comments on the proposed rule, which should be submitted by November 14, 2016.  OCC News Release (Sept. 13. 2016).

Congress Forms a Bipartisan Blockchain Caucus
Rep. Mick Mulvaney (R-SC) and Rep. Jared Polis (D-CO) announced the formation of a new bipartisan Congressional Blockchain Caucus on Monday, September 26, 2016.  See  Polis launches Congressional Blockchain Caucus Press Release (Sept. 26, 2016).   According to Rep. Polis’s press release, this caucus will be dedicated to advancing sound public policies related to cryptocurrencies and other blockchain-based technologies.  It will also seek to educate, engage, and provide research to help policymakers implement smart regulatory approaches to the issues raised by blockchain-based technologies and networks.

New Hampshire Commission to Study Cryptocurrency Holds First Publically Attended Meeting
New Hampshire held a public meeting Wednesday (9/28/2016) to discuss whether to move forward with regulatory action for companies that sell and exchange bitcoin and other virtual currency.  This discussion is in response, at least in part, to New Hampshire’s newly amended banking laws that included virtual currency into the banking regulatory fold as of January 1, 2016.  See  NH Revised Statutes § 399-G:1 (effective Jan. 1, 2016).  Although several companies have registered as money transmitters with the state banking department—another company has announced plans to withdraw from serving New Hampshire residents in October. See David Brooks, State’s banking regulations have NH bitcoin community rattled, Granit Geek, available at Granite Geek (posted Sept. 28, 2016). Attendees of the meeting report that most participants—including the meeting’s chairman, Representative John Hunt of Rindge—were opposed to enacting any regulations.  On the other side of the aisle, the New Hampshire Banking Department representative Maryam Torben-Desfosses, expressed support for regulation. The commission’s ultimate goal is to reach a recommendation either for or against regulation of cryptocurrency in New Hampshire.  The commission will hold its next meeting on October 6th at 10 a.m. in the Legislative Office Building in Concord, NH. Video of NH Hearing

International Developments

British Crown Dependency Channel Isle of Jersey’s Legislature Approves Plan to Regulate Digital Currency
The State Assembly in Jersey’s legislature (the largest of the Channel Islands) published a government order effective September 26, 2016 to regulate anyone operating as a digital currency exchange.  See Jersey Government Order (Sept. 23, 2016).   This legislation is designed to provide a registration system for certain service providers and to avoid a full-on licensure scheme (like the New York BitLicense).  See, e.g., Island of Jersey wishes to regulate bitcoin technology without impeding its development, CoinFox (Oct. 21, 2015), available at  The Order exempts anyone operating as a digital currency exchanger from requirements to register their business with the government if their annual business carried on by a person (“turnover”) is less than ₤150,000.  Digital currency exchanges that exceed that threshold have three months to register their business.

For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.

SDNY Opinion re: Bitcoin

U.S. District Judge Alison Nathan of the Southern District of New York issued a decision yesterday finding that bitcoins are money under the plain meaning of Section 1960, the federal money transmission statute. In July 2015, Anthony Murgio and two others defendants were arrested and charged with operating an illegal bitcoin exchange – Murgio sought to dismiss two counts – operating, and conspiracy to operate, an unlicensed money transmitting business. He argued that virtual currency falls outside the definitional scope of the applicable statute. The court disagreed.

Section 1960 makes it a crime to knowingly conduct, control, manage, supervise, direct, or own all or part of an unlicensed money transmitting business. The statute defines money transmitting to include transferring funds, and lists three ways in which a “money transmitting business” can be deemed “unlicensed.” First, a money transmitting business is unlicensed if it is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony. Second, such a business is unlicensed if it fails to comply with federal money transmitting business registration requirements. And third, a money transmitting business is unlicensed if it involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity.

Section 1960 does not specify what constitutes “transferring funds.” This raises the question of whether bitcoins are deemed to be “funds” or money under the statute. The court concluded that they are. Relying on two prior decisions – Judge Rakoff’s decision in United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014) and Judge Forrest’s decision in United States v. Ulbricht, 31 F. Supp. 3d 540, 570 (S.D.N.Y. 2014) – and applying the “ordinary meaning” of the term “funds,” the court stated that:

bitcoins can be accepted as a payment for goods or services or bought directly from an
exchange with a bank account. They therefore functions as pecuniary resources and are
used as a medium of exchange and a means of payment.

Hence, the court held that bitcoins are “funds” under the statute.

While the publicity surrounding this decision may seem noteworthy, in reality the court’s decision is consistent with several other federal cases and will unlikely have a dramatic impact.

UPDATE: California Bill Has Been Withdrawn

Last week, California legislators introduced an amended AB 1326, which substantially changed California’s proposed bill addressing procedures and regulations of digital currency businesses. After a second reading in the California Senate, this bill has been re-referred to the Committee on Banking and Financial Institutions for additional comment. See California Legislative Status on AB-1326. Industry leaders, including this blog, expressed concerned last week that the proposed bill was being fast-tracked without a meaningful discussion of the substantial changes to the bill or the impacts the changes may have in practice on digital currency businesses. This week, the bill has been withdrawn from consideration for this legislative session. We will keep you posted on additional updates, but the most current information about this bill is that it will no longer be pursued this year.

Our original post can be found here.

California Legislature Fast-Tracks a Bill Creating Enrollment Procedure and Enforcement Authorization for Digital Currency Companies, Leaving Several Important Questions Unresolved

This week, at the tail-end of the legislative session, California legislators have introduced a bill (amended from a bill originally introduced in April 2015) that statutorily addresses the increasingly topical question of how to regulate the emerging crypto-currency market.

The amendment, introduced on August 8, 2016, is a vast departure from the earlier iterations of the proposed bill and addresses many questions about regulating this unique space. With the legislative session ending this month, however, the changes have many in the industry asking: Is this proposed bill ripe for lawmaker approval? While the attempt at specializing the Program towards this unique industry appears to have many advantages over other licensing systems, the bill as-written also introduces various ambiguities — especially regarding questions of the proposed bill’s scope, definitions, and how a statute will be applied in practice. Involvement of industry members in drafting such a bill could help alleviate those concerns. Moreover, several states have already attempted to address this space — with varying success. The ULC is currently engaged in drafting a uniform Virtual Currency Business Act, which aims to unify state systems and avoid a patchwork of conflicting state laws. By enacting this proposed bill, California would be going it alone with an approach that does not appear to be harmonized with the best (or the worst) state solutions out there to date.

What is now essentially a complete overhaul of the original bill, the current version changes what was originally a licensing structure to an enrollment program. To illustrate, the new enrollment program requires digital currency businesses in California to enroll and introduces various industry-specific definitions and enrollment requirements. The proposed bill also gives the DBO authority to regulate. Here is our Summary and Comparison – California Legislature Assembly Bill No. 1326 of the different aspects of the newly proposed bill, which also includes a side-by-side comparison of the new language with the earlier proposed bill.

Florida State Court Order In Espinoza Case Raises Questions About Classification of Bitcoin Under Florida Law

Despite much hype over the ruling by a Florida court that bitcoin is not money, the likeliest outcome of Monday’s decision will be legislative amendments to Florida’s money transmitter laws, rather than the sweeping impact envisioned by some.

Florida state Judge Teresa Pooler dismissed charges on Monday against a man accused of  money laundering and operating an unlicensed money services business.  Tellingly, the court held that it was “unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written.”

In early 2014, Michell Espinoza was caught in a sting operation while selling bitcoin in multiple face-to-face transactions with an undercover agent who claimed that he would use the bitcoin to purchase stolen credit card numbers.  Following the trail of convoluted statutory definitions within Florida’s money transmitter laws, the court ruled that Espinoza was not operating an unlicensed money services business—he was merely selling his property.

A “money services business” under Florida law is defined as any person “who acts as a payment instrument seller, foreign currency exchanger, check casher, or money transmitter.”[1]  The prosecutor first charged Espinoza with engaging in money transmission, but later changed it to selling a payment instrument.  “Money transmission” involves receiving “currency, monetary value, or payment instruments for the purpose of transmitting the same by any means.”  Integral to money transmission is the act of transmitting, which the court reasoned is akin to acting as a middleman.  Under the court’s analysis, selling one’s own property “does not meet the definition of ‘transmit.’”

Puzzling, however, is the court’s finding that Espinoza did not engage in the sale of a “payment instrument.”  Although Florida’s money transmitter law does not define “money,” many state laws define “money” as a medium of exchange issued by a government, leaving little doubt that Bitcoin is not “money” under state law.  Decentralized digital currencies, such as Bitcoin, typically fall within the definition of “monetary value,” which is almost universally defined as “medium of exchange, whether or not redeemable in currency.”[2]  Although “monetary value” is listed within Florida’s definition of “payment instrument,” [3] the court swept past that analysis, focusing instead on determining whether Bitcoin is “money.”  Rather than considering that Bitcoin could be monetary value, the judge concluded “‘[v]irtual currency’ is not currently included in the statutory definition of a ‘payment instrument;’ nor does Bitcoin fit into one of the defined categories listed.”

The court also dismissed charges of money laundering, finding that Espinoza lacked the requisite intent to promote the alleged illegal activity.[4]  Acknowledging the ambiguity in determining whether an act qualifies as “promoting,” the court found that merely “hearing the illicit manner in which the buyer intends to use what has been purchased” unquestionably falls short of promoting the illegal activity.

Although the publicity surrounding the arrest seemed noteworthy at the time, especially considering the “sting operation” that was jointly conducted by the Miami Police Department and the United States Secret Service, it is unlikely the court’s decision  will have a dramatic impact outside of Florida, as many state money transmission laws already capture Bitcoin under the definition of “monetary value.”

Order Granting Motion to Dismiss, Florida v. Espinoza (July 22, 2016)

[1] Fla. Stat. § 560.125(22).

[2] Fla. Stat. § 560.125 (21).

[3] Fla. Stat. § 560.125 (29) defines “Payment Instrument” to include “a check, draft, warrant, money order, travelers check, electronic instrument, or other instrument, payment of money or monetary value whether or not negotiable.”

[4] Fla. Stat. § 896.101(3)(c).