Blockchain Week in Review: Week of November 8, 2019

U.S. Developments

Litigation

New York Resident Indicted for Duping Investors with Fake ICO Scam

On November 6, the United States Attorney for the Southern District of New York announced a wire fraud charge against Asa Saint Clair, the operator of World Sports Alliance, which held itself out on its website as using sports to promote “economic development and social mobility” and claims an association with the United Nations. The U.S. Attorney, Geoffrey Berman, contends that World Sports Alliance is a “sham affiliate of the United Nations.”

According to the indictment, Saint Clair lured investors into loaning funds, through convertible notes, to World Sports Alliance so that the organization could conduct an ICO for a proprietary digital currency called IGOBIT. Saint Clair allegedly promised investors that they would receive guaranteed returns. According to the government, Saint Clair’s representations were false: Investor funds were not used to conduct an ICO and, instead, Saint Clair diverted the funds and used them to support a lavish lifestyle.

The press release from the United States Attorney’s Office can be found here and the indictment here. Continue Reading

Blockchain Week in Review: Week of October 25, 2019

U.S. Developments

Mark Zuckerberg Testifies Before U.S. House of Representatives Regarding Libra

On October 23, Facebook, Inc. CEO, Mark Zuckerberg, testified before the House Committee on Financial Services regarding Facebook’s efforts to launch Libra, a blockchain-based payments system.  Mr. Zuckerberg’s testimony described Libra as a tool for financial inclusion, which would also comply with relevant U.S. regulatory requirements.

Early in his testimony, Mr. Zuckerberg promised that Libra would not launch anywhere in the world until it had received approval from regulators in the United States.  Later, he asserted that Facebook would be willing to quit the Libra project if the product launched prior to receiving regulatory approval.  Mr. Zuckerberg also addressed concerns related to consumer protection over the financial information generated via the Libra network.  He said that Facebook was in the process of building compliance systems for the Calibra wallet application.  He also noted that Facebook was building out strong consumer protections, customer support, and password recovery services designed to ensure that Libra met or exceeded consumer protection standards. Continue Reading

Blockchain Week in Review: Week of October 11, 2019

U.S. Developments

U.S. Federal Regulatory Developments

CFTC, FinCEN, and SEC Leaders Release a Join Statement on Digital Assets

On October 11, 2019, the heads of the Commodity Futures Trading Commission (“CFTC”), Securities and Exchange Commission (“SEC”) and Financial Crimes Enforcement Network (“FinCEN”) issued a joint statement reminding those involved with digital assets about their obligations to protect against money laundering and terrorist financing, as required by the Bank Secrecy Act (“BSA”). The statement clarifies that AML/CFT regulations apply to “financial institutions” as defined under the BSA and includes certain introducing brokers, broker-dealers, money services businesses, and SEC-registered mutual funds. Financial institutions under the BSA definition must, among other things, establish and implement anti-money laundering programs and certain recordkeeping and reporting programs, according to the statement. Continue Reading

Blockchain Week in Review: Week of September 27, 2019

U.S. Developments

REGULATORY

House Passes Bill to Review How Blockchain Technology Can Improve FinCEN

The U.S. House of Representatives passed a bill sponsored by Anthony Gonzalez (R-OH) that requires the Director of the Financial Crimes Enforcement Network (“FinCEN”) to carry out a study on the status of implementation and internal use of blockchain and other emerging and innovative technologies to determine whether they can be leveraged to make FinCEN’s data analysis more efficient and effective, including ways to improve the dissemination of information it collects and stores to better support its investigations.

Representative Gonzalez stated that his “bill makes sure that we are using the best technology we have available to find and stop the money laundering that makes all these crimes not only possible, but financially profitable for cartels, traffickers, and terrorists.” The bill now resides with the U.S. Senate for consideration. Continue Reading

Blockchain Week in Review: Week of September 20, 2019

U.S. Developments

Regulatory

VanEck/SolidX Bitcoin ETF Proposal Withdrawn.

Facing an October 18 deadline for the Securities and Exchange Commission (“SEC”) to approve or disapprove, Cboe BZX Exchange withdrew the proposed rule change to list and trade SolidX Bitcoin Shares issued by VanEck SolidX Bitcoin Trust on September 13, 2019. The decision had already been delayed on March 29, 2019, and August 12, 2019. This same exchange-traded fund (“ETF”) proposal was also withdrawn in January 2019 after the government shutdown threatened to force a rejection of the proposal. Cboe BZX Exchange gave no explanation for the withdrawal of the proposed rule change in the September 17, 2019, filing. According to Gabor Gurbacs, the VanEck director of digital asset strategies, the company is still working to bring a Bitcoin ETF to market in the United States. Continue Reading

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

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