Blockchain Week in Review: Week of January 10, 2020

U.S. Developments

Members of Congress Respond to IRS Tax Guidance for Digital Assets

On December 20, eight members of the U.S. House of Representatives sent a letter to the Commissioner of the Internal Revenue Service (“IRS”) urging further clarity on positions expressed in the IRS’s October tax guidance for digital assets.

The letter described various ways in which the October guidance raised additional questions about the taxation of digital assets, specifically identifying the issue of airdropped or forked digital assets as an area of immediate concern. The authors expressed concern that ambiguity regarding airdrops and forks may result in unanticipated tax obligations for owners of digital assets who become owners of additional digital assets as a result of a fork or airdrop. According to the authors, this outcome would be inconsistent with the IRS’s previous interpretations regarding unsolicited prizes or samples. Continue Reading

Blockchain Week in Review: Week of December 20, 2019

U.S. Developments

Federal Reserve Governor Speaks on Stablecoins and Related Risks

On December 18, 2019, Governor Lael Brainard of the U.S. Federal Reserve delivered a speech entitled “Update on Digital Currencies, Stablecoins, and the Challenges Ahead.” In her prepared remarks, the governor discussed “global stablecoins” and their scalability potential. Comparing the rate of adoption for telephones, the internet, and payment processors (such as Venmo and other digital payment systems), the governor noted the “potential for ‘global stablecoins’ to scale rapidly,” especially when deployed by technology companies with “network advantages.”

Without the “requisite safeguards,” stablecoins could pose risks to consumers that regulators should carefully consider, according to the governor. Using Libra as an example, Brainard went on to discuss various “significant concerns,” such as anti-money laundering, counterterrorist financing, know-your-customer, financial stability, and other issues that she believes stablecoins raise. Continue Reading

Blockchain Week in Review: Week of December 13, 2019

U.S. Developments

FinCEN Director Discusses How FinCEN Uses BSA Data and the BSA Value Project

The Director of the Financial Crimes Enforcement Network (FinCEN), Kenneth A. Blanco, delivered prepared remarks at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference this week.  Mr. Blanco spoke on five key topics: (1) how FinCEN uses Bank Secrecy Act (BSA) data, (2) the status of the BSA Value Project, (3) the importance of beneficial ownership information, (4) the federal banking agency working group efforts, and (5) the realignment of FinCEN’s organizational structure. Continue Reading

Blockchain Week in Review: Week of December 6, 2019

U.S. Legislation

U.S. House Bill Seeks Classification of “Managed Stablecoins” as “Securities”

Texas Representative Sylvia Garcia introduced legislation in the U.S. House of Representatives that would amend the definition of a “security” within the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940 (collectively, the “Securities Laws”) to include “managed stablecoins.”

The definition of security in the Securities Laws currently includes, among other things, stocks, bonds, and “investment contracts.”  While the U.S. Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance recently provided no-action relief to Paxos Trust Company in connection with its U.S. dollar-backed stablecoin, the Paxos Standard, the regulatory status of other stablecoin products under the Securities Laws remains unclear.  For example, at this year’s SXSW conference, SEC Senior Advisor for Digital Assets Valerie Sczepanik noted that some stablecoins, in particular those with a central authority responsible for maintaining the digital asset’s stable value, may constitute securities.  Continue Reading

Blockchain Week in Review: Week of November 22, 2019

U.S. Developments

The Fed Chairman Comments on Potential for a US-backed Digital Currency

Jerome Powell, Chairman of the Federal Reserve, wrote to Congress this week discussing the merits of implementing a central bank digital currency (CBDC) in the U.S. The letter responds to a number of questions posed by lawmakers regarding the value that a digital currency would provide and implementation challenges that would need to be overcome. Two Congressmen had expressed concern that the U.S. is being left behind in the wake of technological advances.

Chairman Powell indicates that the U.S. is not currently developing a CBDC, but the Fed is monitoring development elsewhere. Chairman Powell noted that some of the motivating factors for  a digital currency in foreign countries do not necessarily exist in the U.S. Specifically, the demand for cash in the U.S. “remains robust” and there are fast and reliable digital payment services available that are not available in certain other countries. Continue Reading

Blockchain Week in Review: Week of November 15, 2019

U.S. Developments

Telegram Submits Answer to SEC Complaint Regarding TON Blockchain Network

On November 12, Telegram Group Inc. (Telegram) submitted its answer and affirmative defenses to a complaint filed against it by the U.S. Securities and Exchange Commission (SEC) in federal court. The SEC previously filed an emergency action against Telegram and received a temporary restraining order to prohibit the launch of the Telegram Open Network (TON) blockchain and the issuance of “Grams,” the company’s virtual currency.

In its answer to the SEC complaint, Telegram argues that its offering of investment contracts known as “Simple Agreements for Future Tokens” or “SAFTs” were compliant with the federal securities laws and offered pursuant to a valid exemption from the registration requirements under the Securities Act of 1933. The company also maintains that its actions regarding the SAFTs were consistent with the guidance offered by the SEC at the time and were conducted in good faith based upon the public comments made by SEC officials at the time. Specifically, Telegram cites various SEC statements and actions on the subject. Continue Reading

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 November 1, 2019

U.S. Developments

Mastercard and Food Co-Op Work Together on Food Visibility Blockchain Solution

Envisible, a company that is dedicated to supply-chain visibility in food systems, has teamed up with Mastercard’s blockchain-based Provenance Solution to offer a food tracking system. The system is called Wholechain and will allow customers to know more about the source of the food they consume and its journey to their table.

Topco Associates, one of the largest group purchasing organizations in the U.S., is a notable early adopter of the system. Topco’s food co-op includes almost 50 member-owners – including supermarkets, wholesale distributors, and pharmacy companies – that collectively bring in about $170 billion in sales annually.

Topco has begun working with its member grocery chains, starting with Food City, to pilot the use of the technology. The first of several species to be tracked will be salmon, cod, and shrimp.

Read more about the launch 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

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