Blockchain Week in Review (February 17, 2016)

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

California and New York Take Divergent Approaches to Regulating Fintech

After the OCC began developing bank charters for fintech firms, California’s financial regulator sent a letter to 13 fintech companies seeking a “frank, constructive dialogue” on ways to improve on “the lack of consistency and certainty in the current state regulatory regime.” For more information, please visit our sister blog The Fintech Report.

CFPB Lives to Fight Another Day

By order dated February 16, the D.C. Court of Appeals granted the Consumer Financial Protection Bureau’s (“CFPB”) petition for a rehearing on the Court’s October 2016 decision in PHH Corp. v. CFPB. For more information, please visit our sister blog The Fintech Report.

A New AML Paradigm is Proposed

In a Clearing House Report published February 16, a consortium of stakeholders from both the financial service and law enforcement sectors propose an overhaul in the way financial firms are expected to assist in preventing and reporting criminal activity, including terrorist financing. The Report proposes shifting to a system where law enforcement and investigators relay their priorities, and financial firms report on those priorities rather than reporting every potentially suspicious transaction, as is the current practice. The recommendations are designed to both cut down on the extensive use of resources and reports which yield very limited benefit to law enforcement, and to simultaneously shift those resources to where they can most effectively prevent criminal activity.

Hawaii Legislature May Establish a Blockchain Working Group… In 21 Years.

On January 25, 2017, Representatives Mark Nakashima and Chris Lee introduced HB1481 in the House of Hawaii’s State Legislature. The bill seeks to establish a working group to study the uses of, and determine best practices regarding, blockchain technology. The working group would include stakeholders from not only financial services and legal industries, but also from industries such as identity management, healthcare, manufacturing, and tourism. The House first referred HB1481 to its committee on Economic Development & Business (“EDB”), and with minor revisions, the EDB committee passed HB1481 H.D.1 on February 14 and referred it to the House Finance committee. Those minor revisions? The EDB Committee set the effective date as July 1, 2038. (Track HB1481.)

North Dakota Legislature Hits Roadblock in Attempt to Study Virtual Currency

After unanimously passing in the Senate, North Dakota’s Senate Bill No. 2100 received a unanimous “do not pass” recommendation from the House committee for Industry, Business and Labor on February 14. The bill mandates that legislative management “consider the feasibility and desirability of regulating virtual currency, such as bitcoin,” during the 2017-18 interim, and “report its findings and recommendations, together with any legislation required to implement the recommendations,” to the next legislative assembly. Introduced at the request of North Dakota’s Department of Financial Services, it remains to be seen whether the House will vote in accordance with the State Senate or with the committee’s recommendation.

International Developments

BTCChina Halts Bitcoin and Litecoin Withdrawals

Citing the need to upgrade inspection and verification systems to “aggressively guard against money laundering, illegal money exchange, pyramid schemes, and other illegal activity,” BTCChina announced suspension of bitcoin and litecoin withdrawals until March 15. BTCChina’s announcement comes about a week after similar announcements from China’s other two largest exchanges – OKCoin and Huboi. It is unclear if the People’s Bank of China (“PBOC”) directly ordered these exchanges to suspend withdrawals. However, the PBOC conducted “inspections” of several the Chinese exchanges in January, and issued a statement on February 9 via its website warning that exchanges violating anti-money laundering or foreign exchange regulations could be closed down in accordance with applicable law. 

Blockchain/Fintech Week in Review February 10, 2017

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

Arizona Bill Seeks to Recognize Validity of Smart Contracts and Blockchain Records

A bill introduced in Arizona seeks to legally recognize smart contracts, digital signatures, and other blockchain records.  Arizona House Bill 2417 proposes to define blockchain technology as “distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless.  The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.”  The bill is sponsored by Rep. Jeff Weninger.

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Blockchain/FinTech Week in Review for the week of February 3, 2017

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

The Saga of Coinbase and its IRS John Doe Summons Continues
In November 2016 with approval from a federal court, the IRS served a John Doe summons on Coinbase requesting information on its users from January 1, 2013 through December 31, 2015 reportedly to catch individuals using crypto currency to evade taxes.  In an effort to work with the IRS without disclosing an overly broad amount of private customer information, Coinbase suggested an alternative solution:  issuing 1099-B reports, which brokerage firms use to report customers’ gains and losses.  The issue remains unresolved.  See Laura Shin, Forbes.com, http://www.forbes.com/.

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NYDFS Issues Revised Proposed Cybersecurity Regulation

On December 28, 2016, the New York State Department of Financial Services (NYDFS) issued a revised proposed cybersecurity regulation, Cybersecurity Requirements for Financial Services Companies.  The revised proposed regulation reflects several substantive changes made in response to over 150 public comments received by NYDFS in response to the original proposed regulation published this past September.  These regulations represent the culmination of NYDFS’s multiyear inquiry into the efforts of banking institutions and insurance companies to prevent cybercrime, which included an extensive assessment and review of NYDFS-regulated banks, NYDFS-regulated insurance companies, and third-party vendors.  NYDFS is accepting further comments to the proposed regulation through January 27, 2017.

Much like the version proposed in September, the revised regulation is designed to set certain minimum cybersecurity standards and processes to be followed by regulated institutions.  We have summarized below the key obligations that the regulations would impose, along with their effective dates, if they are implemented in their current form.

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Washington Department of Financial Institutions Proposes Virtual Currency Regulation

The Washington Department of Financial Institutions (“DFI”) introduced a bill last month amending portions of the Washington Uniform Money Services Act (“UMSA”). The proposal includes provisions specific to digital currencies, providing clarity to an industry struggling to muddle its way through unclear and disparate regulations across 50 states. Washington has been a leader in providing sound regulation of digital currency, having previously issued Interim Regulatory Guidance on Virtual Currency Activities in December 2014.

Reflecting industry input, the definition of “virtual currency” carves out blockchain applications in which the token itself is not used as a medium of exchange. If the proposal passes, Washington will be the first state to draw a clear statutory distinction between non-financial blockchain applications and digital currencies. Under the proposal, “virtual currency” means:

“a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government. Virtual currency does not include the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.”

Particularly noteworthy – the proposal provides that in lieu of holding traditional “permissible investments,” digital currency companies must hold capital reserves in “like-kind virtual currencies of the same volume” as that which is obligated to consumers. Most states require digital currency companies to hold capital reserves in dollar-denominated “permissible investments,” regardless of whether the company also holds digital currency value in the same form and volume as it is received—resulting in added burdens on digital currency companies without enhancing consumer protections.  This change provides relief to companies struggling to expand due to the high cost of duplicative reserve requirements.

The proposal also imposes certain requirements specific only to digital currency companies, including consumer protection disclosures and a mandatory third-party security audit of the company’s network infrastructure.

In addition to the digital currency provisions, the proposal also includes a payment-processor exemption and a payroll exemption. Currently, Washington offers a payment-processor waiver program. Aside from Washington, only California, Nebraska, Nevada, New York and Ohio offer a similar “agent of the payee” exemption, and only Mississippi, Ohio and Texas provide an exception for money transmission “integral to the sale of goods or provision of services other than money transmission.”

A copy of the proposed bill is available here.

Bitcoin Week In Review – January 6, 2017

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 FDIC Seeks Comments on Proposed Handbook for De Novo Institutions

On December 22nd the Federal Deposit Insurance Corporation (FDIC) issued a press release inviting comments on a proposed Handbook for De Novo Institutions Applying for Deposit Insurance.  The Handbook aims to provide guidance for navigating the complex insurance application process.  FDIC Chairman Martin J. Gruenberg expressed the critical role played by new entrants, stating that “de novo institutions add vitality to our local banking markets, providing credit and services to communities that may be overlooked by larger institutions.”  In particular, the FDIC seeks comments as to whether the handbook (i) provides sufficient clarity and transparency to the process, (ii) adequately addresses the application requirements, processes and procedures, and (iii) appropriately addresses the information needs of bankers and non-bankers alike.  Comments may be submitted to handbookcomments@fdic.gov between now and February 20, 2017.

Washington State Introduces Bill to Amend the Uniform Money Services Act

The Washington Department of Financial Institutions (“DFI”) introduced House Bill 1045 on December 15 proposing amendments to the Washington Uniform Money Services Act (“UMSA”).  The proposed bill adds a definition of “virtual currency” to the UMSA, carving out blockchain applications in which the token itself is not used as a medium of exchange.  If the proposal passes, Washington will be the first state to draw a clear statutory distinction between non-financial blockchain applications and digital currencies.  In addition, the bill includes a provision alleviating the burdensome obligation to hold capital reserves (i.e., “permissible investments”) in dollar-denominated investments, requiring that companies dealing in digital currencies hold “like-kind virtual currencies of the same volume as that held [on behalf of customers].”

Besides the digital currency provisions, the proposal includes a payment-processor exemption and a payroll exemption.  Currently, Washington offers a payment-processor waiver program. For more information about this, please click here.

North Dakota Proposes Amendments to its Money Transmitter Act

On January 4th the North Dakota legislature introduced Senate Bill 2100, proposing limited amendments to the Money Transmitter Act, including a definition to “virtual currency” that is substantially similar to the definition adopted by the Georgia legislature in 2016.  In addition, the bill proposes regulating “maintaining control of virtual currency on behalf of others” as money transmission.   For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.

Blockchain Syndicated Loans as Uncertificated Securities

Blockchain Loans as Uncertificated Securities

In a previous post, I examined the risk that efforts to employ distributed ledger technology to trade syndicated loans could result in their reclassification as “securities” for purposes of federal securities laws. I will now explain why such a system may need to treat blockchain syndicated loans as “securities” for purposes of the Uniform Commercial Code (“UCC”). It should be possible to treat loans as securities under the UCC without necessarily subjecting them to registration with the SEC. Continue Reading

Could Blockchain Push Syndicated Loans over the Regulatory Edge?

Some banks are hard at work applying distributed ledger technology to trading syndicated loan transactions. Their system would make it easier than ever to invest in syndicated bank loans. At some point, the combination of widespread holdings and a major default could force a reassessment of whether syndicated loans traded over the new system are “securities” for purposes of the Securities Act of 1933 (the “1933 Act”) and Securities Exchange Act of 1934 (the “1934 Act”). To prevent this eventuality, the designers may want to limit who can trade over the new system. Continue Reading

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