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

SEC Obtains Judgment Against Bitcoin Mining Companies The SEC obtained final judgment this week against GAW Miners, LLC and ZenMiner, LLC. – two virtual currency mining companies who, along with their principal, Homero “Josh” Garza – have been the subject of ongoing investigation and litigation since the SEC filed a complaint against them in December 2015. The two mining companies were accused of selling, and accepting payments for, computing power that never existed, and thus defrauding the investors from whom they accepted money. In entering final judgment against them, the U.S. District Court for the District of Connecticut ordered the two mining companies to pay $10,384,099 in disgorgement and prejudgment interest, as well as a civil penalty of $1,000,000 each. The SEC’s litigation continues against Garza. See the SEC’s press release for more information on the final judgment, and our previous post for more background on the legal issues involved in this case. Unregistered Bitcoin Exchangers Beware Operating as a bitcoin exchanger in the U.S. generally requires the exchanger to register with FinCEN and, in many cases, to obtain one or more state licenses to engage in money transmission activity. A few recent cases highlight the importance of operating within the bounds of these laws:

  • Jason Klein pled guilty to charges of conducting an unlicensed and unregistered money transmitting business, in violation of federal laws and the laws of his home state of Missouri. Klein did not operate an online exchange, but rather advertised himself on the internet as a person willing to meet in person and conduct bitcoin exchange transactions. Although he has not yet been sentenced, the maximum statutory sentence for Klein is up to five years in federal prison without parole. (Link.)
  • Father-son duo Michael Lord and Randall Lord pled guilty to operating unregistered money transmission businesses by exchanging bitcoin via LocalBitcoins, and they were recently sentenced to 106 months and 46 months in prison, respectively. (Link.)
  • Anthony Murgio pled guilty in January of this year to various charges associated with operating, an online bitcoin exchange platform, as an unregistered money transmission business. Murgio’s sentencing is scheduled for June 16, and one of the open questions which is expected to be addressed at the sentencing is whether exchanging bitcoin on behalf ransomware victims should be considered a crime. (Link.) Murgio has already agreed to not appeal any prison sentence of about 12.5 years or less. (Link.)

Congressional Quick Takes From consumer finance to combatting terrorism, Congress has been busy on topics involving Fintech and digital currencies.

  • On June 8, the House voted to pass the Financial CHOICE Act, which aims at scaling back or eliminating significant portions the Dodd-Frank Act. If enacted, one of the most impactful changes for Fintech companies would be the scaling back of the Consumer Financial Protection Bureau (CFPB), which is an independent watchdog agency created under Dodd-Frank. (Link to more information on the Financial CHOICE Act.)
  • U.S. Senate Bill 1241, introduced in late May, seeks to amend the USA PATRIOT Act with the “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.” The bill would revise the definition of “financial institution” under federal law to include issuers, redeemers, or cashiers of “prepaid access devices,” as well as “any digital exchanger or tumbler of digital currency.” The bill is sponsored by Senator Grassley (R-IA) and co-sponsored by Senators Feinstein (D-CA), Cornyn (R-TX), and Whitehouse (D-RI). (Link.)
  • On June 8, the House Financial Services Committee held a hearing on “Virtual Currency: Financial Innovation and National Security Implications,” where witnesses included representatives from the academic, policy, and business sectors of the virtual currency industry. (Link.)
  • The House Subcommittee on Digital Commerce and Consumer Protection held a hearing on June 8 to discuss fostering innovation while encouraging consumer protection in the Fintech industry, including digital currency enterprises. (Link.)

State Legislative Updates

  • Alabama: As of May 17, Alabama has enacted Alabama HB 215, which repeals the state’s Sales of Checks Act and replaces it with the Money Transmission Act, effective on August 1. Although the Sales of Checks Act already covered a number of money transmission activities, the new law notably defines “monetary value” as a “medium of exchange, including virtual or fiat currencies, whether or not redeemable in money.” (Link.)
  • Nevada: On June 5, Nevada’s governor signed into law Nevada SB 398, which relates to the use of blockchain technologies. The law prohibits local governments from imposing a tax or fee on the use of a blockchain or smart contract, and from requiring a license to use a blockchain or smart contract. The new Nevada law defines “blockchain” as “an electronic record of transactions or other data which is: (1) Uniformly ordered; (2) Redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and (3) Validated by the use of cryptography.” (Link.)

International Developments

China Banking Regulators Seek New Legal Frameworks for Blockchain-Based Assets In a paper published June 1, staff members of the China Banking Regulatory Commission (CBRC) suggested the China securities market needs new rules to accommodate blockchain-based digital assets. The paper highlights both the benefits of innovative financial products as well as the need for sensible regulations in the industry, and ultimately the authors advocate for a regulatory sandbox for companies developing and testing new financial products in China. Further, the paper calls for cross-border collaboration among industry regulators throughout the world. While it was authored by CBRC staff members, the paper makes clear that does not represent the CBRC’s official position.

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