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.
CFTC Files Civil Action Over Alleged Fraudulent Scheme
On September 21st, the Commodity Futures Trading Commission (“CFTC”) announced the filing of claims against Nicholas Gelfman and Gelfman Blueprint, Inc. (the “Defendants”) for fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin. According to the allegations asserted by the CFTC, the Defendants operated a Ponzi scheme, misappropriated funds from investors, and took steps to conceal losses (including by staging a “hack” on its computer systems designed to conceal what were actually trading losses and depletion of funds due to misappropriation).
Notably, this enforcement action (1) articulates the CFTC’s position that Bitcoin and other virtual currencies are encompassed in the definition of a “commodity,” under section 1a(9) of the Commodity Exchange Act (the “CEA”), (2) emphasizes that section 6(c)(1) of the CEA and CFTC Regulation 180.1 grant broad jurisdiction to the CFTC to combat fraudulent and manipulative behavior related to all transactions in interstate commerce that involve commodities, not just derivatives or forward contracts, and (3) demonstrates the CFTC’s willingness to bring an enforcement action when apparent fraud or manipulation is at issue, even if the financial instrument could fall under the purview of the SEC as a security. As further background on this last point, the pooling of assets for purposes of investing in Bitcoin could be a security, notwithstanding the fact that Bitcoin itself is a commodity.
CFTC Press Release Sept. 21, 2017. For a more in-depth discussion of the action and its effects on future transactions, see CFTC Files Charges in Bitcoin Ponzi Scheme (9/21/2017).
Bitcoin Fraud Suspect’s Extradition Moves Forward
Earlier this month, a court in Greece ruled in favor of the extradition to the United States of Alexander Vinnik, a Russian who is believed to be the mastermind of a $4 billion bitcoin laundering ring. The next week, however, after the Russian government publically spoke out against the U.S. extradition decision and Vinnik appealed the decision, the Greek court supported extradition of Vinnik to Moscow. The supreme court is expected to hear the appeal in the next three weeks.
Vinnik is one of seven Russians arrested or indicted globally this year on U.S. cybercrime charges. A U.S. jury indicted Vinnik in July on allegations that Vinnik was the operator of a digital currency exchange (BTC-e), which was allegedly used to launder more than $4 billion for individuals involved in crimes ranging from computer hacking to drug trafficking. Vinnik is also wanted in Moscow, under lesser charges related to fraud. Vinnik, was arrested in Greece in July. Vinnik has agreed to return to Russia to face charges there. Vinnik claims that he was not the operator of BTC-e—a digital currency exchange “used to trade bitcoin” and to allegedly “facilitate crimes ranging from computer hacking to drug trafficking”— but rather claims he was only a “consultant” for BTC-e. In addition, Vinnik has been accused of obtaining funds from Mt. Gox, a bitcoin exchange that collapsed in 2014 after it was hacked, and laundering money from that exchange through BTC-e. If extradited to the United States and convicted, Vinnik faces up to 55 years in prison. Vinnik denies the charges against him. Reuters (10/4/2017); Reuters, U.S., Russia in Extradition Tug-of-War Over Bitcoin Fraud Suspect in Greece (10/11/2017); Reuters, U.S. Indicts Suspected Russian “Mastermind” of $4 Billion Bitcoin Laundering Scheme (7/26/2017); U.S. DOJ Press Release (7/26/2017); BTC-e Indictment.
Judge Postpones Decision in NYDFS BitLicense Litigation
A New York business owner’s challenge to the New York State Department of Financial Services’ (“NYDFS”) BitLicense regulation regime continues for now. In the case of Theo Chino v. New York State Department of Financial Services (“NYDFS”), No. 101880/15, the petitioner is challenging NYDFS’s authority to issue the BitLicense regulation by claiming that Bitcoin is not money and therefore NYDFS does not have authority to regulate Bitcoin. NYDFS has filed a motion to dismiss arguing that petitioner lacks standing to challenge the regulation, among other things. After entertaining oral argument, the court reserved making a decision on the motion to dismiss. ETH News.
CFTC Chairman Giancarlo Addresses Fintech in Testimony Before the House
This week, CFTC Chairman Christopher Giancarlo testified before the House Agricultural Committee. In this testimony Chairman Giancarlo addressed several questions related to Fintech and the future regulatory environment surrounding such innovation. Chairman Giancarlo indicated that LabCFTC will be crucial to understanding the new markets and technologies in order to properly “catch up with technology and innovation” on the regulatory front. For a more in-depth report on Chairman Gincarlo’s testimony related to Fintech, see Fintech Legal Report, FinTech Highlights from CFTC Chairman Giancarlo’s Testimony Before House Agricultural Committee.
CFTC Commissioner Brian Quintenz Discusses Fintech Regulation Goals and Ideals
Earlier this month, CFTC Commissioner Brian Quintenz delivered the keynote address before the Symphony Innovate 2017 Conference. This address focused on the CFTC’s goals and plans to regulate innovation in the 21st Century, including Fintech. Specifically, Quintenz explained the goals and promoted the industry’s use of LabCFTC and the Technology Advisory Committee or the TAC. Quintenz also addressed Bitcoin and the broader technological innovations of Distributed Ledger Technology (“DLT”). He noted that the CFTC is working hard to define what constitutes “actual delivery” of virtual currencies because delivery outside of a 28-day window would result in a virtual currency transaction falling outside of CFTC exemptions for registration requirements. The Commissioner also discussed Autonomous, Algorithmic Trading and Cybersecurity issues faced in the modern world. Quintenz closed his remarks with “[i]nnovation won’t wait for us. The world is changing, and we as regulators must now change. A 21st century economy demands 21st century regulation. . . .” He noted that the CFTC believes it has the “vision, mindset, and plan to keep pace and ensure the continued leadership of American capital markets.” Keynote Remarks of Commissioner Brian Quintenz before the Symphony Innovate 2017 Conference, Oct. 4, 2017.
SEC Chairman Testifies before the House Committee on Financial Services
The Securities and Exchange Commission (“SEC”) Chairman Jay Clayton appeared before the U.S. House of Representatives on October 4, 2017 to discuss the SEC’s Agenda, Operations, and Budget. In this testimony, the Chairman discussed, among many other things, the SEC’s plans to harmonize regulations between the SEC and CFTC, specifically regarding swaps and security-based swaps. In response to a question about small businesses obtaining loans through Fintech, Chairman Clayton opined that he likes innovation in the marketplace and he likes what he is seeing with DLT. However, he expressed concern that “new things can be an avenue for old frauds” and that he things regulation of this area should be worked on by the SEC or other regulators. Chairman Clayton also explained that with regards to ICOs, the SEC consciously intended to begin with its report on ICOs to notify the market of the proper way to conduct ICOs, rather than start off with an enforcement action. Chairman Clayton noted that they do not yet know if legislation is needed to address the secondary trading of tokens.
Regulations on Cryptocurrencies Proposed in Russia
The Russian Central Bank announced this week that Russia will block access to sites that offer cryptocurrency exchanges. Both Central Bank representatives and Russia’s President Vladimir Putin expressed a desire to protect public investors from risks presented by investment in cryptocurrencies. This is a marked shift from Russia’s Finance Minister Anton Siluanov’s position last month concluding that cryptocurrencies exist, “[t]here is no sense in banning them, there is a need to regulate them.” Reuters.
Cryptocurrency and ICO Regulations Rolled Out in the United Arab Emirates
Through its markets regulator—the Financial Services Regulatory Authority (“FSRA”)—the government of the United Arab Emirates (“UAE”) has released guidelines on virtual currencies and initial coin offerings (“ICOs”). This guidance concludes that a “one size fits all” approach to regulating virtual tokens is inappropriate. Rather, FSRA provides for a case-by-case approach to this diverse class of technology. The new guidelines require companies planning an ICO to approach the FSRA. The FSRA will determine if the token offering is to be regulated as a security. If the FSRA determines that the token falls outside the definition of a security, the token offering will remain unregulated. The guidance also determined that virtual currencies are not legal tender, but rather are commodities like precious metals and fuels. Thus, “mining” or spot transactions in virtual currencies will not constitute a regulated activity in itself. Any regulated firms enabling or using virtual currencies for financial services will be required to comply with existing AML and CFT laws. Finally, the guidance reserved the possibility for regulating cryptocurrencies under its regulatory purview in the future. Financial Services Regulatory Authority, Supplementary Guidance – Regulation of Initial Coin/Token Offerings and Virtual Currencies under the Financial Services and Market Regulations.
Gibraltar Publishes Regulatory Framework for Distributed Ledger Technologies
The Gibraltar Government published regulations regulating distributed ledger technology services as a controlled activity under the Financial Services (Investment and Fiduciary Services) Act. The legislation was designed to provide an “efficient, safe an innovative regulatory framework for firms engaging in activities not otherwise subject to regulation and that use DLT for the transmission or storage of value belonging to others (DLT Framework).” The regulation introduces a “DLT Provider” licensing regime, that is scheduled to take effect January 1, 2018. This regime is intended to cover businesses including exchanges, trading platforms, issuers of tokens, and issuers of unregulated securities. To obtain a license, business must apply for a DLT Provider’s license and comply with the regulatory principles. Regulatory principles include requirements that the DLT Provider: conduct its business with honesty and integrity, pay due regard to the interests and deeds of each customers, provide customers with fair and clear communications that are not misleading, maintain adequate financial and non-financial resources, have systems in place to protect customer assets when responsible for customer assets, have systems in place to prevent, detect, and disclose financial crime risks such as money laundering and terrorist financing, among other principles. Financial Services (Distributed Ledger Technology Providers) Regulations 2017; HM Government of Gibraltar, Ministry of Commerce, Press Release (10/12/2017); Virtual Currency Report (5/26/17).
For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.