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
Regulatory Updates
The CFTC Launches Virtual Currency Resource Web Page
Last week, the Commodity Futures Trading Commission (“CFTC”) launched a virtual currency resource webpage at CFTC.gov/bitcoin. The page will serve as the CFTC’s central repository for information and resources produced by the CFTC about virtual currency. The webpage is designed to provide quick access to the Commission’s virtual currency primer, podcast, staff discussions, LabCFTC, and other resources dedicated to virtual currencies. CFTC Release: pr7665-17 (Dec. 15, 2017).
CFTC Proposes Interpretation of “Actual Delivery” Exception
On December 15, 2017, the U.S. Commodity Futures Trading Commission (the “CFTC”) issued a proposed interpretation of the term “actual delivery” as used in the provision of the Commodity Exchange Act (the “CEA”) that grants the CFTC explicit authority to oversee the marketplace for “retail commodity transactions”. This is the first blog posting in a multi-part series that will explore the regulation of retail commodity transactions and the CFTC’s recent proposed interpretation (the “Proposed Interpretation”), the issuance of which we believe has represents a potentially significant milestone in the regulation of virtual currency transactions. We begin our series with a brief look at the history and background of the regulation of retail commodity transactions. Read the full “Retail Commodity Transactions Involving Virtual Currencies: An Overview of the CFTC’s Proposed Interpretation (Part 1)” post on our Derivatives & Repo Report.
The Proposed Interpretation is open for public comment for 90 days from publication in the Federal Register, until March 20, 2018. CFTC Release: pr7664-17 (Dec. 15, 2017).
Enforcement Actions
The SEC Suspends Stock Trading in a California Digital Currency Company
This week, the Securities and Exchange Commission (“SEC”) temporarily suspended trading in securities of The Crypto Company pursuant to Section 12(k) of the Securities Exchange Act of 1934, due to “concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the compensation paid for promotion of the company, and statements in the Commission filings about plans of the company’s insiders to sell their shares of The Crypto Company’s common stock.” Questions have also arisen concerning potentially manipulative transactions in the company’s stock in November 2017. Trading is suspended until January 3, 2018. December 18, 2017 Order of Suspension of Trading; Release No. 34-82347 (Dec. 18, 2017).
SEC Shuts Down Munchee ICO
On November 1, 2017, the SEC instructed Munchee, Inc. to stop its ICO, which started a day earlier, deeming the MUN tokens to be “investment contracts,” and charging Munchee with selling unregistered securities in violation of Sections 5(a) and (c) of federal securities law. Following the shut-down, the SEC announced on December 11 that it had entered into an administrative settlement with Munchee and would not be taking further punitive action. Relying on established case law (SEC v. W.J. Howey and subsequent decisions, including cases discussed in the SEC’s “DAO Report”), the SEC found that Munchee’s token offering had met several criteria qualifying the tokens as investment contracts: (1) Investment of money, whereby investors exchanged Bitcoin or Ether for MUN tokens; (2) Common enterprise of the Munchee founders, who promoted themselves as experts at building a profitable business and ecosystem; and (3) Reasonable Expectation of Profits, which was the most weighty in the SEC’s analysis. Several factors influenced the SEC’s decision in determining that the true motivation of investors purchasing MUN tokens was profit, not utility:
- MUN tokens did not have utility during the offering period. However, the SEC noted in its Cease-and-Desist Order that the ability to use the token at the time of the offering would not necessarily preclude an ICO from securities law.
- Munchee’s Whitepaper explained how the MUN token would increase in value as a result of more users joining and participating in the platform, which would be built in the months following the token sale.
- The founders of Munchee emphasized the expectation of profits from the purchase of MUN tokens in podcast interviews, social media, and advertisements.
- Munchee did not target its advertisements to potential users in the restaurant industry. Instead, they marketed to potential investors interested in blockchain and digital assets.
SEC Press Release 12.11.17 SEC Cease-and-Desist 12.11.17
Fintech Updates
OCC’s Fintech Charter to move forward
New Comptroller, Joseph Otting, at the Office of the Comptroller of the Currency (“OCC”) commented recently that he saw a future for an OCC charter for fintech firms, first proposed by former Comptroller, Thomas Curry, over a year ago. Reuters 12.20.17
This comment comes on the heels of the OCC’s success in one of several litigations it is involved in challenging the OCC’s authority to issue such a charter. Last week, a New York federal court dismissed the New York Department of Financial Services’ (“NYDFS”) action filed against the OCC challenging the charter on the grounds that because the charter is still hypothetical it presents no challenge NYDFS’s authority to regulate at this time. Business Insider 12.14.17 WSJ 12.12.17
CFPB Reigns in Prepaid Accounts Rule
Under interim director Mick Mulvaney, the Consumer Financial Protection Bureau (CFPB) released its 2018 regulatory agenda, which is a scaled-back version that does not include the prepaid accounts rule passed in April 2017. The CFPB issued the rule to establish comprehensive consumer protections for prepaid accounts–including payroll card accounts and government benefit accounts, in addition to other types of prepaid accounts–under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (TILA or Regulation Z). The rule would established pre-acquisition disclosure requirements, under which financial institutions would be required to provide both “short-” and “long-form” disclosure statements to consumers. In addition, the rule includes a requirement that financial institutions provide summary totals of the fees assessed against prepaid accounts on a monthly and annual basis to account holders, and set forth other amendments to rules governing remittance transfers and overdraft credit features.
Final Prepaid Rule Issued 4.20.17; Effective 10.1.17
International Developments
Singapore Issues Proposed Payment Services Bill; and Issues Guide for Token Offerings
The Monetary Authority of Singapore (MAS) published a consultation paper in November proposing legislation for payment services. The proposed bill would expand the scope of regulation to include the purchase and sale of virtual currencies and other innovations used in domestic money transfers and merchant transactions via point-of-sale or online payment gateways. Specifically, payment firms will only need to hold one license under a single regulatory framework to conduct payment activities, and only certain payment activities will require licensing. The MAS indicated its commitment to ensuring that new legislation is not overly burdensome, noting that the bill will not apply a one-size-fits-all to all payment service providers, but will differentiate in how regulatory requirements apply based on the potential risks of specific payment activities. The new legislation would be incorporated into Singapore’s existing laws on payment services, the 2006 Money-Changing and Remittance Businesses Act. The draft is the second of its kind, and was amended following feedback received from the first consultation paper. The current paper is available for comment until January 8, 2018.
MAS Proposed Payment Services Bill – November 2017
The same month, the MAS published a Guide to Digital Token Offerings, which sets forth the main considerations in determining whether offers of digital tokens within Singapore would trigger regulation under securities law. If a token has utility upon completion of the offering, the MAS would not consider the token to be a security. If a token is designed in a way that makes it behave like a share, debenture, or another form of security, it would fall under the purview of securities law.
MAS Guide to Digital Token Offerings 11.14.17
ustralia To Begin Regulating Digital Currency Exchanges in 2018
On December 7, 2017 the Australian Parliament passed amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act of 2006. Among other rules, the law as amended requires digital currency exchanges to: identify and verify their customers’ identities; monitor and report large or suspicious transactions to the Australian Transaction Reports and Analysis Centre (AUSTRAC); register on the Digital Currency Exchange Register maintained by AUSTRAC; create a management protocol to identify, reduce, and manage money laundering and terrorism-financing risks; and keep certain records for seven years of transactions and customer IDs. The amendments will become effective mid-2018, six months following approval by the Governor-General.
Anti-Money Laundering and Counter-Terrorism Financing Act of 2006 2017 Amendments
South Korea Bans Trading of Bitcoin Futures
Korea’s Financial Services Commission has issued a ban on the trading of bitcoin futures, prompting several securities firms to cancel seminars scheduled in December for bitcoin futures investors. The Korean government has indicated that it will not ban bitcoin exchanges outright, but that ICOs and futures trading will remain subject to the ban.
France Allows Platforms to for Unlisted Securities
France has passed new laws to allow banks and fintech companies to create platforms where unlisted securities can be traded instantly. France’s Finance Minister released a statement on December 8 saying that this will allow for the development of new trading platforms and transactions that are faster, cheaper, more transparent, and safe. Securities listed on exchanges will still need to pass through custodians and clearing houses.
Russia Will Consider New Cryptocurrency Regulation
A senior lawmaker revealed that new cryptocurrency laws will be introduced to Russia’s national legislature on December 28 in a bill that would officially codify rules to regulate the creation and exchange of cryptocurrencies. The new bill, expected to be adopted in March 2018, has already been delayed several times owing in part to conflicting opinions among officials of the scope of the new regulation. President Putin has set the December deadline for the bill’s introduction, following his order in October, which demanded new regulations be developed around cryptocurrencies, blockchain technologies, and initial coin/token offerings (ICO/ITOs). The October order revealed an intention to regulate tokens offered in ICO/ITOs as securities, applying rules used to regulation initial public offerings. Another mandate in the Order directed the creation of a regulatory “sandbox,” in an effort to draw fintech companies to the country to develop blockchain-based technologies. This follows comments by Russia’s Deputy Finance Minister, who indicated that the government is considering outlawing the mining of digital currencies, although most penalties would be administrative.
Kremlin Order 10.21.17 RT 12.6.17
Venezuela Launches Digital Currency
Venezuela has launched its own digital currency, the “petro”, backed by oil, gas, gold and diamond reserves. President Nicolas Maduro announced the launch, which he said would help Venezuela advance its sovereignty and overcome the burdens of global economic sanctions.