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

CFTC Chairman Gives Testimony Before the U.S. Senate Agriculture, Nutrition, and Forestry Committee
On February 15, 2018, Chairman J. Christopher Giancarlo of the Commodity Futures Trading Commission (“CFTC”) provided testimony related to the CFTC’s plans to regulate virtual currencies and how this new technology impacts the agricultural markets before the United States Senate Agriculture, Nutrition, and Forestry Committee.  Specifically, Chairman Giancarlo quoted Chairman of the Securities & Exchange Commission (“SEC”) Jay Clayton to support the argument that “virtual currency presents complex challenges for regulators.”  Giancarlo outlined that the CFTC’s work on virtual currencies is being guided by six broad elements: “(1) staff competency; (2) consumer education; (3) interagency cooperation; (4) exercise of authority; (5) strong enforcement; and (6) heightened review of virtual currency product self-certifications.” As part of satisfying these elements, the CFTC has introduced LabCFTC, issued an “unprecedented amount of public educational materials on virtual currencies,” and collaborated with the SEC, state banking regulators, the IRS, and the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to ensure that the regulators are aware of the CFTC’s approach towards virtual currencies.  Chairman Giancarlo noted that while the CFTC has determined that virtual currencies such as Bitcoin meet the definition of “commodity,” it has concluded that “the CFTC does not have regulatory jurisdiction over markets or platforms conducting cash or ‘spot’ transactions in virtual currencies or other commodities or over participants on such platforms.”  Chairman Giancarlo concluded, however, that the “CFTC does retain jurisdiction to investigate and conduct civil enforcement actions against fraud and manipulation in virtual currency derivatives markets and in underlying virtual currency spot markets.”  Finally, Chairman Giancarlo also outlined the various enforcement actions the CFTC has undertaken involving virtual currency schemes—against alleged “perpetrators of fraud, market manipulation and disruptive trading involving virtual currency.”  Chairman Giancarlo remained positive about the potential impacts of virtual currencies and stated that distributed ledger technology (“DLT”) “is likely to have a broad and lasting impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.”  In closing, Chairman Giancarlo noted that virtual currencies require “attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space.”  He mentioned the shortcomings of the state-by-state money transmitter licensure structure that “leaves gaps in protection for virtual currency traders and investors” and noted that “[a]ny proposed Federal regulation of virtual currency platforms should be carefully tailored to the risks posed by relevant trading activity and enhancing efforts to prosecute fraud and manipulation.”  Chairman Giancarlo encouraged Senate members to adopt a federal regulatory scheme and stated “a rationalized federal framework may be more effective and efficient in ensuring the integrity of the underlying market.” 02.15.2018_Written Testimony of CFTC Chairman Giancarlo

SEC Office of Compliance Announces 2018 Examination Priorities
On February 7, 2018, the SEC announced its 2018 examination priorities, which are typically published annually to help improve compliance, prevent fraud, monitor risk, and inform policy.  The announcement notes “Of particular interest this year will be matters involving critical market infrastructures, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.”  The announcement also communicates the SEC’s Office of Compliance’s focus on cybersecurity and Anti-Money Laundering Programs this year.  SEC Chairman Jay Clayton was quoted saying “I appreciate OCIE’s dedication to maximizing the effectiveness of their resources with a keen eye toward asset verification, market infrastructure, and duties to overall retail investors.”  02.07.2018_SEC Press Release. For more information and details, see https://www.assetmanagementadvocate.com

Colorado Lawmakers Consider Introducing Blockchain Technologies into Government Records
On February 7, 2018, a bipartisan bill was introduced to the Colorado Senate, which proposed the use of blockchain for governmental data security within the state.  Senate Bill 18-086 concerns the use of cyber coding and cryptology for state records. If passed, the bill would require chief information security officers in Colorado to take certain actions to protect state records containing trusted sensitive and confidential information from criminal, unauthorized, or inadvertent manipulation or theft. As part of this effort, the bill would require the department of state to consider “research, development, and implementation for encryption and data integrity techniques, including distributed ledger technologies such as blockchains. . . . when accepting business licensing records and when distributing department of state data to other departments and agencies.”   CO SB 18-086

Wyoming Legislators Welcome Blockchain Technology with Several New Bills Introduced this Session
This legislative session, four bills have already been introduced in Wyoming focused on seeking economic development through various technologies and making it easier to invest in blockchain and cryptocurrencies in the state.

• HB0070 – creates an exemption to initial coin offerings (“ICO”) tokens issued on an open blockchain from Wyoming’s money transmitter and securities laws, as long as (1) the token has not been marketed as an investment, (2) the token is exchangeable for goods and services, and (3) the developer of the token has not entered into a repurchase agreement of any kind or entered into an agreement to locate a buyer for the token. If passed, this bill would also exempt token exchanges from being deemed broker/dealers under Wyoming law.  HB0070.
• HB0101 – focuses on making it easier for autonomous vehicle and Internet of Things (IoT) companies to easily file LLCs in the state. HB 0101
• HB0019 – Exempts virtual currencies from Wyoming’s money transmitter laws. HB 0019
• A final (as yet) unnumbered bill will propose a plan to allow the state to store company ownership, ownership records, ownership changes, and other official documents on the blockchain.

Govtech.com_”4 Wyoming Bills Could Boost Blockchain, Tech Growth”;  Bitcoinist, “Wyoming WElcomes Bitcoin Industry with Blockchain-Friendly Bills”

 

Enforcement Actions

SEC Suspends Trading in Three Issuers Claiming Involvement in Cryptocurrency and Blockchain Technology
On February 16, 2018, the SEC announced that, pursuant to Section 12(k) of the Securities Exchange Act of 1934, it was suspending trading in “three companies amid questions surrounding similar statements they made about the acquisition of cryptocurrency and blockchain technology-related assets.”  The SEC’s trading suspension orders claim that recent press releases issued by Cherubim Interests Inc. (CHIT), PDX Partners Inc. (PDXP), and Victura Construction Group Inc. (VICT) claimed that these companies acquired “AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology among other things.”  The orders raise questions regarding “the nature of the companies’ business operations and the value of their assets.”  Under this suspension of trading authority, the SEC has suspended trading in the securities of these companies until March 2, 2018.  02.16.2018_SEC Press Release; Order of Suspension_Cherubim Interests, Inc.; Order of Suspension_PDX Partners Inc.; Order of Suspension_Victura Construction Group, Inc.

Florida Judge Refuses to Freeze Assets in Case Involving Digital Currency Company, BitConnect
In early February, a federal judge in Florida denied the plaintiffs’ request for a Temporary Restraining Order (“TRO”) that would “freez[e] the Defendants’ assets and requir[e] Defendants to disclose their cryptocurrency wallet addresses,” without Defendants receiving notice and an opportunity to respond in an action filed surrounding the recent collapse of cryptocurrency enterprise, BitConnect.  In a two-page order, the court reasoned that the Plaintiffs’ request did not satisfy the rules’ requirement that the Plaintiffs demonstrate that immediate, irreparable injury would occur before defendants were given an opportunity to respond. The Court noted that the plaintiffs may file and serve on the defendants a request for a preliminary injunction, which the defendants could respond to in order to resolve the matter. Wildes et al. v. Bitconnect International PLC et al., Case No. 9:17-cv-80086-Middlebrooks; see also Law 360 article

By contrast, a Kentucky court recently landed the other way in a recent similar suit.  In the Kentucky matter, the court issued a TRO last month and granted an asset freeze through February 27, in favor of a different group of plaintiffs who claimed that several BitConnect entities and a promoter violated various state and federal securities laws.  The Court granted the TRO request, reasoning that the “entry of a [TRO] is in the public interest because the public is interested in preventing massive consumer fraud and other securities violations described in the Class Action Compliant,” and that the request for TRO could be granted without notice “to preserve the status quo and prevent irreparable harm until such time as the Court may hold a hearing.”  Paige v. Bitconnect et al., No. 3:18-CV-58-JHM (Class Action Complaint); Paige v. Bitconnect et al., No. 3:18-CV-58-JHM (Order Granting TRO); see also  Law 360 Article “Cryptocurrency Outlet Accused of Fraud in 2nd Investor Suit”

Texas Regulators File More Enforcement Actions Against Cryptocurrency Companies
This month, the Texas State Securities Board (“TSSB” or the “Texas Board”) has filed the third and fourth civil enforcement actions of 2018 against companies involved in cryptocurrency businesses.

On February 2, the TSSB filed an Emergency Cease and Desist Order (Order No. ENF-18-CDO-1757) against DavorCoin.  The Texas Board found that in response to the TSSB’s prior Order against BitConnect, DavorCoin made a public announcement to its customers that “[t]his does not change anything for us” and that DavorCoin is now “the number one lending platform in the world!” According to the Emergency Order, DavorCoin offers Texas residents a cryptocurrency lending program as well as a new cryptocurrency (DAVORCOIN), which “behave[s] like physical gold coins.” As a result the TSSB asserts several securities registration violations in the Order including: (1) Fraud in connection with the offer of investments in the DavorCoin Lending Program and making (2) Misleading and Deceptive Statements.  The Order concludes that the DavorCoin Lending Progam investments are “securities” as defined by Section 4.A of the Texas Securities Act as well as making a series of other violations of the Texas Securities Act. The Order requires DavorCoin to immediately cease and desist from offering the sale of any security in Texas. 02.02.2018_Emergency Cease & Desist Order_DavorCoin

Then, on February 15, the TSSB filed an Agreed Cease and Desist Order (Order No. ENF-18-CDO-1759) in the matter of Investors of Crypto LLC and Daniel Neves (collectively “Respondents”). The Texas Board found that Respondents had been offering and advertising investments in cryptocurrency investment programs (including investment pools) to unaccredited investors.  The Order asserts that this conduct violates the registration requirements of the TSSB because Respondents had not registered with the Securities Commissioner.  The order found Respondents in violation of Sections 4.A, 7, 12, and 23.A of the Texas Securities Act.  Respondents agreed to cooperate with the Enforcement Division when contacted by the TSSB.  The Order requires Respondents to immediately Cease and Desist from offering for sale and selling any security in Texas until the security is registered with the Securities Commissioner or is offered for sale pursuant to an exemption and to immediately Cease and Desist from acting as a securities dealer in Texas until Respondents are registered with the Securities Commissioner or are acting under an exemption.  Respondent Neves, personally and on behalf of Crypto LLC, knowingly and voluntarily consented to the entry of the Order.  02.15.2018_Agreed Cease and Desist Order_Crypto LLC and Daniel Neves

 

International Developments

South Africa’s Central Bank Announces Plans to Develop Ethereum-Based Blockchain PoC
The South African Reserve Bank (“SARB”), the Central Bank in that country, announced its new project designed “to replicate interbank clearing and settlements” on an Ethereum-based blockchain. The project is based on proof-of-concept (“PoC”) model.  Through this project, the Central Bank has expressed its intention to gain a practical understanding of distributed ledger technologies within the banking industry.  The project represents a “structured approach to understand the implication of using a tokenized asset on DLT technology to transfer value” and is not anticipated to replace the country’s national payments infrastructure. This PoC project is just one in a series of steps the SARB intends to take in order to explore developing Fintech within the country.  02.13.2018 Press Release