On June 28, the Commodity Futures Trading Commission and the Securities and Exchange Commission announced a new Memorandum of Understanding meant to allow two agencies to further coordinate in areas of common interest.
Under the MOU, the two agencies agreed to identify areas of regulatory interest to either party and cooperate in those areas of common interest, notify the other agency, to the extent practical, of issues that affect areas of common interest, and share information. The MOU specifically contemplates sharing non-public information related to entities registered with both the CFTC and SEC, such as entities registered as Futures Commission Merchants with the CFTC and Broker-Dealers with the SEC. However, it also contemplates sharing non-public data or information about entities where the two agencies regulatory interests overlap. And non-public information that an agency receives under the MOU can be used for rulemaking, in investigations, and, with consent of the other agency, in any proceeding or civil action.
On June 25, 2018, the House unanimously passed the Fight Illicit Networks and Detect Trafficking Act of 2018 (H.R. 6069), which if signed into law would commission a study into how virtual currencies and online marketplaces are used to facilitate sex and drug trafficking. The bill says that while Congress recognizes the virtual currencies meet a “’legitimate market demand,” virtual currencies have become “a prominent method to pay for goods and services associated with illegal sex and drug trafficking . . . .” Because of these findings, the bill would require the Comptroller General of the United States to study both how virtual currencies are used to facilitate such sex and drug trafficking and how the “immutable and traceable nature of virtual currencies” can be used to deter, detect and aid in the prosecution of such illicit uses.
The bill has been sent to the Senate for consideration.
On June 26, the Senate Subcommittee on Crime and Terrorism held a hearing focusing on the risk that virtual currencies could be a mechanism for foreign agents to interfere in elections. The hearing, entitled “Protecting Our Elections: Examining Shell Companies and Virtual Currencies as Avenues for Foreign Interference, included testimony from David Murray of the Financial Integrity Network, Scott Dueweke of DarkTower, and Sheila Krumholz of the Center for Responsible Politics.
Of the three witnesses, Mr. Dueweke’s written testimony was most focused on virtual currencies. Although he emphasized the world-changing aspects of blockchain technology, he warned that blockchain’s pseudonymity and the ease by which cryptocurrencies can be transacted outside of financial institutions complicate identifying the true source of political donations. Indeed, according to a report from CoinTelegraph, Mr. Dueweke said that virtual currencies were “’tailor made’ for affecting the U.S. political process, and, in particular, warned of efforts by Russians to use virtual currency to meddle in U.S. elections.
On June 27, the Ohio legislature passed SB 220, which, if signed by Ohio Governor John Kasich would amend Ohio’s implementation of the Uniform Electronic Transactions Act to add blockchain records and blockchain signatures to the statute’s definitions of “electronic records” and “electronic signatures,” respectively. Although the bill is meant to ensure that blockchain records and blockchain signatures have the same legal force as paper contracts signed by hand, prominent organizations, including the Uniform Electronic Transactions Act Drafting Committee, the Chamber of Digital Organizations, and the Electronic Signature and Records, are on record opposing bills like SB 220 because, in their view, such bills are redundant and ultimately hinder innovation. If Governor Kasich signs SB 220, Ohio would follow in the footsteps of other states that have implemented similar legislation, including Arizona and Nevada.
Click here to find the joint statement issued by the Uniform Electronic Transactions Act Drafting Committee, the Chamber of Digital Organizations, and the Electronic Signature and Records.
On June 26, Florida’s Chief Financial Officer, Jimmy Patronis, announced in a press release that the state was creating a new position in the Florida Office of Financial Regulation to oversee the state’s virtual currency industry.
Mr. Patronis said the move was spurred on by the efforts of regulators in other states to stop bad actors within Florida’s virtual currency industry. He said that Florida could no longer remain on the “sidelines” and needed to protect its own residents from scams involving virtual currencies.
Mr. Patronis said that the new czar would oversee Florida’s efforts to take positions as to how ICOs and cryptocurrencies apply to the state’s securities and insurance laws and help shape future virtual currency regulations in the state. The state’s ultimate goal, Mr. Patronis said, is to “keep pace with demand and not deter innovation while monitoring for fraudulent behavior and scams.”
In a June 26 press release, the U.S. Department of Justice, U.S. Immigration and Customs Enforcement’s Homeland Security Investigations, the U.S. Secret Service, the U.S. Postal Inspection Service, and the U.S. Drug Enforcement Administration, publicly announced their multi-agency sting operation targeting vendors of illicit goods on the Darkweb.
As part of the operation, undercover agents posed as money launderers, offering to convert the virtual currency the vendors received from their illicit goods to fiat currency. The investigation—which is ongoing—has so far resulted in the arrest of 35 alleged vendors and the seizure of, among other things, more than $20 million worth of bitcoin and other cryptocurrencies.
On June 25, in a putative class action involving allegations of a fraudulent sale of a security token, a Magistrate Judge held that the token at issue-the CTR token-is likely a security.
According to the complaint, defendants conducted an ICO for the CTR tokens, which defendants told users that they would use the ICO proceeds to build a suite of financial products, including a “crypto debit card” that defendants said was Visa and Mastercard when, in fact, it was not. And holding defendants’ CTR token would entitle the token holder to a share of the enterprises revenue.
Plaintiffs alleges that defendants’ ICO—which was backed by boxer Floyd Mayweather—was an unregistered sale of a security in violation of Sections 12(a) and 15(a) of the Securities Act. In granting plaintiffs’ motion for a temporary restraining order, the Court concluded that plaintiffs were likely to succeed on his unregistered securities claim. In so concluding, the Court applied the Howey test commonly used for investment contracts. Under the Court’s formulation of a test, a token is a security if three elements are met: (1) there is an investment of money (2) in a common enterprise (3) with an expectation to profit from the efforts of others. The Court swiftly concluded that the three elements were easily met. The Court found there was an investment of money because plaintiffs invested bitcoin or ether. The common enterprise element was satisfied, as well, because the Court found that the fortunes of investors were tied to the success of yet-to-be developed products. Finally, the Court found that the third prong was satisfied because the success of the CTR token was based entirely on defendants’ efforts to build the financial products.
Please click here to read our coverage of the SEC’s enforcement action against the token issuers and the related criminal action.
This week the Korea Financial Intelligence Unit announced revisions to its Virtual Currency Anti-Money Laundering Guidelines, which we’re originally introduced in January. The revisions stem from the regulator’s efforts to monitor compliance with the Guidelines, which identified insufficiencies in how financial institutions, like banks, were implementing the Guidelines.
Previously financial institutions were only required to conduct enhanced customer due diligence on the trust accounts—i.e. those bank accounts in which virtual currency exchanges held customer funds. The revisions to the Guidelines, which take effect on July 10, require financial institutions to conduct enhanced due diligence on operating accounts—those bank accounts virtual currency exchanges use to conduct business operations—if the financial institution finds signs of suspicious transactions in such accounts. The revised Guidelines also require financial institutions to share a list of domestic and overseas virtual currency exchanges to guard against tax evasion and money laundering. Finally, the revised Guidelines clarify that financial institutions must reject transactions when they report suspicious transactions involving the accounts of virtual currency exchanges to the Korea Financial Intelligence Units.
Cambodian Regulators Ban Trading Cryptocurrencies without Licensure
In a joint statement published June 19, three of Cambodia’s top financial authorities announced that any individual or legal entity must obtain licensure from “competent authorities” before engaging in the “propagation, circulation, buying, selling, trading, and settlement” of cryptocurrencies. The National Bank of Cambodia, the Securities and Exchange Commission of Cambodia, and the General-Commissariat of National Police jointly issued the statement, which indicated that engaging in the activities listed above without proper licensure is illegal. This ostensibly could apply to initial coin offerings (“ICOs”) as an activity that “propagates to mobilize funds,” although ICOs were not specifically mentioned. The brief statement also included a warning to the public about the potential risks of cryptocurrencies from the perspective of the three authorities:
- Cryptocurrencies are not backed by collateral
- Volatility of cryptocurrencies may result in investment losses
- Exchanges are susceptible to cyber-attacks resulting in loss of funds
- No customer protection
- Risks of money laundering and terrorist financing