The following update is on our Fintech Legal Report:

FINRA Issues a Regulatory Notice for Firms to Let FINRA Know About Digital Asset Activities

Blockchain Week in Review: Week of July 9, 2018

U.S. Developments

Regulatory Updates

Vermont Enacts Blockchain Business Development Bill

On May 30, Vermont Governor Phil Scott signed SB 269 (thereby becoming Act number 205), which creates several mechanisms intended to stimulate the growth of blockchain business in Vermont.  The new blockchain legislation became effective on July 1, 2018.

SB 269 creates and requires several items related to blockchain, businesses engaged in blockchain technology, and the growth of blockchain technology in Vermont.  After amending the definitions of blockchain and blockchain technology in the Vermont statutory code, the bill first creates a new type of business entity in Vermont, called a blockchain-based limited liability company (“BBLLC”).  Intended for businesses that utilize blockchain technology, a BBLLC can customize its governance structure using blockchain technology.  SB 269 also creates a second kind of business entity called a personal information protection company (“PIPC”).  PIPCs act as fiduciaries and are designed to provide personal information protection services to consumers.  Finally, SB 269 requires that various Vermont state agencies conduct a study on the applications of blockchain, particularly in the finance and insurance sectors, and it requires that several state agencies hold a fintech summit.

Please click here to find the text of SB 269.


“Bitcoin Maven” is Sentenced to One Year in Prison in Her Bitcoin Money Laundering Case

In a July 9 press release, the U.S. Department of Justice, through the U.S. Attorney’s Office for the Central District of California, publicly announced that the court sentenced the “Bitcoin Maven” to a year in federal prison in addition to a number of financial penalties after she plead guilty to one count of operating an unlicensed money transmitting business and one count of money laundering.

According to court documents, the guilty plea stems from the “Bitcoin Maven” offering bitcoin-for-cash exchange services without registered as a money services business with the Financial Crimes Enforcement Network (“FinCEN”), and without implementing anti money-laundering mechanisms.  As a result of her unregistered business, she facilitated laundering for one individual who is suspected of receiving bitcoin from unlawful activity on the dark web.

Please click here for a link to the press release.

SEC Obtains Final Judgements for Illegal Stock Sales of Blockchain Company Stock

On July 9, the U.S. Securities and Exchange Commission (“SEC”) obtained final judgements against two defendants in federal court after the defendants entered into a settlement.  The defendants were alleged to have profited from the illegal sale of stock in a company claiming to have a blockchain-related business.

On July 2, the SEC initially alleged in the Southern District of New York that two Nevada men had received restricted shares in a company that was purported to have a blockchain-related business.  The restrict shares allowed the two men to resell at a specific fixed price.  According to the SEC’s allegations, when the price of the blockchain company spiked, the two men allegedly sold their shares at much higher prices than both the market price and their fixed-price obligation.  In a separate action back on January 5, 2018, the SEC had temporarily suspended trading of the same blockchain-related company’s stock due to concerns about the accuracy of assertions in its filings and because of unusual market activity.  Under the terms of the settlement, the two defendants must return approximately $1.4 million of allegedly ill-gotten gains, and pay $188,682 in civil penalties.

Please click here for a link to the SEC’s litigation release.  Click here for a link to the January 5, 2018 release on the suspension of trading in the blockchain-related company’s shares.

International Developments

New UK Regulatory Sandbox Cohort Includes Numerous Blockchain-Related Pilots

The United Kingdom’s Financial Conduct Authority (“FCA”) recently announced its fourth cohort of regulatory sandbox pilot programs.  The FCA’s regulatory sandbox is a program that allows certain businesses, selected from a list of applicants, to engage with the FCA and launch a limited pilot version of their business in order to test innovative products, services, business models, and delivery mechanisms.

The most recent cohort of businesses selected includes businesses that offer a variety of blockchain-related products and services, including some of the following:

  • A platform that facilitates the issuance and manages the lifecycle of regulated bonds using blockchain technology.
  • The creation of an identity token that supports customers who lack traditional forms of ID to allow them to access bank account services.
  • A blockchain-based platform that allows companies to issue and administer debt and equity securities, including bonds backed by crypto-assets.
  • A governance model based on blockchain technology.
  • A global trade payments and settlement system using an asset-linked smart token that utilizes a permissioned blockchain network.

The full list of sandbox businesses can be found here.

Philippines Regulator Issues First Cryptocurrency Exchange License

On July 10, a Hong Kong-based company launched its cryptocurrency exchange business in the Philippines after it had secured the first cryptocurrency exchange license issued by the Cagayan Economic Zone Authority (“CEZA”).  The CEZA is a government-owned and controlled corporation tasked to manage and supervise the development of the Cagayan Special Economic Zone and Freeport (“CSEZA”), which is itself a special economic zone in Cagayan Province, northern Luzon, in the Philippines.  The license issued to the Hong Kong company is a provisional license that expires after six months; however, the company can acquire a permanent license if it is able to fully comply with the CEZA license requirements.

CEZA’s requirements to obtain a cryptocurrency exchange license include an investment of at least $1 million U.S. dollars over two years and a company must have at least a back-up office in the Philippines.  CEZA officials have stated that they plan to issue 24 more financial technology solutions and offshore virtual currency (“FTSOVC”) licenses.

A Philippines government article on the FTSOVC license can be read here.

India’s Top Court Denies a Stay on the Central Bank’s Ban on Virtual Currencies

On July 3, India’s Supreme Court refused to grant a stay on the Reserve Bank of India’s (“RBI”) ban on lenders dealing in cryptocurrencies.  On April 6, the RBI issued a circular in which it decided that entities regulated by the RBI cannot deal in or provide services connected to virtual currencies (the “Circular”).  The types of services mentioned in the Circular included maintaining accounts, registering, trading, settling, clearing, giving loans against “virtual tokens,” accepting virtual currencies as collateral, and opening accounts of exchanges dealing with virtual currencies.  Any regulated entity already providing such services had to stop by July 5, 2018.

The petitioner in the case had previously filed a motion to stay the RBI’s ban pending a judicial review of the Circular. However, in its order following the July 3 hearing, the Supreme Court of India refused to act on the request for a stay, and instead, scheduled a new hearing for July 20.  As a result, RBI’s virtual currency ban went into effect on July 5.  Media reports have stated that there are four other petitions on the virtual currency ban scheduled in the Supreme Court of India on July 20.

The case is entitled Internet and Mobile Association of India v. Reserve Bank of India (Writ Petition (Civil) No. 528/2018).

Please click here for a link to the July 3, 2018 Supreme Court of India order.  Please click here for a link to the April 6, 2018 Circular from the RBI.  For further information on the virtual currency ban and the cases before the Supreme Court of India, here are links to two different articles.

Jersey Financial Services Commission Issues ICO Application Process

On July 12, the Jersey Financial Services Commission (“JFSC”), the financial regulator of the Isle of Jersey, issued a Guidance Note in which it detailed its new application process for the issuers of initial coin offerings (“ICOs”).  In the Guidance Note, JFSC states that most ICOs are unlikely to be regulated by the JFSC; however, the JFSC places some conditions on an issuer of an ICO through powers conferred on the JFSC by a particular Jersey statute entitled the Control of Borrowing (Jersey) Order 1958 (“COBO”).  Relying on the requirements of COBO, JFSC lays out specified requirements for ICO issuers based in Jersey to follow to maintain regulatory compliance.  The general requirements on Jersey ICO issuers in the Guidance Note are as follows:

  • Be incorporated as a Jersey company.
  • Receive consent under the COBO from JFSC before any action is taken (the consent process is detailed further in the Guidance Note).
  • Comply with JFSC’s Sound Business Practice Policy.
  • Apply relevant anti-money laundering and other such requirements to ICO purchasers.
  • Appoint and maintain a trust company business (“TCSP”).
  • Appoint and maintain a Jersey resident director.
  • Be subject to an ongoing audit requirement.
  • Implement procedures and processes to mitigate and manage the risk of retail investors investing inappropriately in the ICO, and to ensure that retail investors understand the risks involved.
  • Prepared and submit an Information Memorandum such as a white paper or prospectus.
  • Ensure that marketing materials are fair and not misleading.

The Guidance also provides a description of the different classifications of ICOs in Jersey.  It splits ICOs into “security tokens” and “non-security tokens,” although both types of tokes are treated the same by the JFSC.  JFSC goes further with “non-security tokens” by specifying that “utility tokens” and “cryptocurrency tokens” are non-security tokens.

Please click here for a link to the JFSC Guidance Note for ICO Issuers.

UK Regulators Issue “Dear CEO Letters” On Crypto-assets

Over the past month, the two leading United Kingdom financial regulators each issued “Dear CEO” letters on the topic of crypto-assets.  On June 28, the Bank of England Prudential Regulation Authority (“PRA”) followed up a June 11 letter by the FCA on the risks and obligations of providing services to clients relating to crypto-assets.

In its June 11 letter, the FCA asked that banks ensure that they have enhanced scrutiny of clients who offer services related to crypto-assets.  The FCA suggested that banks might want to take the following types of steps:

  • Develop staff knowledge and expertise on crypto-assets.
  • Ensure that existing financial crime frameworks adequately reflect crypto-asset activity.
  • Carry out due diligence on key individuals.
  • If providing services to crypto-exchanges, assess the exchanges own due diligence policies and procedures.

The FCA also asked that firms use the same criteria that would be applied to other sources of wealth or funds.

In its June 28 letter, the PRA followed up on the FCA’s letter by adding three risk strategies and risk management systems that it considers to be the most appropriate to crypto-assets:

  • First, recognition by firms that crypto-assets represent a new, evolving asset class with risks which should be considered fully by the board and highest levels of executive management.
  • Second, firms’ remuneration policies and practices should ensure that the incentives provided for engaging in this activity do not encourage excessive risk-taking.
  • Third, firms ensuring that their risk management approach is commensurate to the risks of crypto-assets.

The PRA letter can be read here.  The FCA letter can be read here.

The above 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.

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Photo of Tom Ahmadifar Tom Ahmadifar

Thomas Ahmadifar primarily advises clients on regulatory issues under federal and state securities, commodity, and banking laws. He counsels broker-dealers on matters before the SEC, FINRA and other SROs, including business expansions, changes of control, membership applications and the trading practice rules. In…

Thomas Ahmadifar primarily advises clients on regulatory issues under federal and state securities, commodity, and banking laws. He counsels broker-dealers on matters before the SEC, FINRA and other SROs, including business expansions, changes of control, membership applications and the trading practice rules. In his funds practice, Thomas advises clients in both the registered and private funds spaces.