The following summary are available in our sister blog, The Fintech Report.
U.S. Chamber of Commerce Announces FinTech Innovation Initiative
Blockchain in Review – Week of August 20 – 24, 2018
U.S. Developments
Regulatory Updates
SEC Rejects Nine Bitcoin ETF Proposals
On August 22, 2018, U.S. Securities and Exchange Commission (“SEC”) issued three orders rejecting nine bitcoin exchange-traded fund (“ETF”) proposals, including the ProShares Bitcoin ETF and ProShares Short Bitcoin ETF; the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares; and the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF. As in previous SEC orders rejecting bitcoin ETF proposals, the SEC explains that each exchange failed to meet “its burden . . . to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.” On August 23, the Commission stayed the orders. The full Commission will review them.
FTC Explains “How to Avoid a Bitcoin Blackmail Scam”
The Federal Trade Commission (“FTC”) released a consumer-focused blog post on “how to avoid a bitcoin blackmail scam.” In short, “[i]f you — or someone you know — gets a letter [demanding that you pay bitcoin to an extortionist], report it immediately to your local police, and the FBI.”
Industry Updates
Virtual Commodity Association Working Group Established
On August 20, 2018, the Virtual Commodity Association (“VCA”) announced the formation of the VCA Working Group, which includes Bitstamp, Inc., bitFlyer USA, Inc., Bittrex, Inc., and Gemini Trust Company, LLC. A press release by the VCA states that VCA Working Group “will work towards the goal of establishing an industry-sponsored, self-regulatory organization (SRO) to oversee virtual commodity marketplaces.” The VCA tapped former NYDFS Executive Deputy Superintendent Maria Filipakis as interim Executive Director. The VCA Working Group will hold an inaugural meeting to discuss guidelines for membership in the VCA, virtual commodity market best practices, and staffing of the VCA.
U.S. Commodity Futures Trading Commission (“CFTC”) Commissioner Brian Quintenz subsequently released a statement in support of the initiative, communicating that “an independent and empowered SRO-like entity could have a meaningful impact on the integrity and credibility of this young marketplace. Today’s announcement is a positive step towards that realization.”
Legislative Updates
U.S. Senate Committee on Energy and Natural Resources Hearing on Blockchain Technologies
On August 21, 2018, the U.S. Senate Committee on Energy and Natural Resources conducted its first hearing on blockchain, focusing on energy-related blockchain applications and the environmental impact of the technology. Senator Lisa Murkowski (R-Alaska), the Chairman of the Committee, expressed concern about the energy demand of mining associated with blockchains. She explained, “[t]his type of computer-driven industry needs electricity, and a lot of it. Miners have flocked to places with the cheapest electric rates, but an overnight demand for more power can cause serious stress on a local utility and impact the grid.” The panelists discussed grid efficiency, cybersecurity, and the potential of secure energy transaction platforms.
Litigation Updates
CFTC Wins Over $1.1 Million Judgment in Virtual Currency Fraud Case
On August 23, 2018, the U.S. District Court for the Eastern District of New York issued a final judgment and order of permanent injunction in CFTC v. McDonnell, ordering Patrick McDonnell and his company CabbageTech, Corp. (d/b/a Coin Drop Markets) to pay over $1.1 million in civil monetary penalties and restitution for perpetrating fraud involving virtual currencies. This case involved a scheme whereby the defendants induced customers to provide them with fiat and virtual currency in exchange for real-time virtual currency trading advice and for the management by defendants of customer trading accounts. The defendants misappropriated these customer funds and never provided the trading advice or traded managed account services. Moreover, the defendants attempted to conceal the scheme by removing their website and social media materials from the Internet. CFTC Director of Enforcement Jamie McDonald stated that “. . . the CFTC will continue to act aggressively to identify bad actors involved in virtual currencies and hold them accountable. This case also shows the CFTC’s readiness to prove its case at trial.”
International Developments
Regulatory Updates
Chinese Regulators to Block Access to 124 Foreign Virtual Currency Exchanges
Shanghai Securities Times reported that the China National Fintech Risk Rectification Office identified 124 overseas virtual currency exchanges that are accessible within the country and plans to block access to these platforms within the country. The Office will also permanently disable access to domestic websites and accounts on WeChat (a text messaging app) that provide virtual currency trading and token sale services.
Beijing District Bans Commercial Properties from Hosting Events Related to Virtual Currency in Financial District
On August 17, 2018, Beijing’s Chaoyang district government issued a notice that bans hotels, office buildings, and shopping malls from hosting events that involve “talks and promotion” or virtual currencies and tokens.
Chinese Regulators Issue Warning Against Token Sales and Trading
On August 24, 2018, Chinese regulators issued a warning against illegally raising funds through crypo token sales and trading tokens. The warning targets celebrity endorsements of token sales, overseas offerings into China, airdrops, and market manipulation.
U.K. Endorsing Entrepreneur Visas for Blockchain Startup
The U.K. Department for International Trade announced through guidance that a U.K. pre-seed investment company is funding blockchain startups. It encourages startups to apply for entrepreneur visas and launch their businesses in the U.K. The guidance document states that the accelerator “is particularly interested in founders who want to solve hard technical problems. Their alumni are having an impact in fields such as artificial intelligence, drones, security, virtual reality and the blockchain and have raised funding from the world’s leading venture investors.”
The Singapore Stock Exchange Working with Monetary Authority of Singapore to Utilize Blockchain for Trade Settlement
The Singapore Stock Exchange issued a release on August 24, 2018 announcing that it is working with the Monetary Authority of Singapore to allow incorporate blockchain technology into its trade settlement and processing systems. The release states that this will “allow financial institutions and corporate investors to carry out simultaneous exchange and final settlement of tokenised digital currencies and securities assets, improving operational efficiency and reducing settlement risks.”
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.