U.S. Developments

Regulatory Updates

Ohio Enacts Cybersecurity Law with addition of Blockchain to Ohio’s Uniform Electronic Transactions Act

On August 7, 2018 Ohio Governor John Kasich signed SB 220, which adds “blockchain technology” to the definition of “electronic record” and “electronic signature” under Ohio’s Uniform Electronic Transactions Act. Generally, SB 220 provides an update for cybersecurity and gaming under the Ohio’s Uniform Electronic Transaction Act. However, in the definitions section, the bill also adds “blockchain technology” to “electronic record” and “electronic signature.” Specifically, SB 220 explicitly states that a record or contract secured through blockchain technology is a valid electronic record. Additionally, SB 220 includes a signature secured through blockchain technology to be a valid electronic signature.

The Ohio legislation comes on the heels of a joint statement on April 4, 2018 by the Chamber of Digital Commerce and the Electronic Signature and Records Association, in which both organizations warned against such legislation that defines “blockchain technology” or “smart contracts.” In the joint statement, the organizations state that although such legislation is well-intentioned, it has the potential to be harmful because it may be redundant with existing laws, it causes inconsistencies across the various states, and it may be federally pre-empted by existing laws such as the Federal Electronic Signatures in Global National Commerce Act.

Please click here to find the text of SB 220. The joint statement of the Chamber of Digital Commerce and the Electronic Signature and Records Association can be found here.

SEC Extends its Period of Review for the VanEck SolidX Bitcoin Trust

VanEck Securities Corporation amended its previously filed registration statement for a bitcoin investment pool on June 6, 2018 (the “VanEck SolidX Bitcoin Trust”). On June 20, 2018, Cboe BZX Exchange, Inc. (“BZX”) filed a rule change proposal to allow for the trading of the VanEck SolidX Bitcoin Trust. On July 31, members of the SEC Staff met with representatives of VanEck Securities Corporation, SolidX Management LLC (“SolidX”), and BZX to discuss BZX’s proposal on behalf of the VanEck SolidX Bitcoin Trust. In the meeting, SolidX and the others provided a presentation to the SEC staff, which included the Director of Corporate Finance, William Hinman, and Valerie Szczepanik, the SEC’s Senior Advisor for Digital Assets and Innovation, on reasons for approval of the investment product. Focusing on four main discussion topics, SolidX especially highlighted how the VanEck SolidX Bitcoin Trust would address the concerns raised by the January 18, 2018 Staff Letter from the SEC’s Division of Investment Management on cryptocurrency funds (separately, VanEck also submitted a comment letter to the SEC on July 20, 2018 in response to the January 18 Staff Letter regarding the viability of bitcoin futures exchange-traded funds). For instance, SolidX argues that because the VanEck SolidX Bitcoin Trust will use over-the-counter (“OTC”) markets to trade bitcoin, the OTC markets will provide investors just as much protection in the bitcoin context as they would for securities.

On the heels of the July 31 meeting, on August 7, 2018, the SEC extended its period for Commission action on the VanEck SolidX Bitcoin Trust, designating September 30, 2018 as the new date by which it will either approve, disapprove, or institute formal proceedings on the proposal.

Effective Date for New NFA Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities

As we previously mentioned in our Blockchain Weeks In Review for the Weeks of July 16th and 23rd, by letter dated July 20, 2018, the National Futures Association (“NFA”) submitted an interpretive notice (“Interpretive Notice”) proposal to the Commodity Futures Trading Commission (“CFTC”) for the adoption of certain disclosure requirements with respect to NFA members engaging in virtual currency activities.

The NFA’s Interpretive Notice includes heightened disclosure obligations related to the lack of regulatory involvement of the NFA (for futures commission merchants and introducing brokers) and the unique features of virtual currencies, price volatility, challenges with respect to valuation and liquidity, cybersecurity risks, and asset verification risks associated with the opaque nature of the underlying or spot virtual currency market, among others (for commodity pool operators and commodity trading advisors). On August 9, 2018, the NFA announced that the Interpretive Notice will become effective on October 31, 2018.

The NFA’s Interpretive Notice can be found here.

WSJ: Cryptocurrency Traders are Conducting Pump-and-Dump Schemes

On August 5, 2018, the Wall Street Journal published on an in-depth statistical survey in which it found that a number of groups are conducting pump-and-dump schemes on cryptocurrency exchanges. In a pump-and-dump scheme, a trader tells others that the price of an asset is going to go up. Knowing that the price is likely incorrect, once the price of the asset has risen, the original trader sells before a price crash. According to the WSJ report, such schemes with crypto-assets likely cost unsuspecting investors hundreds of millions of dollars in losses over the last six months.

A link to the WSJ article can be found here.


Judge Allows Class Action Against Tezos Foundation to Move Forward

On August 7, 2018, the federal judge in a class action lawsuit regarding the Tezos initial coin offering (“ICO”) allowed the lawsuit to move forward against most, but not all defendants.  In 2017, the Tezos Foundation launched an ICO for Tezos tokens.  Since the time of the ICO, a number of lawsuits have been filed alleging that the Tezos ICO involved the sale of unregistered securities.  The cases were have since been consolidated into two class action suits, one of which was remanded back to the California state courts for jurisdictional reasons, and one remained in federal court.  The remaining federal class action suit has four distinct groups of defendants, all of whom have moved to have the lawsuit dismissed as it pertains to them.

In his August 7 order, Judge Richard Seeborg separated the four groups of defendants and ruled separately for each.  For two defendants, the Judge dismissed the claims against them: (1) a foreign service provider that helped provide administrative services during the ICO had the case against it dismissed entirely; and (2) a prominent investor who had invested in the Tezos ICO had the case against it dismissed, but the Judge allowed the class action plaintiff the opportunity to amend its allegations and try again.  More notably, the Judge allowed the claims against the key persons, company, and foundation related to the Tezos ICO to continue.  Now past the “Motion to Dismiss” stage, the Tezos ICO litigation can proceed to the discovery phase.

The grounds for dismissal were based primarily upon personal jurisdiction, forum non conveniens, and the application of U.S. federal law to foreign transactions.  The Tezos Foundation oversaw the Tezos ICO and is a Switzerland domiciled non-profit organization.  In denying the motion to dismiss against the Tezos Foundation and the company integrally involved with the Tezos ICO, Judge Seeborg focused on several factors:

  • Personal Jurisdiction:  The California-based founders of both the Tezos Foundation and the Tezos-related company were the “de facto U.S. marketing arm of the Tezos Foundation,” the Foundation “engaged in little to no marketing” of the Token Sale “anywhere other than in the U.S.,” and “an accordingly significant portion” of the Token Sale contributors were U.S. citizens.
  • Forum non conveniens:  The ICO’s terms of sale included a forum selection clause that required all Tezos Foundation litigation to occur in Switzerland.  Judge Seeborg highlighted the difference between a “browsewrap” agreement, where user content is inferred by visiting the website, and a “clickwrap” agreement, where user assent specifically requires engagement with the website in a way to establish assent to the terms (typically by checking a box on a website).  Based upon the facts alleged, Judge Seeborg determined that the terms of the Tezos ICO on the website could be construed to lack sufficient inquiry notice to be binding upon purchasers.  Also using a traditional forum non conveniens analysis, the judge concluded that private interest factors did not warrant dismissal, noting that the “vast majority” of evidence, litigants, and other practical efficiencies were present or most easily accessible in the United States.
  • Extraterritorial Application of the Securities Exchange Act of 1934:  Judge Seeborg also evaluated whether the Securities Exchange Act of 1934 (the “Exchange Act”) could be applied to the Tezos ICO, considering it was overseen by a Swiss foundation.  Judge Seeborg focused on the ‘actual rather than the ‘contractual’ situs of the Token Sale transactions in determining that the transactions with U.S.-based purchasers occurred on U.S. soil and therefore implicated U.S. securities laws and the Exchange Act.

Please click here for a link to the Judge’s order (a paywall may apply).

International Developments

Germany’s Second-Largest Stock Exchange Launches a Cryptocurrency and ICO Trading Platform

Following on its announcement that it is creating a cryptocurrency trading application called BISON, Boerse Stuttgart, the second largest exchange in Germany, announced on August 2, 2018 that it is also planning to launch a trading venue for cryptocurrencies and ICO tokens. According to Boerse Stuttgart, the trading venue would allow the issuance of digital tokens for corporate financing or to represent rights and assets. In addition, the trading venue will allow tokens launched on the platform to be traded on a secondary market. The trading venue will also allow for the trading of more established cryptocurrencies such as bitcoin and ether. Lastly, through the trading platform, Boerse Stuttgart plans to provide custody solutions for the digital assets.

The move to create an “end-to-end” digital asset trading platform comes on the heels of a survey conducted by Boerse Stuttgart in which the exchange found that investors want easy access to the crypto markets.

A press release to the Boerse Stuttgart announcement can be found here.

UK and other Foreign Financial Regulators Announce Creation of Global Financial “Sandbox”

On August 7, 2018, the United Kingdom’s Financial Conduct Authority (“FCA”) announced the creation of the Global Financial Innovation Network (“GFIN”). GFIN is a collaborative effort with twelve financial regulators from around the world to create a network that will provide an efficient way for FinTech firms to interact with, and navigate financial regulators while building new and innovative ideas.

According to the announcement, GFIN has three main functions:

  • Act as a network of regulators to collaborate and share experience of innovation in respective markets, including emerging technologies and business models;
  • Provide a forum for joint policy work and discussions; and
  • Provide firms with an environment in which to trial cross-border solutions.

GFIN’s consultation document specifically lists out the types of innovative businesses that could seek out GFIN, including businesses focused on big data, artificial intelligence, and blockchain.

The countries and regulators that currently comprise GFIN are:

  • Abu Dhabi Global Market (UAE)
  • Autorite des marches financiers (Quebec, Canada)
  • Australian Securities & Investments Commission (Australia)
  • Central Bank of Bahrain (Bahrain)
  • Consumer Financial Protection Bureau (USA)
  • Dubai Financial Services Authority (UAE)
  • Financial Conduct Authority (UK)
  • Guernsey Financial Services Commission (Guernsey)
  • Hong Kong Monetary Authority (Hong Kong)
  • Monetary Authority of Singapore (Singapore)
  • Ontario Securities Commission (Ontario, Canada)

Consultative Group to Assist the Poor (global partnership housed at the World Bank)A link to the press release for GFIN can be found here. A link to the Consultation Document for GFIN can be found here.

Bank of Thailand Allows Banks to Create Subsidiaries for Cryptocurrency Business

According to a regulatory announcement on August 3, 2018 by the Bank of Thailand, Thai banks will be allowed to issue digital tokens, provide crypto-brokerage services, be involved with crypto-related businesses, and invest in cryptocurrencies through subsidiaries. However, according to a report in the Coin Telegraph, Thai banks and other financial institutions are still banned from directly dealing with cryptocurrencies. There are also limits on the crypto-business allowed by the subsidiaries, according to the Coin Telegraph report. The subsidiaries will only be allowed to interact with businesses that are approved by Thailand’s Securities and Exchange Commission (“Thailand SEC”) and the Office of Insurance Commission.

The Coin Telegraph article about the announcement can be read here.

Applications to the Thailand SEC for ICO and Exchange Licenses Draw Interest

In a report on August 9, 2018, the Bangkok Post reported that about fifty ICO projects have shown interest in applying for licenses from the Thai government and about twenty digital asset exchanges have applied for their own respective licenses. On May 14, 2018, the Thai government issued a decree that placed the Thailand SEC in charge of cryptocurrency regulations. After the decree, the Thailand SEC opened up applications for digital asset exchange licenses until August 14, 2018. To qualify for a license, a company must be registered in Thailand and there is an upfront fee of roughly USD$156,000. There are also annual fees for exchanges and brokerage firms along with minimum capital levels.

An article on the Thai licenses can be found here. The Bangkok Post article can be found here.

The Philippines is Reportedly Researching Whether to Issue Its Own Cryptocurrency

On August 7, 2018, Business World reported that the central bank of the Philippines, Bangko Sentral ng Pilipinas (“BPS”) is researching the question of whether it should issue its own central bank-issued digital currency (“CBDC”). BSP Governor Nestor A. Espenilla, Jr. stated in a recent speech that while CBDCs may not be appropriate for the Philippines yet, BPS is monitoring other countries and the impact of CBDCs on the local financial system. Specifically, BPS is looking into CBDCs and “what [they mean] for the supply of credit and the impact on the financial system.”

Some countries, such as Ecuador, Senegal, and Venezuela, have started to experiment with the idea of CBDCs. Recently, a government official from Iran also announced that the Islamic Republic was in the early stages of creating a CBDC.

The Business World article about BPS can be read here.

Japan Virtual Currency Exchange Association Applies to Become a Self-Regulatory Body

On August 7, 2018, CCN reported that the Japan Virtual Currency Exchange Association (“JVCEA”) applied with the Japanese Financial Services Agency (“FSA”) to become a self-regulatory body. The JVCEA, formed in March 2018, is comprised of sixteen Japanese licensed cryptocurrency exchanges, all of which are licensed with the FSA. According to the CCN report, the JVCEA has now applied to become a “certified fund settlement business association,” which would allow it to create self-regulatory rules regarding cryptocurrency trading. Also according to the report, the processing time with the FSA for an application to become a certified fund settlement business association is one to two months.

The CCN article about the JVCEA 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.