FinCEN Issues Advisory on Illicit Iranian Activities
On October 11, 2018, the U.S. Treasury Department Financial Crimes Enforcement Network (“FinCEN”) issued an advisory to help money services businesses and foreign financial institutions better understand the U.S. Anti-Money Laundering/Combating the Financing of Terrorism (“AML/CFT”) risks related to Iranian activity. The report encourages financial institutions to “consider reviewing blockchain ledgers for activity that may originate or terminate in Iran” and “utilize technology created to monitor open blockchains and investigate transactions to or from P2P exchange platforms.” It also reminds foreign companies that “a non-U.S.-based exchanger or virtual currency provider doing substantial business in the United States is subject to AML/CFT obligations and OFAC jurisdiction.” The U.S. Treasury Department Office of Foreign Asset Controls (“OFAC”), which administers the U.S. sanctions programs, distributed this advisory on behalf of FinCEN to those who subscribe to OFAC updates. This shows a level of cooperation between these two agencies, as does the discussion of OFAC jurisdiction in the FinCEN advisory.
SEC Brings Enforcement Action Against Blockvest LLC and Reginald Buddy Ringgold, III
On October 11, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced that it had obtained an emergency court order halting the planned sale by Blockvest LLC and its founder, Reginald Buddy Ringgold, III, of BLV tokens. Ringgold marketed the Blockvest Decentralized Exchange as the “first [U.S.] licensed and regulated tokenized crypto currency exchange and index fund.” Moreover, he misrepresented to potential investors that the sale of BLV tokens had been “registered” and “approved” by the SEC, the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”) and that Blockvest was “partnered” with and “audited by” Deloitte.
The BLV token would allow purchasers to earn a return by holding the tokens in Blockvest’s digital wallet. The defendants filed Form D for a $100 million offering of BLV tokens, claiming an exemption from registration under Rule 506(c). However, the Blockvest website indicated that defendants were conducting a Regulation A+ offering open to unaccredited investors. Ringgold also stated at a conference that the defendants received “Reg A approval from the SEC.” Accordingly, although the defendants claimed an exemption from registration, they did not comply with Rule 506(c) and solicited unaccredited investors.
Ringgold also claimed that a made-up agency called the “Blockchain Exchange Commission” had blessed his project. The U.S. District Court for the Southern District of California issued an order freezing the defendants’ assets and providing other emergency relief. The SEC alleges in its complaint that the defendants violated the antifraud and securities registration provisions of the federal securities laws.
The NFA had sent a cease-and-desist letter to the defendants earlier this year in connection with misrepresentations made by the defendants. Blockvest is a registered commodity trading adviser, but Ringgold and others associated with the business are not.
CFTC Chairman Giancarlo Discusses Cryptoasset Markets in Fox Business Interview
On October 12, 2018, CFTC Chairman J. Christopher Giancarlo discussed cryptoasset markets in an interview on Fox Business. He explained that “[w]e’ve still got a long way to go, there’s a lot of issues in some of these spot exchanges, a lack of transparency, a lot of conflict of interest, a lack of systems and systems safeguards, and that’s a concern. But you know, like all things, it takes time to mature, and with the movement of more institutional investors into the space, I think we’ll see that.”
SEC Seeks to Enforce Subpoena Involving Planned Token Sale
On October 9, 2018, the SEC filed a subpoena enforcement action against Saint James Holding and Investment Company Trust and its trustee, Jeffre James. The SEC is investigating an alleged pump-and-dump scheme in the stock of Cherubim Interests, Inc. after suspending trading in Cherubim securities in February. The SEC alleges that Cherubim issued false public statements claiming that it had executed a $100 million financing commitment to conduct a token sale for St. James Trust. The subpoena requests the production of documents related to Cherubim’s statements about St. James Trust and the token sale.
U.S. Senate Committee on Banking, Housing and Urban Affairs Holds Hearing on Cryptocurrency and Blockchain
On October 11, 2018, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on cryptocurrency and blockchain featuring testimony from Nouriel Roubini, Professor of Economics at New York University, and Peter Van Valkenburgh, Director of Research at Coin Center. Roubini dubbed crypto “the Mother of All Scams” and argued that blockchain is nothing more than a spreadsheet. Van Valkenburgh retorted with a narrative that framed cryptoassets and blockchain as important emerging technologies that will benefit from “light-touch pro-innovation policy.” He noted that many token sales were unregistered securities offerings or scams but explained that legitimate token sales may be conducted in compliance with the securities laws and regulations.
Roubini’s written testimony is available here. Van Valkenburgh’s written testimony is available here.
FSB Concludes Cryptoassets Are Not a Threat to Financial Stability
On October 10, 2018, the Financial Stability Board (“FSB”) issued a report titled “Crypto-asset markets: Potential channels for future financial stability implications.” In an accompanying press release, the FSB stated: “Based on the available information, crypto-assets do not pose a material risk to global financial stability at this time. However, vigilant monitoring is needed in light of the speed of market developments.” The report encourages regulators to monitor cryptoasset markets but acknowledges that there is a lack of helpful market data and information.
The following topic is covered in the Fintech Week in Review – Week of October 8-12
IMF and World Bank Launch Bali FinTech Agenda
Managing Director of the Monetary Authority of Singapore Provides Insight Into Priorities
The Managing Director of the Monetary Authority of Singapore (“MAS”), Ravi Menon, stated in an interview on October 9, 2018 that the MAS is working to “bring the banks and cryptocurrency fintech startups together to see if there is some understanding they can reach.” Additionally, he explained that many of the token sales conducted in Singapore do not constitute securities offerings. He noted, “If they are not a security, then we don’t have a problem with it. We’ve seen quite a lot of ICO activity that is not security related . . . And there’s a lot of interesting business models out there trying to raise capital in interesting ways, which as far as the consumers are aware of what these are, we have no issues.”
United Arab Emirates Announces Plans to Regulate Token Sales as Securities
The United Arab Emirates Securities & Commodities Authority announced that it is drafting rules that will govern token sales under its securities jurisdiction and is working with industry to develop trading platforms for cryptoassets. The Authority plans to have finalized regulations in place by mid-2019.
Venezuela Requires Citizens to Purchase Passports Using Petros
Venezuelan citizens must now pay for new passports using the country’s oil- and mineral-backed cryptoasset, the Petro. Each passport costs 2 Petros, which is four times the country’s monthly minimum wage. The Petro token sale will begin on November 5, 2018.
The above is a summary of one 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.