SEC Remarks on International Virtual Currency Enforcement
On December 5, 2018, Steven Peikin, Co-Director of the Division of Enforcement at the U.S. Securities and Exchange Commission (“SEC”), gave a speech at the IOSCO/PIFS-Harvard Law School Global Certificate Program for Regulators of Securities Markets on the topic of international cooperation in the enforcement of the US securities laws. In his remarks, Mr. Peikin described the SEC’s recent enforcement activities related to cryptoassets and initial coin offerings (“ICOs), and the importance of international assistance in reaching ICO sponsors in foreign jurisdictions.
In his remarks, Mr. Peikin stated that the Division of Enforcement sees two separate types of securities law violations in the ICO space. “First, we see ICOs that meet the definition of a security, but are being sold, brokered, or traded to U.S. investors without complying with the registration requirements of the federal securities laws. Second, we see ICOs that appear to be outright frauds -where the issuers are using excitement around the cryptoasset space to simply rip off money from investors.” Mr. Peikin commented that international cooperation has been essential to the SECs enforcement efforts because the sponsors of ICOs are often located outside the United states.
In the past year, the Division of Enforcement has cooperated with several foreign securities regulators, including Canadian securities regulators, to investigate ICO sponsors. In 2017, the Canadian AMF assisted the Division of Enforcement in stopping a fraudulent ICO perpetuated by two Canadian nationals. Recently, the Division of Enforcement received a court ruling confirming personal jurisdiction over the two Canadians charged in connection with their role in selling unregistered securities to U.S. investors.
Please click here for the transcript of the speech.
NYDFS Approves Digital Payments Platform That Can Operate at Any Time of the Day, Year-Round
On December 4, the New York Department of Financial Services (“NYDFS”) announced the approval of a new digital payment platform that allows customers at Signature Bank to make instantaneous transactions using virtual currency backed by the US dollar (“USD”). The new platform leverages blockchain technology to allow commercial clients to transfer “Signets” representing USD payments instantaneously. Unlike other similar blockchain products, Signets are only transferable among Signature Bank’s commercial clients. Customers must also maintain a minimum balance of $250,000 to be eligible for the service. In addition to NYDFS approval, the Federal Deposit Insurance Corporation has also approved Signet deposits to receive insurance up to the legal insurable amounts. Signet joins the PAX token and Gemini Dollar among the virtual assets recently approved by the NYDFS.
Please click here for the NYDFS press release.
FinCEN and Federal Banking Agencies Issue Joint Statement Encouraging Innovative Approaches to AML Compliance
On December 3, The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network (FinCEN), the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, the “Agencies”) issued a joint statement to regulated financial institutions on the topic of the private sectors role in combatting money laundering and other financial crimes. FinCEN Director Kenneth Blanco encouraged financial institutions to experiment with new Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) techniques. He stated that financial institutions that choose to institute pilot programs would not be subjected to supervisory criticism, even if such programs are unsuccessful or result in exposing gaps in a BSA/AML compliance program. Among the examples of pilot programs given in the statement, Mr. Blanco emphasized pilot programs that leverage artificial intelligence-based transaction monitoring systems that could identify suspicious activity that would not otherwise have been identified under existing processes. The statement concluded by encouraging financial institutions to engage financial regulatory agencies for discussion on any planned pilot programs.
Please click here for the joint statement.
U.S. Congressman Plans to Introduce Legislation to Regulate Token Sales
On December 3, U.S. Representative Warren Davidson (R-OH) announced at the Blockland Solutions conference that he would soon introduce draft legislation designed to create a new regulated asset class for virtual currencies. The draft legislation would seek to provide greater clarity regarding the regulatory status of virtual currencies and potentially provide a new path forward for tokens sold in ICOs. Mr. Davidson advocated for a light touch towards the regulation of virtual currencies and ICOs in the past. He has also engaged industry leaders regarding potential regulations and legislation designed to deal with the challenges posed by virtual currencies. In November, Mr. Davidson met with 30 industry members to discuss the regulation of virtual currency and his new bill. No copy of the draft legislation has yet been made public.
Please click here for the report regarding the announcement.
SEC Settles with Virtual Currency Fund Manager
On December 7, the Securities and Exchange Commission (“SEC”) settled with CoinAlpha Advisors LLC, A Delaware-registered, California-based company that sold shares of its virtual currency investment fund without registering with the SEC or qualifying for a relevant exemption. The order states that although CoinAlpha filed a Form D Notice of Exempt Offering of Securities with the SEC on November 3, 2017, the company failed to uphold certain criteria related to the exemption which resulted in a violation of the securities laws. Specifically, the SEC alleges that that CoinAlpha failed to have pre-existing substantive relationships with nine investors. CoinAlpha also engaged in general solicitation of public interest in the securities offering through CoinAlpha’s website, blog postings and media interviews.
Upon notification from the SEC, CoinAlpha promptly halted its offering and undertook a review of its website, social media postings and other marketing materials. CoinAlpha also reimbursed all fees it had already collected, surrendered all rights to future management and incentive fees, unwound the CoinAlpha investment fund, and made payments to ensure that no investors suffered a loss. In light of the substantial remedial efforts undertaken by CoinAlpha, the SEC assessed a small monetary penalty of only $50,000.
Please click here for the SEC order.
Lawsuit Alleging Anti-Trust Claims Against Virtual Currency Sponsor
On December 6, a lawsuit was filed in Florida federal court by a Miami-based company against a group of prominent sponsors of the Bitcoin Cash virtual currency. The complaint alleges that the group of Bitcoin Cash sponsors engaged in “network hijacking” during a software upgrade to the Bitcoin Cash blockchain network that resulted in substantial harm to the plaintiff.
The eight-count complaint includes claims of violations of the Sherman Act and the Clayton Act, negligence, negligent misrepresentation, unjust enrichment and conversion. The claims arose from a scheduled software upgrade to the Bitcoin Cash blockchain on November 15. During the upgrade, the Bitcoin Cash sponsors allegedly negotiated with large blockchain mining operations to control the computational resources dedicated to the Bitcoin Cash blockchain, effectively resulting in control centralizing temporarily with the Bitcoin Cash sponsors. As a direct result of the alleged manipulation, the plaintiff alleges damages caused by being cut out of the network and through the loss of value of the virtual currency due to the uncertainty created by the defendants’ manipulation.
Please click here for the complaint to United American Corp. v. Bitmain Inc. et al., case number 1:18-cv-25106.
G20 Issues Joint Declaration to Regulate Virtual Currency under FATF Standards for Anti-Money Laundering and Countering the Financing of Terrorism
On December 1, a joint declaration was signed by G20 member nations at the G20 Leaders’ Summit in Buenos Aires, Argentina. Among other things, the declaration addressed the topic of the digital economy and virtual currency. First, the declaration acknowledged the risks posed by emerging digital technologies, including virtual currencies, related to money laundering and terrorist financing. All G20 nations agreed that virtual currencies should be regulated pursuant to standards promulgated by the Financial Action Task Force (“FATF”), an independent inter-governmental body that develops policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. Shortly following the G20 Leaders’ Summit, the FATF published its report to the G20 Leaders’ Summit that promulgated the FATFs continued efforts establish standards and education for virtual currency. In the report, the FATF stated that it would update its 2015 risk-based approach guidance on virtual currencies and would consider further updates to ensure the FATF standards “stay relevant.”
Swiss Financial Regulator Announces Simplified Rules for Blockchain Companies Seeking FinTech Licensure
On December 3, Switzerland’s Financial Market Supervisory Authority (“FINMA”) announced new requirements for blockchain companies applying for a FinTech license in Switzerland. The new requirements are notably less restrictive than those imposed on incumbent financial services companies. FINMA’s stated goal for the new requirements is to facilitate greater market access for FinTech companies and boost innovation within Switzerland.
In order for a company to receive a FinTech license, the company must first have limited shares, a registered office in Switzerland and conduct its business activities in Switzerland. Applicants must also provide general information regarding why they are pursuing the license, their proposed business activities, financial statements and certain other information related to their employees and customers. Once an application is submitted, FINMA will pair the applicant with a FINMA staff member to assist the applicant with follow-up requests to complete the application.
Please click here for the new guidelines.
Four Blockchain Companies Create Association for European Regulatory Outreach
On December 5, four leading blockchain companies (EMURGO/Cardano, Fetch.AI, NEM and Ripple) announced the formation of Blockchain for Europe, an association to engage with European regulators on the challenges related to the regulation of the blockchain industry. The association hopes assist industry participants in understanding blockchain regulations in Europe and also develop open relationships with regulators that will help drive innovation.
Please click here for the press release.
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.