U.S. Developments

Regulatory Updates

Texas Clarifies that Stablecoins Backed by Sovereign Currency Qualify as “Money” Under Money Transmission Statute

The Texas Department of Banking recently issued a Supervisory Memorandum clarifying how its money transmission statute applies to stablecoins backed by sovereign currency. The Department reiterated—consistent with its 2014 guidance—that Texas’s money transmission statute only regulates “money” or “monetary value” and that most virtual currencies fall outside the statute’s scope. But the Department stated that stablecoins backed by sovereign currency, such as Tether, qualify as “money” or “monetary value.” Under Texas’s statute, money or monetary value includes either sovereign-issued currencies or claims that can be converted into such currencies. The Department concluded that, unlike most virtual currencies, stablecoins backed by sovereign currency are money or monetary value because they represent claims that can be redeemed for currency. The Department explained that, as a result, entities doing business in Texas that hold stablecoins backed by sovereign currency for third parties—such as custodial wallet providers or intermediated exchanges—will most likely need a Texas money transmission license.

The Department’s Supervisory Memorandum is available here.

SEC’s Compliance Arm Announces that Examining the Digital Assets Market Will Be a Priority in 2019

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently announced its examination priorities for 2019. OCIE stated that its priorities reflect areas that represent “potentially heightened risk to investors or the integrity of the U.S. capital markets,” and listed digital assets—which is defined to include virtual currencies, coins, and tokens—as a priority area for oversight. OCIE indicated that it will examine firms active in the market to assess, among other things, how firms are managing digital assets, trading such assets, and holding the digital assets of clients.

The SEC’s press release is available here and the publication here.

International Developments

China Announces New Regulations Governing Blockchain Information Service Providers

On January 10, the Cyberspace Administration of China, the country’s Internet regulator, published regulations applicable to blockchain information service providers, which the regulations define as entities that provide information services to the public—via websites or applications—based on blockchain technology. Among other requirements, the new regulations require blockchain information service providers to register with the government, verify the identities of their users, and keep records of all content on the platform for at least six months (and make such information available to law enforcement as required by law). Additionally, such providers are forbidden from allowing their platforms to be used to disseminate illegal content. If blockchain information service providers do not comply with this regulation, the provider may be warned, fined, or face criminal prosecution. The regulations, which were first published in draft form in October 2018, go into effect on February 15.

The regulations can be found here (Chinese). Coindesk’s reporting on the regulations is available here.

European Supervisory Authorities Publish Reports Identifying Gaps in EU Regulation of Digital Assets

This week, the European Securities and Markets Authority (“ESMA”) and the European Banking Authority (“EBA”) each published reports outlining how EU laws apply to digital assets and identifying areas where further regulation or study is warranted. The reports respond to the European Commission’s 2018 request for assessments of the EU’s regulatory framework as applied to Initial Coin Offerings and, more generally, digital assets.

Each report focuses on the particular authority’s regulatory purview—securities for ESMA and financial services for the EBA—but both reports highlight concerns that the EU’s existing regulatory framework left underregulated wide-swaths of the digital asset market and may inadequately protect consumers. Although security tokens are covered by EU securities law and some virtual currencies may be covered by EU financial services law, the reports highlight that all other digital assets fall into a gap in the EU’s regulatory framework. Both reports ultimately recommend that, rather than allow EU member states to implement a patchwork of gap-filling rules, that the policymakers should consider adopting an EU-wide regulatory framework for such underregulated digital assets.

ESMA’s press release can be found here. EBA’s press release is here and its report here.