U.S. Developments

Florida Court of Appeals Rules That Direct Sales of Bitcoin Constituted Money Transmission and the Sale of Payment Instruments

Reversing the order issued by the Miami-Dade County Circuit Court, the Florida Court of Appeals issued an opinion on January 30 in the case of Florida v. Espinoza in which the appellate court ruled that an individual’s sale of bitcoin for cash constituted money transmission and the sale of payment instruments. Largely basing its conclusions on definitional interpretation of the terms “payment instrument” and “money transmitter” under Florida statute, the court of appeals found that the sales of bitcoin involved a “medium of exchange” with “monetary value,” and thus bitcoin fell within the definition of “payment instrument.” The court of appeals relied on similar analysis to conclude that Mr. Espinoza’s sales qualified as money transmission and that, since Mr. Espinoza was not licensed to act as a money services business, he could be charged with engaging in unlawful money transmitter services.

The full opinion is available here.  It is not yet clear if the case will be appealed further, and it is similarly unclear whether the court of appeals’ decision will change the Florida Office of Financial Regulation’s official position regarding the regulation of bitcoin and other virtual currencies.

SEC Issues Sources Sought Notice for Blockchain Data and Analysis

On January 31, the U.S. Securities and Exchange Commission (SEC) issued a sources sought notice soliciting submissions “for a data source . . . which extracts blockchain data and parses this data to make it easily reviewable.” The SEC described its intent with this notice as a “means of conducting market research to determine the availability and technical capability of large and small business to provide blockchain data to support the SEC’s efforts to monitor risk, improve compliance, and inform Commission policy with respect to digital assets.”

The notice encourages vendors to submit a package of information detailing data harvesting, sharing, validation, and analytics processes for the SEC’s consideration. Such vendor relationships would support the SEC’s stated goal of “acquiring data for the most widely used blockchain ledgers, including the universe of available information and transaction details.”

SEC Commissioner States SEC Ultimately Likely to Approve Bitcoin ETF

SEC commissioner Robert J. Jackson Jr.’s statements regarding cryptocurrency-based ETFs (exchange-traded funds) made waves in cryptocurrency markets on February 8, leading some to believe that the SEC may approve such funds in the not-too-distant future. In response to the question of whether an ETF proposal would eventually satisfy the SEC’s requirements and garner the SEC’s approval, Mr. Jackson said, “I hope so, yes, and I think so.”

The SEC considered several ETF proposals in 2018, but none has yet been granted approval.  SEC commissioners have cited concerns regarding cryptocurrency market manipulation and consumer protection as the basis for these rejections, but Mr. Jackson’s statement lends support to those remaining optimistic about the prospects of an SEC-approved cryptocurrency-based fund. As numerous applications are pending review by the SEC, Mr. Jackson declined to comment on the likelihood of any of these pending applications being granted approval.

International Developments

Canada: Nova Scotia Supreme Court Grants Creditor Protection to QuadrigaCX

On February 5, Justice Michael J. Wood of the Nova Scotia Supreme Court granted QuadrigaCX’s application for creditor protection under Canada’s Companies’ Creditors Arrangement Act and issued an order granting a 30-day stay of proceedings. QuadrigaCX, a major Canadian cryptocurrency exchange, filed the order on February 1, 2019—the same day that reports emerged asserting that the company is not able to access approximately $137 million of its users’ digital assets following the sudden death of QuadrigaCX’s founder and CEO, Gerald Cotten, in December 2018. Mr. Cotten was purportedly the sole individual with knowledge of QuadrigaCX’s private keys to the cold wallets in which the digital assets were stored. Reports indicate that approximately 115,000 users of the exchange have been affected.

Ernst & Young has been appointed to serve as an independent third-party monitor for the course of the proceedings and will attempt to assist QuadrigaCX with locating and accessing the digital assets. The stay of proceedings is set to expire on March 7, 2019.

QuadrigaCX’s users are unlikely to receive assistance from the British Columbia Securities Commission, which noted that QuadrigaCX was not “trading in securities or derivatives or operated as a marketplace or exchange under British Columbia securities laws” and therefore would not be subject to the securities regulator’s jurisdiction.

Switzerland Stock Exchange Announces Blockchain Integration Testing

On February 4, the CEO of SIX Swiss Exchange, Switzerland’s principal stock exchange, announced in an interview that the exchange expects to begin testing the integration of blockchain technology for its forthcoming parallel digital trading platform known as SDX in late 2019. SIX has indicated that it anticipates the blockchain-based platform will replace its existing trading platform within the next ten years, citing security and expediency benefits. The SDX rollout will be subject to the approval of the Swiss Financial Market Supervisory Authority, Switzerland’s principal financial regulatory authority.