U.S. Developments

Cboe Withdraws and Then Submits a Proposed Rulemaking for a Bitcoin ETF

On January 22, 2019, Cboe BZX Exchange (Cboe) withdrew its proposed rulemaking with the U.S. Securities and Exchange Commission (SEC).  Had the proposal been approved, Cboe would have been allowed to list shares of bitcoin electronically-traded funds (ETFs) backed by VanEck and SolidX.  On January 30, 2019, Cboe submitted a new proposed rulemaking to list the VanEck and SolidX bitcoin ETFs.

Cboe filed its proposed rulemaking in June 2018, and the SEC had delayed a decision on the proposal many times since.  By law, the SEC needed to reach a final decision by February 27, 2019.  There has been speculation that the government shutdown was to blame for Cboe’s decision, as the SEC is without staffers and the shutdown would have resulted in a denial of the proposal.  VanEck has stated that there are plans to submit the proposed rulemaking again after further discussions with the SEC.

Please click here to read Cboe’s notice of withdrawal.

Please click here to read Cboe’s new proposed rulemaking.

FINRA’s Exam Priorities Include Digital Assets

On January 22, 2019, the Financial Industry Regulatory Authority, Inc. (FINRA) published its 2019 Risk Monitoring and Examination Priorities Letter.  Included in its discussion of operational risks, the Letter states that FINRA will be supervising firms’ business related to digital assets.  The Letter encourages firms to notify FINRA if they plan to engage in activities related to digital assets, even where a membership application is not required.  The Letter also states that it will be reviewing firms’ digital assets activities for compliance with securities laws, as well as firms’ compliance and operational controls designed to mitigate risks associate with digital assets activities.  During its review, FINRA intends to coordinate closely with the SEC and will be considering how firms make a determination about whether a particular digital asset is a security.  Additionally, FINRA will consider whether firms have implemented adequate controls and supervision related to rules governing the marketing, sale, execution, control, clearance, recordkeeping, and valuation of digital assets.  Finally, FINRA will review firms’ compliance with anti-money laundering/Bank Secrecy Act rules related to digital assets business. FINRA previously provided more detailed guidance to firms related to digital assets business in its July 2018 Regulatory Notice.

Please click here to read FINRA’s examination priorities letter.

Wyoming Proposes More Virtual Currency Legislation

Last week, we covered many virtual currency bills introduced or passed in four different states.  Since that installment, a bipartisan group of state legislators in Wyoming proposed another bill (SF0125) that would, among other things, classify digital assets as property under Wyoming law, authorize security interests in digital assets, and establish an opt-in framework for banks to provide custody for digital assets.  The bill passed the Wyoming Senate on January 31, 2019.

The bill addresses three broad types of digital assets—digital consumer assets, digital securities, and virtual currency.  Each type of digital asset would be classified as intangible personal property.  Additionally, the bill would classify digital consumer assets as general intangibles for purposes of Article 9 of the Uniform Commercial Code (UCC), digital securities as securities and investment property for purposes of Articles 8 and 9 of the UCC, and virtual currency as money for purposes of Article 9 of the UCC.

The bill provides that the control of the asset is sufficient for perfection of a security interest in a digital asset.  Control does not require physical possession of the asset, but can be attained by (a) a party having exclusive authority to conduct a transaction relating to the digital asset, including by means of a private key or use of a multi-signature arrangement, or (b) a smart contract created by the secured party that has exclusive authority to conduct a transaction relating to the digital asset.

The bill also creates a framework for banks to provide custody services for digital assets.  To do so, a bank must provide written notice to the banking commissioner 60 days before engaging in the provision of custody services.  Under the framework, a bank would serve as a qualified custodian as specified by the SEC.  In providing custody services, the bank must meet certain requirements, including implementing standards specified by state and federal law for custodial services; maintaining information technology best practices as specified by rule; complying with federal anti-money laundering, customer identification, and beneficial ownership requirements; and taking any other action necessary to fulfill Wyoming law, including exercising fiduciary powers similar to national banks and complying with federal law governing digital assets classified as commodities.

The bill provides additional rules for a bank’s digital asset custody services.  Digital assets held in custody are not depository liabilities or assets of the bank.  The bank must maintain control over the digital asset while it is in custody.  Finally, the customer elects the type of relationship for each digital asset in custody, either as a bailment as a nonfungible or fungible asset, or a bailment that permits a bank to undertake transactions with the digital asset so long as the bank maintains control and enters into an agreement with the counterparty to a transaction containing a time for return of the asset.

Please click here to read the bill.

Pennsylvania Clarifies Its Stance on Virtual Currency

On January 23, 2019, the Pennsylvania Department of Banking and Securities (DoBS) published guidance clarifying its position on virtual currency.  The DoBS’s guidance begins by explaining that the Pennsylvania Money Transmitter Act (the Act) defines “money” as “currency or legal tender or any other product that is generally recognized as a medium of exchange,” “[l]awful money of the United States,” and “[a] medium of exchange currently authorized or adopted by a domestic or foreign government.”  Based on that definition, the DoBS only considers fiat currency to be “money” under the Act.  The DoBS also considers the act of transmitting money to be limited to the transmission of fiat currency with or on behalf of an individual to a third party for a fee.

The DoBS’s guidance concludes that web-based virtual currency exchange platforms are not money transmitters.  The guidance states that these platforms typically facilitate the purchase or sale of virtual currencies in exchange for fiat or other virtual currency, including the purchase and sale of virtual currencies from other users of the platform.  The guidance also states that the platforms do not directly handle fiat currency, and instead hold fiat currencies in the platforms’ bank accounts.  Thus, the platforms are not money transmitters because the platforms only facilitate the change of ownership of virtual currency, do not directly handle fiat currency, and do not transfer money from one user to another user or a third party.

Finally, the DoBS guidance concludes that virtual currency kiosks, ATMs, and vending machines are not money transmitters because these entities merely exchange fiat currency for virtual currency or virtual currency for fiat currency, and do not engage in money transmission.

Please click here to read the DoBS’s guidance.

International Developments

UK FCA Issues Consultation Paper with Guidance on Cryptoassets

The United Kingdom’s Financial Conduct Authority (FCA) recently published a consultation paper (CP19/3) providing guidance on various aspects of “cryptoassets.”  The FCA is seeking public comment on its guidance.  The consultation closes May 4, 2019, and the FCA anticipates issuing a policy statement in Summer 2019.  The consultation paper also notes that Her Majesty’s Treasury will be publishing a consultation paper in early 2019 to explore legislative changes to potentially broaden the FCA’s regulatory authority to include additional types of cryptoassets.  The consultation paper sets out to provide clarity to firms about where current cryptoasset activities are regulated, which was one of the UK Cryptoassets Taskforce’s stated goals when it was created in October 2018.  To this end, the consultation paper provides guidance on how cryptoassets are subject to FCA regulation.

The guidance divides cryptoassets into three categories—exchange tokens, security tokens, and utility tokens.  Exchange tokens are tokens not issued by any central authority and designed as a means of exchange.  The guidance states that exchange tokens are generally outside the FCA’s regulatory authority.  Security tokens are tokens with characteristics that mean they meet the definition of a Specified Investment (as in a share or a debt instrument) as described in the UK’s Regulated Activities Order.  Therefore, security tokens are likely within the FCA’s authority.  The FCA may also regulate security tokens as financial instruments under the Markets in Financial Instruments Directive II (MiFID II).  Utility tokens are tokens that grant holders access to a current or prospective product or service, but do not grant the same rights as Specified Instruments.  Utility tokens typically do not have features that would make them similar to securities, and so would not be regulated by the FCA unless the utility tokens meet the definition of e-money.  Additionally, the guidance cautions that a utility token could become a security token during the utility token’s lifecycle if its characteristics confer with those of a security by, for example, offering a reward if the reward has the same or equivalent characteristics as Specified Investments.

The guidance provides further detail on the FCA’s considerations regarding classifying cryptoassets as e-money.  In particular, the guidance notes that bitcoin, Ether, and other equivalents are unlikely to represent e-money because they are not centrally issued or represent a claim against an issuer.  However, the guidance cautions that any category of cryptoasset has the potential to be e-money based on how it is structured, including whether it is accepted for transactions by parties that are not the issuer.  Stablecoin backed by a fiat currency could meet the definition of e-money as it is pegged to a fiat currency and used for payment of goods or services.

Please click here to read the FCA’s consultation paper.

Italian Senate Takes First Step to Recognize Legal Validity of Blockchain 

On January 23, 2019, in what would become Italy’s first law related to blockchain technology, the Italian Senate committees of Constitutional Affairs and Public Works approved an amendment to statute, known as the “Decreto semplificazioni.” The amendment would define distributed ledger technology–based technologies and smart contracts.  The amendment also would give legal effect to blockchain-based registers of the memorialization of documents.  The Italian Parliament must still approve the amendment before it becomes law.

Please click here to read the text of the statute (in Italian).