U.S. Developments

Regulatory Updates

CFTC Plans Public Meeting Addressing Fintech, Including Blockchain Technology

On March 27, 2019, the Commodity Futures Trading Commission (CFTC) Technology Advisory Committee will host a public meeting  at the CFTC headquarters in Washington, DC. The Technology Advisory Committee plans to use the meeting to listen to presentations and consider actionable recommendations from various subcommittees. The subcommittees that will be represented are Automated and Modern Trading Markets, Distributed Ledger Technology and Market Infrastructure, Virtual Currencies, and Cyber Security. For those who cannot attend in person, the CFTC will provide a conference call line and a live webcast. The CFTC will accept written comments through April 3, 2019.

Bitfinex Announces Partial Recovery of Funds Stolen in August 2016

iFinex Inc. (also known as Bitfinex) was the beneficiary of U.S. law enforcement efforts this week. According to a press release issued by the company, the U.S. government recovered and returned 27.66270285 Bitcoin (BTC) stolen from Bitfinex in an August 2, 2016 security breach. While the amount recovered is only a fraction of the total BTC lost as a result of the hack, this example demonstrates that recovery is possible. No detail was provided regarding the source of the recovered funds or the nature of the U.S. law enforcement efforts that resulted in the seizure of the Bitcoin. After the 2016 hack, Bitfinex redeemed all BFX tokens at 100 cents on the dollar and additionally issued tradable Recovery Right Tokens for BFX token holders. According to Bitfinex, the 27 BTC recovered by law enforcement has now been converted to USD and paid pro rata to Recovery Right Token holders. Bitfinex issued Recovery Right Tokens pro rata to all accountholders to reduce  the impact of the breach. The Recovery Right Tokens policy is available here.

DOJ Charges Individual in Use of Industry Buzz Words to Entice Investors

The Department of Justice has indicted Randall Crater on charges related to participation in a scheme to defraud investors by marketing and selling virtual currency. Between 2014 and 2017, Crater allegedly claimed that the “cryptocurrency” he created was fully functioning and backed by valuable assets such as gold. Using social media, websites, and direct communication with investors, Crater and others marketed the “cryptocurrency” to investors. The indictment alleges that the “cryptocurrency” was not readily transferrable, which indicates that it was not associated with a blockchain. Furthermore, the “cryptocurrency” was not backed by valuable assets.

Such funds were allegedly raised by My Big Coin Pay, Inc. Crater allegedly appropriated the funds for personal use. Additional descriptions of the charges are available in the indictment published by the Department of Justice.

State Updates

California Assembly Member Introduces Uniform Regulation of Virtual Currency Businesses Act

California Assembly Member Ian Calderon introduced AB 1489, a virtual currency business registration bill, on February 22, 2019. The bill is intended to enact the Uniform Regulation of Virtual Currency Businesses Act (URVCBA). The URVCBA had been approved  by the Uniform Law Commission on October 9, 2017. The Uniform Law Commission is an organization focused on drafting “non-partisan, well-conceived, and well-drafted” state legislation where there is a need for uniformity. The URVCBA has been characterized as an improvement to the BitLicense regime. The URVCBA defines “virtual currency business activity,” “control,” “ownership,” and other terms relevant to the regulation of money services businesses. For the URVCBA, unilateral control is required.

Calderon previously authored AB 2658, which created a definition for key blockchain terms and established a blockchain working group to study the uses for blockchain by the state government and California-based businesses. The working group will also study risks and benefits associated with blockchain and its legal implications. AB 2658 was signed into law on September 28, 2018. The working group is to be established by July 1, 2019 and will include chief information officers as well as appointees from the director of finance, the state senate, and the state assembly.

Are Stablecoins a Solution to the Cannabis Industry’s Ongoing Banking Problem?

Following in the footsteps of Ohio’s cryptocurrency tax payment portal, California’s legislature is now exploring the use of stablecoins to pay certain tax liabilities. However, California’s law would be narrowly tailored to the cannabis industry’s city and county tax liabilities. The bill was introduced by California Assembly Member Phil Ting (San Francisco and San Mateo) and Kevin McCarty (Sacramento) on February 21, 2019.

Under the bill, anyone licensed under the Medicinal and Adult-Use Cannabis Regulation and Safety Act may remit California cannabis excise taxes or cannabis cultivation taxes by use of stablecoins. The bill defines stablecoins as digital assets whose value is pegged to the value of the United States dollar and for which United States dollars serve as collateral, excluding many stablecoins from eligibility. Unlike Ohio, California would not accept Bitcoin under the proposed law.

The intent of the bill, as discussed by several news sources, is to address the logistical issues experienced by licensed cannabis businesses when participating in the traditional financial services industry. Obtaining bank accounts in order to transfer funds to government agencies is an ongoing problem for cannabis businesses, and several news sources covering this bill noted that cannabis companies hold dangerous amounts of cash on site to cover taxes and other costs of the business.

International Developments

Private Sector Input Requested on FATF Interpretive Note

The Financial Action Task Force (FATF), which globalizes the policies implemented in the United States by the Financial Crimes Enforcement Network (FinCEN), plans to release an interpretive note to Recommendation 15. Recommendation 15 focuses on the responsibilities of countries and financial institutions in identifying risks introduced by new or developing technologies, particularly risks arising from virtual assets. The interpretive note will specifically address the regulation, supervision, and monitoring of virtual asset service providers.

The FATF has requested comments to paragraph 7(b) of the interpretive note. Under paragraph 7, Recommendations 10 through 21 would be applied to virtual asset service providers (VASPs). The current draft of paragraph 7(b) describes how wire transfer rules under Recommendation 16 may be applied to virtual asset transfers. It reads:

  1. With respect to preventive measures, the requirements set out in Recommendations 10 to 21 apply to VASPs, subject to the following qualifications:

. . . .

(b) R.16 – Countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers, submit the above information to beneficiary VASPs and counterparts (if any), and make it available on request to appropriate authorities. It is not necessary for this information to be attached directly to virtual asset transfers. Countries should ensure that beneficiary VASPs obtain and hold required originator information and required and accurate beneficiary information on virtual asset transfers, and make it available on request to appropriate authorities. Other requirements of R.16 (including monitoring of the availability of information, and taking freezing action and prohibiting transactions with designated persons and entities) apply on the same basis as set out in R.16.

Recommendation 16 generally is analogous to the “Travel Rule” (31 C.F.R. 103.33(g)) of the FinCEN regulations. It is anticipated that the interpretive note will be formally adopted in June 2019, and comments are due by April 8.

Australian Government Agency Explores FATF Reporting Via Blockchain

In related news, the Australian Transaction Reports and Analysis Centre (AUSTRAC) has started to build a blockchain prototype for financial transaction reporting. AUSTRAC is an Australian government financial intelligence agency similar to FinCEN and is a member of the FATF. Under Australian anti-money laundering rules similar to Recommendation 16, discussed above, Australia requires certain intermediaries to report payer, sender, and beneficiary information for cross-border transfers. The prototype will experiment with using blockchain for the reporting of cross-border transfers processed by these intermediaries.

AUSTRAC is partnering with Swinburne University of Technology in Melbourne to build the prototype.

Swedish Taxpayer Hit with Effective 300% Tax Rate

Tax compliance in Sweden drew attention this week. The Norwegian online news service CCN published an article regarding a taxpayer in Sweden who reportedly received a tax bill for over $1 million from the Swedish Tax Agency (the “Skatteverket”). According to CCN, the taxpayer frequently traded in cryptocurrencies. The taxpayer reported the gross income from his Bitcoin trades without disclosing the purchase price of each trade in 2014 and 2015. After an audit, the Swedish Tax Agency assessed the taxpayer as if each Bitcoin was purchased for $0, and the full amount of proceeds was therefore subject to income tax.

This is the latest in a series of enforcement actions that the Swedish Tax Agency has taken against traders. According to CCN, the Swedish Tax Agency contacted the taxpayer in 2016 and provided instructions on how to report his  trades. The taxpayer says that he attempted to comply but was still uncertain of the correct procedure, so he included a note agreeing to corrections if necessary. He says that he got no response until he was audited in 2018. This assessment was the outcome of the audit. It is not currently clear how the taxpayer plans to respond to the assessment or whether appellate review will be available.