U.S. Developments

Regulatory Updates

SEC Releases “No-Action Letter” Stating Turnkey Jet ICO Tokens Are Not Securities and Releases “Framework for ‘Investment Contract’ Analysis of Digital Assets”

The U.S. Securities and Exchange Commission (SEC) Strategic Hub for Innovation and Financial Technology (FinHub) published a framework on April 3, 2019, for analyzing whether a digital asset is offered and sold as a security under the federal securities laws.

Concurrent with the announcement of the framework, the SEC’s Division of Corporation Finance issued a no-action letter in connection with TurnKey Jet, Inc.’s (TurnKey) proposed offering of a digital asset for use in its air charter business. This no-action letter provides the first illustrative example of how a digital asset can be sold without having to register it as a security.

An in-depth review and commentary on this development is available here.

ParagonCoin Files Form 10 with the SEC

Following the AirFox Form 10 filing late last month, ParagonCoin recently filed its Form 10 with the SEC in order to register its PRG tokens as a class of securities. ParagonCoin was ordered to file a Form 10 as part of its settlement with the SEC in November 2018.

The ParagonCoin filing appears to be less substantive than AirFox’s filing. AirFox provided significant detail regarding its operations and risk disclosure, while the ParagonCoin filing does not. ParagonCoin takes the position that it is not required to provide risk factors because it is a small business registrant.

The report of ParagonCoin’s independent auditor revealed that ParagonCoin has sustained losses since inception in 2017 and has a deficiency in working capital as of December 31, 2018. This raised substantial doubt about Paragon’s ability to continue as a “going concern,” in terms of its future viability, meaning Paragon’s ability to function for the next 12 months without a threat of liquidation due to failing to timely meet its financial obligations. Paragon states that it is working to generate and raise capital but cannot give any assurances that it will be successful in these efforts.

SEC Designates a Longer Period for Commission Action on Proposed Rule Change to List and Trade Shares of SolidX Bitcoin Shares Issued by VanEck SolidX Bitcoin Trust

On January 30, 2019, Cboe BZX Exchange (Cboe) filed a proposed rule change with the SEC to list and trade shares of the SolidX bitcoin. The proposed rule change was published for comment in the Federal Register on February 20, 2019 and the SEC has received comment letters on such proposal.

As stated on March 29, 2019, the SEC is now extending the period in which it can take action on the proposed rule change in order to ensure it has sufficient time to consider it. While the SEC was supposed to make a decision on April 6, 2019, it has now designated May 21, 2019 as the date by which it must approve, disapprove, or institute proceedings to determine whether to disapprove of the proposed rule change. The SEC has also extended the period for SEC action for the Bitwise Bitcoin ETF Trust under NYSE Arca until May 16, 2019.

Read our previous post on Cboe here.

Swiss Regulator Fines Envion AG, Finding Its $90 Million ICO Illegal

The Swiss Financial Market Supervisory Authority (FINMA) fined Swiss firm Envion AG for selling tokens without a license. Envion accepted more than 90 million Swiss francs ($91 million) from at least 37,000 investors without the requisite license. Although there was no evidence of misappropriation of funds or an intent to damage Envion’s investors, FINMA found that the conditions under which the tokens were issued were not equal for all investors, the prospectuses did not meet minimum requirements, and Envion did not have an internal auditor.

Industry Updates

Federal District Court Applies Howey Test and Finds ATB Coins Are Securities

The Southern District of New York issued a denial of a motion to dismiss in Balestra v. ATBCoin, providing interpretive guidance on when a token might be considered a security under federal law. The court applied the Howey test and held that the facts of the pleadings were sufficient to survive the motion to dismiss. The “investment of money” prong was not disputed by the Defendant and, although there was no formalized profit-sharing mechanism, the court held there was a “common enterprise” due to “horizontal commonality” because the value of the ATB Coins was dictated by the success of the ATP enterprise as a whole. The court also relied on the SEC’s decision In the Matter of Munchee, in which the SEC concluded that its token was a security even though it “did not promise investors any dividend or other periodic payment.” Finally, the court held that the third prong of the Howey test was satisfied based on the content of ATBCoin’s marketing materials and the fact that they were solely responsible for developing and launching the ATB Blockchain—the performance of which largely dictated the value of ATB Coins. Thus, purchasers of the coins were “led to expect profits solely from the efforts” of ATBCoin.

RAND Releases Report on Terrorist Use of Cryptocurrencies

RAND released a report on terrorist use of cryptocurrencies which considers: (1) whether terrorist groups are currently using cryptocurrencies to support their activities; and (2) what properties of new and potential future cryptocurrencies would make them more viable for terrorist use.

The report finds that while current cryptocurrencies are not well matched with all of the features that would be needed and desirable to terrorist groups, they may still be employed for discrete financial activities. It also identified factors that would increase the viability of cryptocurrencies for terrorist organizations, including a single cryptocurrency that has widespread adoption, increased anonymity, and inconsistent regulation.

PayPal Makes Its First Blockchain Investment in Blockchain Startup

PayPal joined a Series A investment in Cambridge Blockchain, a startup that is geared towards helping financial institutions streamline digital identity compliance. A spokesperson said this was PayPal’s first investment in any blockchain company and that it made this investment because Cambridge Blockchain is “applying blockchain for digital identity in a way that we believe could benefit financial services companies including PayPal.” He also stated that “[o]ur investment will allow us to explore potential collaborations to leverage blockchain technology.” The amount of PayPal’s investment has not been disclosed.

International Developments

Chinese Regulator Approves First 197 Blockchain Firms

The Cyberspace Administration of China (CAC) recently released the first list of 197 registered blockchain service providers. According to analysts, this will allow China to “provide a controllable environment to explore blockchain technology in the country.”

The list includes well-known companies and their initiatives, including Baidu Blockchain Engine, Alibaba Cloud Blockchain-as-a-Service (BaaS) and Tencent BaaS (TBaaS). It also includes financial institutions such as the China Zheshang Bank and Ping An Insurance Company, as well as smaller companies such as blockchain-enabled supply chain management service VeChain and parcel delivery service ParcelX.

State Bank of Pakistan Plans to Issue Its Own Digital Currency by 2025

The deputy governor of Pakistan’s central bank recently announced that it aims to issue a digital currency by 2025, in an effort to “promote financial inclusion and efficiency and combat corruption.”

According to Cointelegraph, the move is a reaction to the Finance Action Task Force’s (FATF) repeated concern that cryptocurrencies are used in terrorist financing, which Pakistan has been unable to sufficiently address. In February, FATF said Pakistan had only made “limited progress” on curbing money laundering and terrorism financing.