U.S. Developments

Blockstack Files With SEC for Regulation A+ Token Sale

Blockstack, the New York-based blockchain software provider, has announced that it intends to make a $50 million token offering that would use the SEC’s Regulation A+ exemption. The sale would enable Blockstack to raise capital through the U.S. securities markets via a subsidiary, Blockstack Token LLC, and would be the first SEC-qualified token offering of its kind.

While Blockstack’s offering requires further regulatory review, a Regulation A+ offering provides an alternative to a traditional IPO. Passed as part of the 2012 Jumpstart Our Business Startups (JOBS) Act, the exemption is intended to give companies wider access to the public investing community and to support small business growth and employment by lowering regulatory hurdles for companies trying to raise capital. In addition to exemption from registration, a company filing under Regulation A+ may confidentially submit its offering memorandum to the SEC, undergo an expedited review process, and have fewer ongoing public disclosure requirements.

Click here for Blockstack’s public filing.

Token Taxonomy Act Reintroduced in Congress

This week, U.S. Representative Warren Davidson (R-OH) introduced the Token Taxonomy Act of 2019, which would exclude digital tokens from the definition of “security” and provide guidance on how the SEC may approach cryptocurrency regulation.

The bill was initially proposed last December by Representatives Warren Davidson and Darren Soto (D-FL), but received little traction. This newest version clarifies the jurisdictions of the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC) and states that it seeks to preempt state regulations like New York’s BitLicense. Issues previously flagged by industry leaders remain, including uncertainty over potential tax implications.

Davidson’s press release calls attention to the growing strength of the digital asset and blockchain industries in both Europe and China and rallies for U.S. leadership within the global market.

Utah Exempts Blockchain From State’s Money Transmitter Act

Effective May 25, 2019, certain blockchain firms may be exempt from being classed as money transmitters in Utah. Specifically, under the Blockchain Technology Act, a person who facilitates the creation, exchange, or sale of certain blockchain technology-related products is beyond the scope of the state’s Money Transmitter Act.

Under the new law’s definitions, however, some private blockchains may not be included in the amendment: “Blockchain” or “blockchain technology” is defined as “an electronic method of storing data that is: (a) maintained by consensus of multiple unaffiliated parties; (b) distributed across multiple locations; and (c) mathematically verified.” (Emphasis added.)

West Virginia Creates New Exemptions From Licensing Requirements

Similarly, West Virginia legislators signed a bill into law that exempts certain payment processors, service providers, and persons facilitating payment for goods or services from the state’s statutory scheme pertaining to money transmission. Though not specific to blockchain, the exemption provides further clarity on the applicability of West Virginia’s licensing requirements. Section 32A-2-3 goes into effect June 7, 2019.

West Virginia’s law comes on the heels of a similar law taking effect in Michigan. As of March 28, 2019, Michigan’s money transmitter statute exempts “agents of a payee”—defined as “a person appointed by a payee to collect and process payments as the bona fide agent of the payee”—from the statute’s licensure requirements so long as certain conditions are met.

Bitstamp Receives License to Do Business in New York

Bitstamp has become the nineteenth company to receive a virtual currency license from the New York State Department of Financial Services. The company, considered Europe’s biggest digital asset exchange, applied for BitLicense through its U.S. subsidiary and received approval to conduct digital currency operations in New York State—including services that allow customers to buy and sell Bitcoin and other unspecified virtual currencies.

The review process for BitLicense entails a thorough examination of the company’s Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance, as well as its anti-fraud, capitalization, and cybersecurity policies. Bitstamp joins other notable providers such as Square, Coinbase, bitFlyer USA, Circle Internet Financial, and XRP II in the so-named “BitLicense Club.”

FinTech Issues Discussed at SEC Speaks Conference

At Practicing Law Institute’s annual SEC Speaks conference, SEC leadership and staff showcased the agency’s 2018 successes and outlined upcoming initiatives. Highlights in the cryptocurrency and FinTech industries included the SEC’s analytical framework for digital assets, published last week by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub). The SEC also touted cooperation credit given in its recent action against Gladius Network, LLC, which was resolved without penalties after Gladius self-reported and agreed to return ICO funds to investors and register its tokens as securities.

International Developments

China Proposes Ban on Cryptocurrency Mining

The National Development and Reform Commission (NDRC), a state planning body that administers China’s economy from a macroeconomic perspective, proposed adding cryptocurrency mining to its list of 450 wasteful and hazardous activities slated for elimination. The proposed ban is set to come into effect after a public comment period ending May 7, 2019. If implemented, Chinese authorities may begin the process of raising electricity prices for affected businesses to force them to either relocate or close.

The move is no surprise to industry insiders: Cryptocurrency mining is notorious for generating e-waste and consuming large amounts of electricity. Historically, China’s cheap electricity and coal supply has made it a favorite for Bitcoin miners; nearly three quarters of cryptocurrencies are mined in China, and these mining operations generate up to 10 million tons of carbon dioxide annually.

This is not the first time that authorities have cracked down on cryptocurrency mining. In January 2018, China’s top internet-finance regulator, the Leading Group of Internet Financial Risks Remediation, issued a notice demanding companies carry out an “orderly exit” from the business, citing risk of speculation of virtual currencies.

South Korea Announces Possible Regulation Reform

South Korea lawmakers recently announced an intention to revisit the regulatory policy affecting cryptocurrency firms within the country. The statement came during the Deconomy conference in Seoul (2nd Decentralized Economic Forum), and included officials Byung-Doo Min, chairman of the National Assembly; Byung-Kuk Jung, chairman of the 4th Industrial Revolution Committee of the National Assembly; Hee-Kyung Song, co-president of the 4th Industry Forum of the National Assembly; and Hee-Ryong Won, the governor of Jeju Island.

During the debate, Co-President Hee-Kyung Song urged a more aggressive implementation of the regulatory sandbox program:

The government has misunderstood the virtual currency and tried to meet the real currency standards, so there are various problems. The industry does not stand still while waiting for the regulatory sandbox authorization, so it is just like confining it in the box.

Governor Hee-Ryong Won proposed to designate Jeju Island as a cryptographic special zone:

If we are concerned about regulation, we can operate a regulatory agency with the government in a limited area called Jeju Island. We will make a case study and try to create a foundation for the government to look at cryptocurrency.

South Korea has a reputation for stringent cryptocurrency regulation, including instituting a ban on ICOs that is still in effect as of January 2019.