U.S. Developments

Regulatory Updates

SEC’s Valerie Szczepanik Speaks at SXSW

The U.S. Securities and Exchange Commission’s (“SEC”) Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets Digital and Innovation, Valerie Szczepanik, participated in a Q&A session at the South by Southwest (SXSW) conference in Austin, Texas. Szczepanik spoke on a number of blockchain-related topics, including the SEC’s regulatory approach to digital assets and stablecoins.

On the regulatory approach to digital assets, Szczepanik encouraged companies to approach the SEC and its FinHub to discuss and engage in a discussion about proposed projects and approaches to digital assets before launching to the public. Szczepanik highlighted the recent action against Gladius as an example of a company working with the SEC, albeit after the fact. In that action, Gladius avoided the imposition of penalties due to self-reporting and cooperation with the SEC.

Szczepanik’s comments on stablecoins were also notable, most significantly that certain kinds of stablecoins could raise issues under securities law. Szczepanik discussed the general categories of stablecoins: coins tied to an asset such as gold or oil; coins tied to fiat currency held in reserve; and coins that use a centralized pricing mechanism to control its price. The third type, those using a centralized pricing mechanism, were singled out by Szczepanik as potentially “getting into the land of securities.”

CFTC’s Dan Berkovitz on the Regulation of Blockchain Futures and Options Markets

The U.S. Commodity Futures Trading Commission (“CFTC”) Commissioner Dan Berkovitz participated in a fireside chat with BLOCKTV, where he discussed the CFTC’s efforts to understand blockchain technology and the broader cryptocurrency market. Berkovitz discussed the CFTC’s innovation program (“LabCFTC”), coordination with the SEC, and other CFTC initiatives designed to help the Commission develop familiarity with the technology and police markets against fraud and manipulation.

Berkovitz emphasized the CFTC’s efforts with LabCFTC, a program that allows companies and entrepreneurs with new ideas and technologies to come to the CFTC for guidance on how regulations might apply to their business and how best to proceed (or not) in a compliant way. Although the CFTC is learning at a rapid pace, Berkovitz cautioned that the regulation of cryptocurrency futures and options markets are nonetheless likely to take time to develop over several years.

AirFox Files Form 10 to Register Its Token[S] with the SEC

CarrierEQ, Inc. d/b/a AirFox, a startup focused on providing mobile financial services in emerging markets, filed a Form 10 with the SEC. The filing comes months after the company settled claims made by the SEC that it had offered unregistered securities to the public. The filing is one of the conditions of that settlement.

There are numerous items of interest included within the filing. For example, in many places in the Form 10, including Item 11 (Description of Registrant’s Securities to be Registered), AirFox indicates that the AirTokens (the securities being registered) (i) may never have the functionality described in the registration statement and (ii) should not be viewed as analogous to traditional securities, partly because they do not “convey any dividend, distribution, voting, liquidation, or preemption rights” to holders and are accounted for as current liabilities (i.e., AirToken Obligations) on the company’s balance sheet. Also of note, the company’s public accounting firm’s audit report expressed “substantial doubt about the company’s ability to continue as a going concern.” The company also discloses that it faces (x) a relatively large deficit accumulation and (y) “material contingent liabilities” connected to, among other things, uncertain future payments to initial coin offering purchasers in connection with the company’s rescission offer under the settlement with the SEC.

This was AirFox’s initial public filing of the Form 10; substantial changes and additions to the registration statement could be required pursuant to the SEC comment process that should take some months to complete. Stay tuned.

Industry Updates

Cboe Puts Bitcoin Futures Market on Hold

Cboe Futures Exchange announced to traders last week that it is assessing it approach to digital asset derivative trading and that it will not list a Cboe Bitcoin (USD) futures contract for trading in March 2019. Currently listed contracts will remain available with the last contracts expiring in June. Bitcoin futures contracts will still be available through the CME Group’s exchange. Bakkt, which announced in August 2018 that it plans to offer one-day physically-settled bitcoin futures, continues to wait on approval from the CFTC to begin offering its contracts.

The ABA Releases Cryptocurrency and Digital Asset Whitepaper

The American Bar Association (“ABA”) Derivatives and Futures Law Committee’s Innovative Digital Products and Processes Subcommittee Jurisdiction Working Group has released a whitepaper touching on the various jurisdictional issues created by cryptocurrencies and digital assets.

The paper looks at a number of topics, including the application of securities and commodities law to digital assets; FinCEN’s regulation of digital assets, including anti–money laundering and know-you-customer rules; how digital assets are being regulated in foreign jurisdictions; and how states have approached digital assets, including various state law licensing requirements.

The whitepaper can be found here.

State Updates

Legislators in Colorado Explore Use of Blockchain in the Agriculture Industry

A Colorado bill seeking to explore the use of blockchain technology in the agriculture industry was filed last week. The bipartisan House Bill 1247 would direct the state’s Commissioner of Agriculture to create an advisory group to study potential use cases for blockchain technology in the state’s agriculture industry.

The proposed advisory group would report its findings and recommendations to the state’s General Assembly by January 2020.


International Developments

Mexico Considering New Regulations That Could Effectively Ban Crypto Exchanges in the Country

Mexico’s central bank recently proposed new regulations that would effectively prevent crypto exchanges from operating within the country. The regulations would prohibit financial institutions regulated by the central bank from offering exchange, transmission, or custody services for cryptocurrencies. The reported reasoning behind the move is to protect customers from the volatility of digital assets and because of the “complexity of the mathematical and cryptographic processes that underlie digital assets.”

There will be a 60-day period for the public to submit comments regarding the proposed rule.

Failed Exchange Mt. Gox’s Trustee Approves Creditor Claims

Creditors of the failed cryptocurrency exchange, Mt. Gox, learned the fate of their claims this week. Nobuaki Kobayashi, rehabilitation trustee for Mt. Gox, has notified the Tokyo District court overseeing the exchange’s bankruptcy that he has either approved or disapproved all claims. The trustee stated that assets of the exchange, including cash and cryptocurrency, will be distributed to approved claims.

The trustee reported that the exchange currently has 69,553,086,521 Japanese yen ($629,594,540.00) in cash, 141,686.35 BTC, and 142,846.35 BCH, as of March 19. The cryptocurrency held by the exchange is currently worth over $593 million. Approved claims total 802,521 BTC (worth $3,233,256,500.00), 792,296 BCH ($124,953,000.00), and $38,165,664.00. A final rehabilitation plan is due by April 26, 2019.

Japan Seeks Stricter Rules for Cryptocurrency Margin Trading

The Japanese Cabinet has approved draft amendments to its rules governing margin trading of cryptocurrencies. The amendments would cap cryptocurrency margin trading at two to four times the initial deposit. Additionally, exchanges that allow margin trading of cryptocurrencies will be required to register with the Japanese government within 18 months of the amendment’s effective date. Failure to register would result in closure of the exchange. Finally, cryptocurrency exchanges will be divided into two categories: those that offer margin trading and those that issue tokens from initial coin offerings.

If finalized, the amendments would go into effect in April 2020.

Steering Committee Formed for Creditors of QuadrigaCX

In a new development regarding the saga of failed Canadian exchange QuadrigaCX, an “Official Committee of Affected Users” (comparable to a creditors’ committee in a U.S. bankruptcy proceeding) steering committee has been established to help guide the representation of the former customers of the exchange. The committee was formed by two Canadian law firms, Miller Thompson and Cox & Palmer. These firms were appointed by Nova Scotia Supreme Court Judge Michael J. Wood to represent the former customers last month.

The committee of seven people and two alternates is tasked with guiding representation by these firms of the estimated 115,000 customers who potentially lost cryptocurrency held by the exchange.

Canada Considers Rules for Crypto Trading Platforms

In the wake of QuadrigaCX’s collapse, Canada is considering new rules aimed at crypto trading platforms operating in the country. The Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada released Consultation Paper 21-402, seeking input from the industry as it considers the creation of a framework to regulate trading platforms operating in Canada or that have Canadian citizens as customers.

The move comes after QuadrigaCX’s failure highlighted a possible regulatory vacuum for crypto trading exchanges. As previously reported, the British Columbia Securities Commission noted that it did not have jurisdiction over the exchange, because the exchange did not offer trading in securities or derivatives under British Columbia’s securities law.