U.S. Developments

Regulatory Updates

SEC Suspends Trading for Crypto Exchange and Mining Company

On April 29, 2019, the U.S. Securities and Exchange Commission (“SEC”) announced that it was suspending trading for Bitcoin Generation (“BTGN”), a cryptocurrency exchange and mining company, until 11:59 p.m. ET on May 10, 2019, due to concerns about the accuracy and adequacy of information in the marketplace.  Specifically, the SEC was concerned about “(1) BTGN’s public statements regarding the viability and valuation of a bond that BTGN purportedly acquired from an entity based in the United Kingdom; (2) the amount of BTGN’s outstanding common stock; (3) stock promotional activity relating to BTGN and the market impact of such promotional activity; and (4) the accuracy and adequacy of current public information regarding BTGN’s financial condition.”  BTGN merged with Inolife Technologies and Inolife Technologies Operations in 2018 and offers two ERC20 tokens, the BTGN token and the Bitachon token.  BTGN holds itself out as specializing in the development of blockchain technology applications, cryptocurrency mining and operating a “publicly traded cryptocurrency exchange.”

BTGN issued a response to the SEC’s trading suspension on April 30, 2019, which called the SEC’s action “surprising and highly prejudicial,” but also stated that it intended to comply fully with the SEC’s requests and the requests of any other regulatory agencies concerning the company’s operations.

CFTC Chairman Giancarlo Suggests Revising CEA to Address Crypto

On May 1, 2019, Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo testified before the House Committee on Agriculture about the state of the CFTC.  During his testimony, Chairman Giancarlo addressed issues related to cryptocurrency.  He noted that he anticipated that the CFTC will receive new applications for clearinghouse registrations attributable to the “explosion of interest in cryptocurrencies.”  Additionally, Chairman Giancarlo stated in response to questions from the committee that he thought it necessary to  give the CFTC greater oversight of cryptocurrencies to keep pace with emerging technologies.  You can read Chairman Giancarlo’s testimony here.

OCC Seeks Comments on Proposed Innovation Pilot Program

The Office of the Comptroller of the Currency (“OCC”) is soliciting public comment on its proposed Innovation Pilot Program. For more information on the proposed Program, please visit our sister blog, The FinTech Report.

OFAC Issues Framework for OFAC Compliance Commitments

On May 2, 2019, the Office of Foreign Assets Control (“OFAC”) published guidance entitled “A Framework for OFAC Compliance Commitments.” OFAC’s Framework clearly establishes the agency’s expectations regarding an effective sanctions program. Perkins Coie has published an update with in-depth review of the framework with important takeaways. The update can be found here.

Government Blockchain Bill Introduced in Ohio

On April 24, 2019, Representative Rick Carfagna (R-Dist. 68) introduced a bill (HB 220) in the Ohio House of Representatives that would allow the state government and other government entities to adopt blockchain technology to conduct government functions such as recording licenses.  The bill has been referred to the Commerce and Labor Committee.

Washington State Enacts Distributed Ledger Technology Law

On April 26, 2019, Washington State Governor Jay Inslee signed into law a bill (SB 5638) that is designed to encourage the development of distributed ledger technology.  The bill defines establishes that an “electronic record may not be denied legal effect, validity, or enforceability solely because it is generated, communicated, received, or stored using distributed ledger technology.”  Distributed ledger technology is defined as “any distributed ledger protocol and supporting infrastructure, including blockchain, that uses a distributed, decentralized, shared, and replicated ledger.”  Blockchain is defined as “a cryptographically secured, chronological, and decentralized consensus ledger or consensus database maintained via internet, peer-to-peer network, or other similar interaction.”  The law will take effect July 28, 2019.

Litigation Updates

Bitfinex and Tether Respond to the NY Attorney General

Last week, we discussed the New York Attorney General’s (“NYAG”) court order enjoining iFinex Inc., operator of the Bitfinex trading platform, and Tether Limited, issuer of “tether” virtual currency, from further violations of New York law in connection with potential acts of fraud.

Since the NYAG’s April 25 order, the general counsel for Tether filed an affidavit in support of an order to show cause to vacate or modify the NYAG’s order.  In addition to challenging the NYAG’s allegations as being based on a misunderstanding of the arrangement between Bitfinex and Tether, the affidavit claimed that Tether had on hand cash or cash equivalents totaling approximately $2.1 billion, which represented about 74% of the current outstanding tethers.

On April 30, 2019, the Supreme Court of the State of New York ordered the NYAG’s office to show cause why the Court should not issue an order vacating or modifying the NYAG’s initial order.  The Court required the NYAG to show why Bitfinex and Tether should be restrained from accessing, lending, extending credit, encumbering, pledging, or making any other claim on the U.S. dollar reserves held by Tether.  Vacating this preliminary restraint would enable Bitfinex and Tether to access Tether’s line of credit to Bitfinex.  Both the NYAG and the defendants now have motions before the Court to argue the appropriateness of the NYAG’s injunction.

DOJ Announces Charges Against Crypto Shadow Bankers

On April 30, 2019, the U.S. Department of Justice (“DOJ”) unsealed a grand jury indictment in the Southern District of New York and announced charges against two individuals who opened up numerous bank accounts to offer fiat-currency banking services to various cryptocurrency exchanges between February and October 2018.  The defendants each face charges with penalties of up to 30 years imprisonment.  One of the individuals is located in the United States, and the DOJ is seeking pre-trial detention due to concerns that he may flee the country.  According to the DOJ, the defendants allegedly committed bank fraud using a system of bank accounts to deposit funds to cryptocurrency exchanges.  The indictment includes charges of bank fraud and operating an unlicensed money transmission business, and conspiracy to commit these offenses.  In its announcement, the DOJ stated that the defendants “allegedly ran a shadow bank that processed hundreds of millions of dollars of unregulated transactions on behalf of numerous cryptocurrency exchanges” and thereby “skirted the anti-money laundering safeguards required of licensed institutions.”  According to a workbook found by investigators, the alleged shadow banking operation received over $740 million in 2018 and has a combined account balance across over 60 bank accounts around the world of over $345 million.  The DOJ notes that agents from the FBI’s New York Money Laundering Investigations Squad and the U.S. Internal Revenue Service participated in the investigation.

Industry Updates

Report that More Than 20% of Institutional Investors Own Digital Assets

Fidelity Investments and Fidelity Digital Assets recently reported on a survey that shows that nearly one-half of institutional investors believe digital assets have a place in their portfolio, with over 20% of institutional investors already owning digital assets and roughly 40% saying they are open to future investments in digital assets over the next five years.  Digital assets are well-regarded, with 74% of financial advisors and 80% of family offices viewing the characteristics of digital assets most favorably.  The survey indicated that the way investors would prefer to hold digital assets differs, with 72% preferring to buy investment products that hold digital assets, 57% preferring to buy digital assets directly, and 57% preferring to buy an investment product that holds digital asset companies.  The survey was conducted by Greenwich Associates on behalf of the Fidelity Center for Applied Technology and included over 400 U.S.-based institutional investors.

International Developments

Central Banks of Canada and Singapore Settle First Cross-Border Blockchain Payment

On May 2, 2019, the central banks of Canada and Singapore, the Bank of Canada and the Monetary Authority of Singapore, announced that they had used central bank digital currencies to conduct the first successful experiment on cross-border and cross-currency payments.  Each central bank has an experimental domestic blockchain payments network, Project Jasper and Project Ubin, respectively.  The projects are built on different blockchain platforms, with Project Jasper developed on R3’s Corda, and Project Ubin developed on JP Morgan’s Quorum.  The two central banks used a technique called Hashed Time-Locked Contracts to connect the two networks to allow direct payment versus payment (“PvP”) settlement to occur without the need of a trusted third-party intermediary.  Accenture and J.P. Morgan partnered with the central banks to conduct the experiment.  Upon the conclusion of the experiment, the central banks have also jointly issued a report discussing the project and proposing different design options for such cross-border settlement systems.

India Purportedly Considering Banning Use of Crypto

On April 26, 2019, as reported by the Indian newspaper, The Economic Times, India’s government announced that it was engaging in inter-ministerial consultations on a draft bill that would ban use of all cryptocurrencies and regulate official digital currencies.  A final law will be proposed to the next government after elections at the end of May 2019.  The draft bill stems from work done last year by a government panel related to cryptocurrencies, which included India’s Department of Economic Affairs, Central Board of Direct Taxes, Central Board of Indirect Taxes and Customs, and the Investor Education and Protection Fund Authority.