U.S. Developments

Regulatory Updates

SEC Continues to Delay Decision on Bitwise ETF

On May 14, 2019, the U.S. Securities and Exchange Commission (“SEC”) continued its delay on a decision regarding a bitcoin exchange-traded fund (“ETF”) application. A decision regarding the ETF application, filed by Bitwise Asset Management and the NYSE Arca exchange earlier this year, has been delayed several times by the SEC. The SEC is requesting public comment from interested parties on the proposal. This is one of several crypto ETF applications currently in front of the SEC.

Szczepanik Says IEOs Could Create Legal Risks for Exchanges

During the annual Consensus conference in New York, the SEC’s Senior Advisor for Digital Assets and Innovation, Valerie Szczepanik, commented on the recent trend of initial exchange offerings (“IEOs”) that some cryptocurrency exchanges recently launched. She expressed concern that some IEOs could be breaking U.S. securities laws, specifically if they are charging fees for the token offering without registering as a broker-dealer, alternative trading system, or a national securities exchange. Ms. Szczepanik pointed to a recent enforcement action against TokenLot as informative to potential consequences for exchanges conducting IEOs without required registrations. In that action, SEC alleged that TokenLot facilitated ICOs as an unregistered broker-dealer. “Platforms seeking to list these tokens for a listing fee or bring buyers to the table for issuers are probably engaging in broker-dealer activity,” Szczepanik stated.

Tax Bill Regarding Hard Forks to Be Reintroduced in Congress

U.S. Representative Tom Emmer announced plans to reintroduce a tax bill targeted at helping people who hold digital assets that have experienced a hard fork. A hard fork results when changes are made to the blockchain protocol of a particular digital asset and such changes are not adopted by all of the nodes that confirm transactions on the blockchain protocol creating two distinct blockchain protocols that are incompatible. First introduced in 2018, the “Safe Harbor for Taxpayers with Forked Assets” bill would stop the Internal Revenue Service (“IRS”) from imposing tax penalties on the failure to report or the failure to pay tax on taxable income attributed to hard forks. The prohibition would last until detailed guidance on the tax treatment of forked digital assets is released by the IRS.

Emmer, who announced the plans during the Consensus conference, noted that the blockchain education of Congress must continue: “A lot of them have these preconceived notions, all they’ve ever heard of is the Silk Road,” he commented.

SEC Levels Fines Against Canadian Investment Firm

On May 15, 2019, the SEC fined NextBlock Global and its CEO and co-founder, Alex Tapscott, for alleged securities violations. SEC claims that NextBlock, a Canada-based investment firm, has offered securities that were not registered with the SEC and made misrepresentations when soliciting investors. NextBlock and Tapscott agreed to cease and desist from future securities violations and Tapscott agreed to pay a civil penalty of $25,000 USD. The SEC noted NextBlock’s agreement to pay a $700,000 CAD penalty to the Ontario Securities Commission as a factor in not requiring the firm to pay an additional civil penalty. The SEC further notes that Tapscott voluntarily agreed to surrender his share of NextBlock profits resulting from the offering in question, valued at more than $2,000,000 USD.

CFTC Chairman Giancarlo Makes Parting Remarks Regarding Blockchain

This week, the Commodity Futures Trading Commission’s (“CFTC”) outgoing chairman, J. Christopher Giancarlo, gave a farewell address to the blockchain community titled “Free Markets and the Future of Blockchain.” The speech, published on CoinDesk, highlights the measures that the CFTC has taken during the Chairman’s term to address the rapid growth of cryptocurrencies and distributed ledger technology, along with other fintech innovations. Among other things, the Chairman pointed to the LabCFTC initiative, aimed at connecting its regulators with market innovators. The Chairman ended his speech with a full-throated endorsement of free market capitalism to future regulators: “Freedom to act in the marketplace is a part of freedom itself,” Giancarlo stated. “Free markets should be the natural choice of today’s innovators.”

Litigation Updates

Mayweather, DJ Khaled Dismissed from Centra Tech Lawsuit

Four promoters and/or participants of the Centra Tech ICO, including boxer Floyd Mayweather and music producer DJ Khaled, have been dismissed from a lawsuit related to the failed project. Judge Robert Scola granted a motion to dismiss the four individuals from the suit, finding that the plaintiff failed to prove they bought Centra Tech’s CTR tokens due to the defendants’ promotion or participation. The civil suit, brought by investors in the ICO, follows a suit from the SEC along with a grand jury indictment from the Department of Justice against the founders. Last year, Mayweather and Khaled settled charges from the SEC that they failed to disclose that they were paid by Centra Tech to promote the ICO.

NY Court Modifies NYAG Injunction Against Bitfinex and Tether

In the latest update in the ongoing legal saga between Bitfinex, Tether, and the New York Attorney General (“NYAG”), a the Supreme Court of the State of New York has modified an existing preliminary injunction it had granted against Bitfinex and Tether in connection with an investigation into loans between the two sister companies. The newly tailored injunction will last for 90 days and prevent Tether from loaning assets to Bitfinex or other parties, except in the normal course of conducting its business. Additionally, Tether cannot distribute reserve funds to its executives or employees except for normal payroll, contractor, consultant, and vendor payments. Finally, Bitfinex and Tether cannot modify any documents requested in the NYAG’s original subpoena.

The modification comes days after the parties each submitted their own proposed modifications as requested by the court. Attorneys for Tether and Bitfinex asked the court to modify the existing preliminary injunction to a 45-day injunction that would have prevented Tether from entering into line-of-credit transactions similar to the one at issue in the original dispute, but would have allowed affiliated entities to continue to redeem USDT for U.S. dollars. The NYAG’s proposed modification sought a 90-day injunction that would have prevented affiliated entities from accessing Tether’s funds.

International Developments

New Bahamian Rules for Token Sales Proposed

The Securities Commission of the Bahamas has presented a draft of a new bill that seeks to regulate non-security token offerings. The bill would create a process for registering these offerings with the government and providing important details of the offering to investors and government officials via a project memorandum. If significant changes are made to the project, the memorandum must be updated by the offering’s sponsors. Registration would also require hiring a sponsor attorney to regularly communicate with the government about the offering. The law creates strong penalties for failing to comply, including a fine of $500,000 or imprisonment for up to 5 years or a possible 10-year sentence if issuers file misleading registration information. The law would apply to token issuers, wallet providers, crypto exchanges, and individuals facilitating an initial token offering in the country. The draft bill is currently still in a public comment period.