U.S. Developments

Regulatory Updates

CFTC Publishes Enforcement Manual

On May 8, 2019, the U.S. Commodity Futures Trading Commission’s (“CFTC”) Division of Enforcement (“DOE”) published its first public Enforcement Manual (the “Manual”). The Manual establishes general policies and procedures for the DOE’s work in investigating and prosecuting violations of the Commodity Exchange Act. Director of Enforcement James M. McDonald commented on the release at the 41st Annual Conference of the Future Industry Association’s Law & Compliance Division, noting that the Manual was publicly released to ensure that the procedures applied by the DOE in investigating and litigating potential violations of the Commodities Exchange Act and regulations thereunder are available to those potentially affected by them. The CFTC has previously asserted that virtual currencies are commodities and has regularly brought enforcement actions against companies and individuals in the virtual currency market.

CFTC Allegedly Ready to Approve Ether Futures

CoinDesk reported this week that the CFTC is ready to approve an ether futures contract if it met the CFTC’s requirements. The CFTC has previously allowed contracts on bitcoin futures. Approving futures on ether could strengthen the CFTC’s claim of jurisdiction over ether, which to date has only consisted of a handful of enforcement actions. The report follows the CFTC’s request for input seeking information about ether and Ethereum from the industry. The CFTC has not made any official statement on the timing for approval of any potential ether derivative products.

FinCEN Releases Guidance Applying Regulations to the Virtual Currency Market

On May 9, 2019, the Financial Crimes Enforcement Network (“FinCEN”) released interpretive guidance regarding the application of the Bank Secrecy Act (“BSA”) to companies, platforms and individuals operating in the virtual currency market. The guidance gathers current FinCEN regulations and other administrative rulings and guidance that FinCEN has issued since 2011 and applies them to certain business models in the virtual currency market.

SEC Commissioner Peirce Expresses Innovation-Stifling Concerns

During a speech at the Securities Enforcement Forum in Palo Alto, California, Securities & Exchange Commission (“SEC”) Commissioner Hester Peirce expressed concern that the SEC’s unwillingness to take “meaningful action” is stifling the growth of the crypto industry. In her speech, entitled “How We Howey,” she pointed to what she considers “heel-dragging” on behalf of the SEC to create clear public guidance as to how crypto companies can comply with federal securities law.

With regard to the SEC’s recent framework, she expressed concern that the framework did not give the industry new information to use nor did it provide information as to the weight each consideration listed should be given. Peirce also spoke on the recent TurnKey Jet no-action letter, stating that the offering involved was so clearly not a security that it might have inadvertently broadened the reach of securities laws to items like stored value gift cards. She noted that the Turnkey Jet no-action letter also imposed conditions on a non-security. She noted the lack of guidance from the SEC and the Financial Industry Regulatory Authority on issues like custody of digital assets and argued that the silence is causing a bottleneck for potential brokers and trading platforms. Peirce closed her remarks with a warning that the SEC’s relative silence on crypto “is likely to simply push…innovation and any attendant economic growth into other jurisdictions that have done their work and provided clear guidelines for the market participants to follow.”

Litigation Updates

New Development in Bitfinex/Tether/NYAG Fight

In the latest development in the ongoing legal battle between Bitfinex, Tether, and the New York Attorney General (“NYAG”), a New York state judge ordered that the NYAG’s preliminary injunction against Bitfinex and Tether remain in effect but granted a motion from Bitfinex and Tether to modify the substantive and temporal scope of the injunction.  Judge Joel M. Cohen asked the parties to meet and try to agree on a narrower scope for the injunction. He criticized the injunction, calling it “both amorphous and endless.” If the parties cannot agree on a mutual modification, each can offer an individual proposal to modify the injunction. Proposals are due to the court next week.

OneCoin Sued by Former Investor; Possible Class Action

A former investor is suing OneCoin and its principals for alleged fraud and violations of federal securities laws. Christine Grablis is seeking a return of her initial investment of $130,000 plus damages, as well as class action status on behalf of other investors in the project. As we previously reported, federal prosecutors have alleged that OneCoin is an illegal pyramid scheme and a number of people connected with the project have been arrested or are wanted in connection with their involvement in the alleged scheme.

Industry Updates

Binance Loses $40.7M in Bitcoin from Hack

On May 7, 2019, crypto exchange Binance announced that it had been the victim of a hack in which more than 7,000 BTC (~$40.7M) was stolen from the exchange’s hot wallet. Binance is still investigating the attack, but has stated they believe the hackers were “able to obtain a large number of user API keys, 2FA codes, and potentially other info.” Binance also reported that the hackers “used a variety of techniques, including phishing, viruses and other attacks.”

Binance plans on using its Secure Asset Fund for Users (“SAFU”) to cover the losses. SAFU, which is funded from 10% of all Binance trading fees, was created last year to provide protection to users in case of an event like this week’s. Binance’s CEO, Changpeng Zhao, stirred some controversy by suggesting that Binance might encourage bitcoin miners to “rollback” the bitcoin blockchain, essentially reversing transactions on the chain to return the stolen funds. Such a rollback would require gathering more than 51% of the bitcoin network’s hashing power to create a new version of the existing chain where the transfer of the stolen coins from the hot wallet never occurred. Many were quick to criticize the move as an affront to the basic spirit of bitcoin and its chain’s immutability. Zhao clarified in a subsequent tweet that Binance would not pursue the rollback idea.

iFinex Planning $1B Initial Exchange Offering

iFinex, the parent company of Bitfinex and Tether, confirmed that it will be conducting a $1 billion initial exchange offering (“IEO”), releasing a white paper on May 8, 2019. The new token, which would trade under the symbol LEO, would allow users discounts on trading fees on the Bitfinex, Ethfinex, and eosfinex exchanges. The token would be purchased using USDT, the stablecoin issued by Tether. The IEO would be sold as a private offering and require a 1 million USDT buy-in to participate. The IEO will be unavailable to U.S. customers.

The white paper also contains several other announcements of note. First, iFinex is planning to launch an IEO platform that would allow other tokens to launch via an IEO on its exchanges. Next, iFinex is working to create a licensed and regulated securities exchange and, while it does not specify which regulator would be licensing the exchange, it notes the exchange would be unavailable to U.S. customers. Last, the white paper notes a forthcoming derivatives product involving USDT-based collateral.

New Crypto ETF Filed with SEC

An application for a new cryptocurrency exchange-traded fund (“ETF”) has been filed with the SEC. The application was filed by Crescent Crypto Index Services and is sponsored by the United States Commodity Funds LLC. According to the SEC filing, the USCF Crescent Crypto Index Fund would trade on the NYSE Arca under the ticker symbol XBET and pursue its investment strategy by investing in bitcoin and ether in order to generate returns that are based upon the Crescent Crypto Core II Index, an index designed to “track the performance of a market capitalization weighted portfolio of Bitcoin and Ether.”

The filing follows several other crypto ETF applications that have been filed with the SEC. No crypto ETFs have been approved by the SEC and decisions about the fate of two other proposed ETFs, the Bitwise Bitcoin ETF Trust and the VanEck SolidX Bitcoin Trust, have been delayed while the SEC continues to consider their filings.

International Developments

Liechtenstein Passes New Blockchain Regulation

On May 7, 2019, Liechtenstein passed the Token and VT Service Providers Act (the “Act”). According to an official press release, the Act covers “transaction systems based on trust technologies,” a definition intentionally broad so as to cover “the next generations of technology.” The Act was passed, in part, to ensure consumer protection and fight illicit use and money laundering. According to the press release, the Act clarifies questions as to how current laws apply to tokens and blockchain technology. The Act also addresses property rights as it relates to tokens.

Australian Securities Exchange Opens DLT Development Environment

On May 7, 2019, the Australian Securities Exchange (“ASX”) announced the opening of a new equities clearing and settlement system, the Customer Development Environment (“CDE”). The CDE, which uses distributed ledger technology (“DLT”), replaces the existing CHESS system. The first “drop” of code for the CDE was released on April 30, 2019, with another six drops scheduled at an eight-week cadence. Using DLT will allow customers to connect via a system node, providing quick access to source-of-truth data. CDE was built using Digital Asset’s open source smart contract language, DAML.

Crypto Assets Noted as a Priority for IOSCO

The International Organization of Securities Commission’s (“IOSCO”) Board recently released a list of priority issues for 2019, with crypto assets listed as one of the priorities. The Board states that IOSCO will focus on “how platforms where crypto-assets are traded are regulated and will also examine regulation of investment funds with exposures to crypto-assets.” IOSCO will also create a portal for members to share information on enforcement efforts. In addition, IOSCO will continue its development of an “ICO Support Framework,” aimed at helping members address domestic and international issues related to initial coin offerings.