U.S. Developments

Regulatory Developments

SEC Chair’s Recent Comments on Digital Assets

Securities and Exchange Commission (“SEC”) Chairman Jay Clayton touched on digital asset issues during two recent appearances. On June 4, Chairman Clayton addressed the Mid-Atlantic Regional Conference, where he noted the work of SEC staff to trace transactions across blockchains. Specifically, he mentioned that tracing was critical in two recent cases where the SEC was able to obtain preliminary injunctions to stop alleged potential frauds.

On June 6, Chairman Clayton appeared on CNBC, where he discussed virtual currency exchange-traded funds (“ETFs”). He stated that the SEC is engaging with those seeking ETFs but that core issues, such as custody of digital assets and prevention of market manipulation, continue to be sticking points that the SEC is working through.

FINRA Fines Investment Advisor for Unreported Crypto Mining Business

The Financial Industry Regulatory Authority (“FINRA”), the self-regulatory organization for broker-dealers, fined and suspended a financial advisor for failing to declare his cryptocurrency mining business. The advisor, a registered broker, worked for Merrill Lynch and allegedly violated FINRA rules when he failed to provide Merrill Lynch notice of the new venture. Individuals registered with FINRA are required to notify their current company, in writing, of any business activity they conduct outside their current employer. FINRA fined the advisor $5,000 and suspended him from working for any FINRA-registered company for one month.

Legislative Developments

Senate Releases Draft Legislation on AML

A group of Republican and Democratic senators released a draft bill seeking to reform and update anti-money laundering (“AML”) requirements. The legislation would require certain types of companies to disclose beneficial owners of business accounts directly to the Financial Crimes Enforcement Network (“FinCEN”) and require FinCEN to create a database to track that beneficial ownership data. The bill would create criminal and civil penalties for willful violations of the new beneficial ownership requirements. The new bill would also require the Department of Justice to release metrics on AML reporting. Additionally, the new bill seeks to strengthen how law enforcement officials and financial regulators work together to investigate AML concerns, creating a new investigative resource hub.

Of note to the crypto industry, the draft bill would add digital currencies to the definition of “monetary instruments” in the U.S. Code. Additionally, the draft bill would require the Government Accountability Office to conduct a study on how cryptocurrencies are used to facilitate payment for sex and drug trafficking and report to Congress on their findings.

Industry Developments

Financial Firms Launching Blockchain-Based Settlement Coin

A group of some of the world’s largest financial companies, led by UBS Group, are launching a new blockchain-powered utility coin, called the utility settlement coin (“USC”). The coin, which will be issued by Fnality International, a new joint venture between the companies, will reportedly be used as a settlement and payment device that would also transfer trade data between the parties. The tokens will be backed by fiat currency held at central banks. The financial companies involved in the venture include Barclays, Nasdaq, Credit Suisse, Bank of New York Mellon, Canadian Imperial Bank of Commerce, State Street Bank & Trust, Santander, Commerzbank, ING, KBC, Lloyds Bank, Mitsubishi UFG, and Sumitomo Mitsui Bank.

Binance to Open Exchange in United States

Binance, one of the world’s largest crypto exchanges by trading volume, is opening an exchange in the United States. The new exchange, Binance US, will partner with U.S.-based BAM Trading Services to provide exchange and wallet services to U.S. residents. Binance plans for the new exchange to be in “full regulatory compliance,” and CoinDesk reports that partner BAM has registered with FinCEN as a money services business. Binance did not provide a timeline for the new exchange’s launch.

In a potentially related move, CoinDesk reported, Binance is cracking down on U.S. residents using Binance.com, updating its Terms of Use to state that “Binance is unable to provide services to any U.S. person.” The company says that it will remove deposits from and access to its services if individuals are found to be violating its policies.

State Developments

A Number of Blockchain Bills Passed in Nevada

Nevada Governor Steve Sisolak recently signed several blockchain-related bills into law to help promote blockchain adoption in the state. The new legislation includes laws that:

  • Establish a new regulatory sandbox;
  • Create a new definition for “public blockchain” and require that governmental agencies accept documents certified on a blockchain;
  • Authorize businesses in the state to store corporate records on a blockchain; and
  • Define digital currencies as intangible personal property, creating an exemption from the state’s personal property taxation.

International Developments

FATF to Release New Regulatory Standards for Crypto Companies

Next week, the Financial Action Task Force (“FATF”), an intergovernmental organization that creates recommendations for international AML regulations, will release new standards for the international regulation of digital assets. The new standards will reportedly require exchanges and other crypto companies to pass certain customer information along with transfers of $1000 or €1000 worth of digital assets.

Many in the crypto industry have expressed technical concerns about how companies will be able to gather, verify, and send the required customer information. They also argue that the new standards might push individuals to transact directly with other individuals, making it harder for law enforcement to track the transactions.

FATF standards are not laws themselves but rather are recommendations as to how member countries should update their own laws and regulations. However, member countries who don’t conform their regulations to FATF’s standards may risk losing access to many of the world’s most important financial markets and systems. As a result, for most entities engaged in activities covered by FATF standards, consideration of FATF recommendations is a part of an effective compliance program.

G20 Nations Committed to Adopting New FATF Standards

The Group of Twenty (“G20”) nations expressed commitment to align their countries’ AML regulations with the forthcoming FATF standards discussed above. A communiqué released by the G20 finance ministers and central bank governors expressed concern regarding crypto asset risks, including risks related to consumer and investor protection, AML, and countering the financing of terrorism. They expressed appreciation for the International Organization of Securities Commissions’ recent focus on investor protection and market integrity as they relate to crypto-asset trading. The communique also referenced the work the Financial Stability Board has been doing in the crypto space, calling on it and other standard setting bodies to “monitor risks and consider work on additional multilateral responses.”

Malta Asked to Increase Its AML Efforts

The European Commission (“Commission”) is recommending that Malta increase its AML enforcement efforts to keep up with its growing crypto and gaming industries. The Commission commended recent AML efforts by the country but noted the risk of conflicts of interest for governmental officials and the understaffing of Malta’s Economic Crimes Unit. The Commission also asked that Malta look at its tax system to prevent aggressive tax planning and tax avoidance.