U.S. Developments

SEC Sues Social Media Company Kik over Digital Coin Offering

The Securities and Exchange Commission (“SEC”) sued Kik Interactive Inc. (“Kik”) in federal court in Manhattan this week, arguing that Kik’s sale of “Kin tokens” in late 2017 was a sale of unregistered securities. The complaint alleges that Kik marketed its tokens as an investment opportunity and failed to disclose material financial information about Kik’s business. Kik has argued previously that the Kin tokens were not sold as securities and should not be covered by federal law because they are not considered stocks or bonds under relevant definitions of the U.S. securities laws.

As previously reported on this blog, Kik submitted a Wells response to the SEC in November 2018 laying the groundwork for potential litigation with the SEC. Last month, Kik established a legal defense fund, DefendCrypto.org, to assist with its legal bills incurred fighting the SEC’s suit. The fund has raised almost $5 million worth of various cryptocurrencies from backers.

FBI Joins Probe into Quadriga’s $195 Million Crypto Collapse

As previously reported on this blog, QuadrigaCX, a Canadian cryptocurrency exchange, collapsed in January after the reported sudden death of its founder, Gerald Cotten, who is said to have the only copy of the private keys to the cold storage where the majority of the exchange’s tokens are held. QuadrigaCX’s customers lost $195 million in cryptocurrencies and cash after the collapse. The exchange owner, Quadriga Fintech Solutions Corp., is now in bankruptcy proceedings in Canada. The FBI has decided to join the investigation into the company to determine whether QuadrigaCX’s customers were potential victims of a financial crime. The FBI has asked the customers whether they provided identifying information when opening accounts and whether the transfers were done using financial institutions that are based in the United States.

U.S. Senate Confirms New CFTC Chair

Heath Tarbert has been chosen as the new chairman of the Commodity Futures Trading Commission (“CFTC”). The CFTC is responsible for the regulation of commodities and futures, including digital assets. The current chairman, J. Christopher Giancarlo, has been celebrated by many in the crypto world for his guidance of the CFTC to what many see as more crypto-friendly regulations, including the approval of two bitcoin futures contracts.

Dueling Bitcoin White Paper Copyright Registrations

In April 2019, Craig Wright, an entrepreneur in Australia, filed two copyright registrations claiming authorship over Satoshi Nakamoto’s white paper and Bitcoin source code. Satoshi Nakamoto is believed to be a pseudonym for the creator or creators of Bitcoin. On May 24, 2019, Wei Liu, a Chinese entrepreneur living in America, filed another copyright registration, claiming that he authored the white paper. He stated days later that he filed the copyright registration to illustrate that anyone can register a copyright. The filing appears to be an attempt to push back against viewing a copyright filing as evidence of true authorship. The original Bitcoin source code was released under the open source MIT License, allowing anyone the legal right to “use, copy, modify, merge, publish, distribute, sublicense, and/or sell copies” of the software. Consequently, a successful copyright infringement claim relating to the use of the Bitcoin source code would be unlikely to occur.

International Developments

CBE to Ban Issuance of Cryptocurrency Without Licenses

A proposed new law for the Central Bank of Egypt (“CBE”) would prohibit the creation, promotion, or operation of platforms that issue or exchange cryptocurrency without obtaining required licenses. The bill, currently in draft form, would allow the Board of the CBE to promulgate rules governing the trading and dealing of cryptocurrency.

Vancouver Considering a Ban on Crypto ATMs

Vancouver, Canada is considering various control measures for crypto ATMs, including a possible ban, due to money laundering concerns. Earlier this year, its city council suggested enacting regulations, including requiring a license and certain disclosures on the machines. Vancouver’s mayor has gone even further, pushing for a ban on all crypto ATMs. Supporters argue that the machines are convenient and necessary for people who have transaction limits at their bank accounts. City staff are currently researching the issue and plan to report their findings by the end of the year.

Proposed Indian Law Would Create Long Sentences for Involvement with Crypto

A panel led by India’s Economic Affairs Secretary has drafted a bill that would severely penalize anyone holding, selling or dealing in cryptocurrencies in the country. The bill proposes a 10-year prison sentence without the possibility of bail for individuals who “mine, generate, hold, sell, transfer, dispose of, issue or deal in cryptocurrencies.” The Reserve Bank of India has denied knowledge of the proposed ban, stating that it has not been in communication with other governmental officials regarding the bill, nor has it seen a copy of the bill.

India currently bans financial institutions from offering services to people or entities transacting with cryptocurrencies. The draft bill also mentions a possible state-sponsored cryptocurrency, the Digital Rupee, which would be exempt from the proposed law.