U.S. Federal Regulatory Developments
SEC Staff Holds FinTech Forum to Discuss Blockchain Technology and Digital Assets
On May 31, 2019, the staff of the U.S. Securities and Exchange Commission (“SEC”) held a FinTech Forum to discuss distributed ledger technology and digital assets. It was hosted by the SEC’s Strategic Hub for Innovation and Financial Technology. The FinTech Forum’s agenda and its speakers can be found here.
Members of Congress Write a Letter to the National Economic Council in Favor of Blockchain Technology
On May 24, 2019, seven bipartisan members of the U.S. House of Representatives sent a letter to Lawrence Kudlow, the Director of the National Economic Council (“NEC”), urging the Administration, through the NEC, to hold a forum on blockchain technology. Citing the President’s most recent State of the Union Address, the letter asks that blockchain technology be included in the Administration’s initiatives to promote emerging technology. It also argues that while government agencies are already using blockchain technology in operations, more can be done to support the adoption and development of technology in the United States. The letter suggests that the NEC host a forum including policymakers, the private sector, and academia to help promote technology innovations and identify how to appropriately update laws and regulations.
Please click here for the letter.
SEC Commissioner Peirce Remarks on Possibility for a Cryptocurrency-Related Exchange-Traded Product
On May 21, 2019, SEC Commissioner Hester M. Peirce spoke on exchange-traded products (“ETPs”), including exchange-traded funds (“ETFs”), at the ETFs Global Markets Roundtable. In her speech, she voiced concern that the SEC may be engaging in merit regulation through its cautious approval or rejection of various types of ETPs, including cryptocurrency-related ETPs. Commissioner Peirce said she believes that the SEC’s fund regulatory system is designed to require extensive disclosure and then let investors and markets use the information to make their own informed choices about where to invest and which types of products are desired. Specifically, with regard to cryptocurrency-related ETPs, Commissioner Peirce argued that the SEC should focus on how the exchange-traded wrapper would work for cryptocurrency-related assets, including the impact of increased institutional participation in the market, rather than on the merits of cryptocurrencies like Bitcoin as an investment. She also pointed out that while approving a cryptocurrency-related ETP would provide a regulated space for investors, who may seek less regulated means of investment in cryptocurrency-related assets even without such a product, the SEC’s approval of an ETP is not a seal of approval and that investors would still assess the investment opportunity as they do for other funds.
Please click here for Commissioner Peirce’s remarks.
U.S. State Regulatory Developments
Montana Enacts Legislation to Exempt Certain Utility Tokens from the Montana Securities Laws
On May 8, 2019, the Governor of Montana signed HB 584 into law, thereby enacting a new exemption to the Montana security laws for “utility tokens.” HB 584 defines “utility token” as a token that meets a number of elements, including that the token’s purpose is primarily consumptive and that the issuer markets the token for its consumptive purpose as opposed to a speculative investment. Under HB 584, a utility token meeting the bill’s requirements would be exempt from key provisions of the Montana securities laws, including the registration requirement. Instead, an issuer would file a notice of intent to sell utility tokens with the Montana securities commissioner. HB 584 also allows the Montana securities commissioner to enter into agreements with other jurisdictions to allow for exempt transactions in utility tokens that occur inside or outside of Montana. HB 584 goes into effect on July 1, 2019, and sunsets on September 30, 2023.
Please click here for the text of the legislation.
New York Court Orders the NYAG to Show Cause Related to Its Request for Documents in a Case Against iFinex and Tether Limited
As we have discussed in our Week-in-Review reports for the Week of April 22-26, 2019, Week of April 29 – May 3, 2019, and Week of May 6-10, 2019, the New York Attorney General (“NYAG”) has been engaged in ongoing litigation with iFinex Inc., operator of the Bitfinex trading platform, and Tether Limited, issuer of the “tether” virtual currency. In the latest development, Justice Joel M. Cohen of the Supreme Court of New York issued an Order to Show Cause on May 21, 2019, which set a hearing for July 29, 2019, on the application of iFinex Inc. and Tether Limited to stay production of documents pursuant to a previously issued order obtained by the NYAG on April 24, 2019, pending considering of a motion to dismiss by iFinex Inc. and Tether Limited. Pending the July 29 hearing, Justice Cohen’s May 21 order stays production of documents except for topics relevant to determining whether iFinex Inc. and Tether Limited are subject to jurisdiction in New York.
Please click here for the court’s order.
Kik Announces Legal Defense Fund to Help Fund Defense Against Potential SEC Enforcement Action
On May 28, 2019, Kik Interactive (“Kik”) announced that it had created a legal defense fund to pay its legal bills incurred in fighting the SEC over its 2017 $100 million “Kin” token offering. As we have previously mentioned, in January 2019, Kik publicly released the SEC Wells Notice it received in November 2018, as well as Kik’s response. A “Wells Notice” is a communication of a preliminary determination by the SEC Enforcement Staff to recommend an enforcement action or administrative proceeding against the recipient. In its response to the Wells Notice, Kik said it did not plan to settle and expected to litigate with the SEC to conclusion. To fund its legal battle, Kik said that it has set aside $5 million for legal fees, and it is enlisting the help of those who would like to contribute additional funds in the event that the $5 million is not sufficient. As of May 29, 2019, Kik had raised approximately $5.2 million for its legal defense fund.
Please click here for the defense fund’s website.
Australian Securities and Investment Commission Issues Updated Guidance on ICOs and Cryptocurrencies
In May 2019, the Australian Securities and Investment Commission (“ASIC”) issued updated guidance on initial coin offerings (“ICOs”) and crypto-assets. The guidance is limited to issues under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 and is predicated on an ICO or crypto-asset being deemed a “financial product.” The questions it touches upon under these two laws include “what should you consider when offering crypto-assets through an ICO?,” “what is misleading or deceptive conduct in relation to an ICO or crypto-asset?,” “when could an ICO be or involve a financial product?,” “when could a crypto-asset trading platform become a financial market?,” “what about financial products that reference crypto-assets?,” and “how do overseas categorisations of crypto-assets translate to the Australian context?” The guidance also provides reminders to different types of crypto-asset participants as to what, depending on the relevant facts and circumstances, their respective licensing responsibilities may be under the applicable Australian laws.
Please click here for ASIC’s guidance.
South Korean Regulators Reportedly Hold an Emergency Meeting Regarding Virtual Currencies
According to a report by CoinDesk Korea, several South Korean government agencies convened for an emergency meeting on May 28, 2019, to discuss the risks to investors from the recent price increases for cryptocurrencies. The participants reportedly included the Ministry of Economy and Finance, the Ministry of Justice, and the Financial Supervisory Commission. The CoinDesk report also included quotes from a statement by Noh Hyeong-ouk, minister for the Office for Government Policy Coordination. According to CoinDesk, Mr. Hyeong-ouk said that the South Korean government is closely monitoring the market situation for virtual currencies and will “actively respond to the risk of investor damage.” Mr. Hyeong-ouk also reportedly advocated for the passage of an amendment to the Specific Financial Information Act to enhance money laundering protections.
Please click here for the CoinDesk report.
A Draft Law by the Egypt Central Bank Would Allow for Licensed Crypto-Related Activities
According to a report in the Egypt Independent on May 28, 2019, a new legislative proposal in Egypt would, among other things, require licensure from the Central Bank of Egypt (“CBE”) to lawfully create, promote, or operate platforms for issuing or trading cryptocurrencies. In addition, the report states that the proposal would give the Board of Directors of the CBE the ability to issue rules to govern the trading and dealing of cryptocurrencies.
Please click here for a news report on Egypt’s draft law.
India Proposes Framework for a New FinTech Sandbox
On May 20, 2019, the Securities and Exchange Board of India (“SEBI”) proposed a framework for a FinTech “innovation sandbox.” The proposed sandbox would allow Indian companies or individuals to apply for the program and gain access to historical datasets that they could then use to develop new FinTech products. The historical market-related data would include information from stock exchanges, depositories, and transfer agents.
The SEBI proposal can be found here.
German Financial Regulator Issues Guidance of Tokenization and Issues Its First Approval of a Securities Prospectus for a Security Token
On May 20, 2019, the Federal Financial Supervisory Authority of Germany (“BaFin”) published new guidance on “tokenisation.” The guidance provides a summary of the German securities laws and what may qualify as a “capital investment,” which is regulated under one regime, and as a “security,” which is regulated under another. The guidance also provides explanations of how tokens may be treated under the applicable German laws depending on the tokens’ characteristics, including mutability. Finally, the guidance, through an announcement, provides an example of how the novelty of tokens are affecting German regulation of financial products by announcing that BaFin had approved its first securities prospectus for a security token. BaFin explained that in January 2019, it had initially approved the prospectus when the product was designed as a registered bond (i.e., a capital investment), which would have placed the product under the German capital investment legal regime. However, because of the elements of blockchain technology, BaFin determined that a capital investment tokenized in that way had to be classified as a security under the German securities legal regime, and therefore it required that the issuer register its prospectus under the German securities law.
Please click here for BaFin’s guidance. BaFin did not mention the name of the security token it approved; however, click here for the Bitbond Securities Prospectus, which describes itself as “Germany’s first security token.”