U.S. Developments

Veritaseum Founder Provides Response to Asset Freeze Order

Responding to an emergency application filed by the Securities and Exchange Commission, Judge LaShann DeArcy Hall of the United States District Court for the Eastern District of New York issued an order on August 12, 2019, freezing Veritaseum accounts and digital assets and ordering founder Reggie Middleton to provide a response to the SEC’s allegations. On the day of the filing, defense counsel asked for permission to file a response prior to a ruling being issued. The Court ruled the same day. On August 19, Mr. Middleton filed a response with the court defending against the SEC’s claims of securities fraud stating among other things that the SEC did not have any evidence that he was attempting to hide company funds by transferring digital assets from one account to another, which Mr. Middleton claimed was done to fund Veritaseum operations.

The filing was shared with the public later that night, through a Twitter post on Reggie Middleton’s Twitter account. The 423-page document includes a large volume of email and other written communications wherein Mr. Middleton told purchasers of Veritaseum that the purchase of the Veritaseum token was not an investment. The filing ends with approximately 15 declarations made by private individuals regarding their reasons for purchasing the Veritaseum token.

SEC Announces Settlement with ICO Ratings

An unincorporated organization doing business as ICO Ratings settled charges with the SEC on August 20 related to the content provided on its website between December 2017 and July 2018. The SEC alleged that ICO Ratings marketed itself as a rating agency which provided independent research but did not disclose payments it received from issuers during that time. In connection with the settlement, ICO Ratings consented to the entry of the SEC’s order to cease and desist committing or causing any violations and future violations of Section 17(b) of the Securities Act, and pay disgorgement, interest, and penalties of approximately $270,000.

OFAC Adds Crypto Addresses to Blacklist

For the second time, the U.S. Treasury Department’s Office of Foreign Assets (“OFAC”) announced sanctions against suspected Chinese narcotic traffickers, including adding a number of crypto wallet addresses to its blacklist allegedly belonging to them. Last year, OFAC blacklisted crypto wallet addresses allegedly belonging to two Iranian nationals.

OFAC alleges that the Chinese nationals ran “an international drug trafficking operation that manufactures and sells lethal narcotics, directly contributing to the crisis of opioid addiction, overdoses, and death in the United States.” The addresses include a number of bitcoin addresses and a litecoin address.


State Developments

NYDFS Grants Charter to Bakkt Authorizing Futures Custodian

Following Bakkt’s “self-certification” for its bitcoin futures contracts through the CFTC in May, on August 17, Bakkt announced that the New York Department of Financial Services has granted a trust charter for the Bakkt Warehouse, a bitcoin custodian that forms a critical part of the Bakkt futures contract operations. The New York-charted trust company will be authorized to act as a qualified custodian for bitcoin that support their futures contracts. ICE Futures U.S. will provide the exchange services.

New York City Bar Association Outlines Rule on Fees Paid in Crypto

On July 11, the Association of the Bar of the City of New York’s Committee on Professional Ethics issued a formal opinion addressing legal fees paid in cryptocurrency. The opinion concludes that if the form of payment is required under the terms of the agreement, the transaction is a “business transaction” that may represent a conflict of interest subject to Rule 1.8(a) of the New York Rules of Professional Conduct. The rule imposes certain disclosure requirements on such transactions and requires that the client be advised to seek independent counsel and provide written consent to the essential terms of the transaction. The document does not distinguish between different cryptocurrencies in determining that the transaction is a “business transaction” but rather points to the volatility of cryptocurrency prices as the source of the issue.

Although this opinion is not binding, it is likely to be adopted as a standard in New York and other states.


International Developments

Reserve Bank of India Has Two Weeks to Justify Ban

Reports suggest that a hearing on August 21 before the Supreme Court of India marked a turning point in the fate of cryptocurrency in that country. Last year, the Reserve Bank of India barred transactions between Indian banks and cryptocurrency exchanges. As a practical matter, this greatly restricts the ability for Indians to transact in cryptocurrency.

Many cases were filed challenging the ban, which have been consolidated by the Supreme Court of India into Internet and Mobile Association of India v. Reserve Bank of India. Local cryptocurrency legal news tracker Crypto Kanoon reported that counsel for the central bank, Senior Advocate Shyam Divan, cited reports issued by the Financial Action Task Force and a European Union directive in support of the position. Divan was pressured to respond to specific representations by cryptocurrency exchanges that regulation could remove the need for a ban. At the conclusion of the hearing, India Supreme Court issued an order requiring the Reserve Bank of India to provide itemized responses to the representations provided by the exchanges.

The case was deferred for two weeks to allow the Reserve Bank of India to respond, and a new hearing is expected to occur on September 25. Last month, the Secretary of Economic Affairs Subhash Chandra Garg was abruptly reassigned after publishing a draft bill to ban cryptocurrencies and instate an official digital currency in India, though sources say the two events were not related.