U.S. Developments

Regulatory Developments

Commissioner Hester Peirce Speaks Before the SUSS Convergence Forum: Inclusive Blockchain Finance, and Emerging Technologies

On August 1, 2019, Securities and Exchange Commission (“SEC”) Commissioner Hester Peirce gave a speech before the Singapore University of Social Sciences Convergence Forum: Inclusive Blockchain, Finance, and Emerging Technologies. In her remarks, she discussed the challenge U.S. regulators are facing in trying to address the cross-border trading of digital assets. She emphasized that this problem is not unique and raises the same concerns as other cross-border asset trading—“the fear that we [the U.S. Government] will not be able to examine foreign entities registered to operate in our markets and, more generally, that our [the SEC’s] ability to enforce domestic rules will be stymied by our [the SEC’s] inability to regulate outside our borders.” However, she also stated that due to the current diverse landscape of jurisdictional specific regulation combined with the many different use cases for digital assets (and therein legal considerations), these concerns are exacerbated.

The Commissioner discussed various countries and the specific types of regulations they have imposed and lessons that can be extrapolated. This led her to discuss her desire for the SEC to develop a new regulatory regime (as opposed to adapting the current regime) for dealing with the sale and trading of digital assets. Commissioner Peirce suggested that an attractive solution would be to create a new, non-exclusive, safe harbor that would be designed to specifically address the digital asset market and require specific disclosures and restrictions that are applicable to digital assets.

CFTC Clarifies LedgerX Status for Offering Bitcoin Futures

The U.S. Commodity Futures Trading Commission (“CFTC”) has clarified that LedgerX has not yet received all of the CFTC approvals necessary to list Bitcoin futures contracts. Although LedgerX has been approved as a designated contract market, the CFTC has not approved the amendment to LedgerX’s derivatives clearing organization (“DCO”) Order that would allow LedgerX to provide clearing for futures contracts, which is a necessary component to offering futures. LedgerX has been registered with the CFTC as a swap execution facility and DCO since 2017.

Legislative Developments

Senate Committee Cryptocurrency Hearing

On July 30, 2019, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on cryptocurrency regulation. Chairman Michael D. Crapo commented that blockchain technology is inevitable, cannot be completely stopped even through a universal ban, and has the potential to be highly beneficial. Other than the Chairman, only one other Republican member attended the hearing. The hearing was attended by a number of Democratic senators.

The experts invited to speak were Circle CEO Jeremy Allaire, representing the Blockchain Association; Rebecca Nelson, a member of the Congressional Research Service specializing in international trade and finance; and Mehrsa Baradaran, a law professor at the University of California, Irvine School of Law. Of the speakers, Professor Baradaran expressed the most negative outlook on cryptocurrencies, stating that Blockchain technology will not be successful in solving the key problems that it is often promised to solve, such as “banking the unbanked”—which she identified as a policy issue, not a technology problem. By contrast, Mr. Allaire expressed a more positive outlook on the future of the technology and called on regulators to establish a new asset class for digital assets outside of the current regulatory frameworks.

Litigation Developments

Tucker v. Chase Bank USA, N.A. (18 Civ. 3155 (KPF))

On August 1, 2019, the United States District Court for the Southern District of New York released a decision on the case, which analyzed the question of whether cryptocurrency constitutes currency in regard to a credit card agreement between Plaintiffs Brady Tucker et al. and Defendant Chase Bank USA, N.A.

The Plaintiffs sued the Defendant for treating purchases of cryptocurrencies from a credit card inconsistently, first as “cash advances” (which are charged at a higher rate) and then later as “purchases.” The court described cryptocurrencies as “not legal tender, do not represent a claim on legal tender, are not accepted as currency by the government, and are not accepted as payment by the overwhelming majority of private business and individuals. Although certain types of cryptocurrency may be used as currency, cryptocurrencies are fundamentally private-sector technologies, computer codes, and software applications” (pages 2-3).

Although the case was decided on other grounds, the Court did hold that the question of whether cryptocurrency is “currency-like” is not clear prima facie and the credit card contract did not “clearly reveal to an average consumer that acquisitions of cryptocurrency are cash-like transactions…” (page 16).

Bitfinex and the New York Attorney General—Injunction Extended

On July 29, in another chapter to the ongoing legal battle between iFinex (the company behind Tether and Bitfinex) and the New York State Department of Justice, Justice Joel M. Cohen of the New York Supreme Court has extended the New York Attorney General’s preliminary injunction for an additional 90 days.

In late April, the New York Attorney General obtained a court order that enjoined iFinex and its subsidiaries from operating in the state in connection with activities that allegedly defraud New York investors and traders of cryptocurrencies. In this recent move, Justice Cohen has allowed the injunction to continue to provide for additional time for the court to consider iFinex’s motion to dismiss based on the claim that iFinex does not operate in the State of New York and for the New York Attorney General’s office to further investigate the underlying charges of defrauding New York investors.

Industry Developments

Overstock.com to Pay Dividends in Digital Shares

On June 30, 2019, the publicly traded online retailer Overstock.com announced that it will be declaring a dividend of its Digital Voting Series A-1 Preferred Stock (Series A-1). According to the official release, “The Dividend will be payable at a ratio of 1:10, meaning that one share of Series A-1 will be issued for every ten shares of common stock, Series A-1 or Voting Series B Preferred Stock held by all holders of such shares as of the record date.” The digital security is currently being traded by accredited investors on the PRO Securities alternative trading system, which is run off of software that was developed by tZERO Group, Inc., a majority-owned subsidiary of Overstock.com.

International Developments

U.K. Financial Conduct Authority Releases Crypto Asset Guidance

The U.K. Financial Conduct Authority (“FCA”) has finalized and published a comprehensive policy statement that lays out guidance, including a reframed taxonomy of cryptoassets, to assist market participants in understanding whether cryptoassets are regulated by the FCA or whether they are outside their regulatory perimeter. The finalized guidance distinguishes cryptoassets as (1) security tokens, (2) e-money tokens, or (3) unregulated tokens.

A security token is described as a token that provides rights and obligations akin to “specified investments” (as defined in the Regulated Activities Order (“RAO”), including those that are financial instruments under the second Markets in Financial Instruments Directive), and explicitly excludes “e-money tokens.” For example, security tokens are likely to have characteristics that mean they are the same as or akin to traditional instruments like shares, debentures, or units in a collective investment scheme. Security tokens are subject to the FCA’s oversight under the RAO, pursuant to the Financial Services and Markets Act of 2000.

E-money tokens are cryptoassets that meet the definition of “e-money” under the E-Money Regulations 2011 (“EMRs”), namely, cryptoassets that represent “(i) electronically stored monetary value that represents a claim on the issuer, (ii) issued on receipt of funds for the purpose of making payment transactions, (iii) accepted by a person other than the issuer, and (iv) not excluded under regulation three of the EMRs.” E-money tokens are subject to the FCA’s oversight under the EMRs (and potentially other legislation).

The final category of unregulated tokens are all other tokenized cryptoassets that do not meet the definition of a security token or an e-money token. These cryptoassets, as the name implies, fall outside the FCA’s regulatory perimeter. This unregulated category potentially includes cryptoassets colloquially referred to as “utility tokens” and “exchange tokens,” provided that they do not otherwise meet the definition of a security token or e-money token. The guidance also addresses “stablecoins” (i.e., cryptoassets that attempt to stabilize volatility), noting that such stablecoins cannot be readily categorized and require a case-by-case analysis to determine their category.

Brazil Tax Authority

As of August 1, 2019, the Brazilian tax authority (The Department of Federal Revenue of Brazil, or “RFB”) has begun requiring that all transactions involving cryptocurrencies must now be reported. As set forward in Normative Instruction RFB 1,888 / 2019, failure to make such filings can result in fine of 100 to 500 Brazilian Reals ($25 to $130) or from 1.5% to 3% of the amount of the unreported transaction. These reporting obligations apply not only to individual traders, but also to companies and brokers. The transaction types to which this reporting applies specifically include sales, purchases, donations, barters, deposits, and withdrawals.