U.S. Developments

Mark Zuckerberg Testifies Before U.S. House of Representatives Regarding Libra

On October 23, Facebook, Inc. CEO, Mark Zuckerberg, testified before the House Committee on Financial Services regarding Facebook’s efforts to launch Libra, a blockchain-based payments system.  Mr. Zuckerberg’s testimony described Libra as a tool for financial inclusion, which would also comply with relevant U.S. regulatory requirements.

Early in his testimony, Mr. Zuckerberg promised that Libra would not launch anywhere in the world until it had received approval from regulators in the United States.  Later, he asserted that Facebook would be willing to quit the Libra project if the product launched prior to receiving regulatory approval.  Mr. Zuckerberg also addressed concerns related to consumer protection over the financial information generated via the Libra network.  He said that Facebook was in the process of building compliance systems for the Calibra wallet application.  He also noted that Facebook was building out strong consumer protections, customer support, and password recovery services designed to ensure that Libra met or exceeded consumer protection standards.

At several points during his testimony, Mr. Zuckerberg emphasized the threat posed by China’s government-supported stablecoin project.  Mr. Zuckerberg said that the United States would be relinquishing its influence online—particularly regarding online payments—if China’s stablecoin becomes widely adopted.  He emphasized that unlike the Chinese stablecoin, Libra would be collateralized primarily by U.S. dollars.

Please click here for the opening statement.

Draft Bills for Stablecoins Proposed in House Committee

On October 22, Representative Sylvia Garcia (D-Texas) introduced draft legislation entitled “Stablecoins are Securities Act of 2019” to the U.S. House Committee on Financial Services that seeks to regulate stablecoins under the Securities Act of 1933 (Securities Act).  The draft legislation was introduced jointly with another draft bill sponsored by Representative Michael San Nicolas (D-Guam), which would bar national security exchanges, regulated under the Securities Exchange Act of 1934 (Exchange Act), from listing any security of an issuer if the issuer or an executive affiliated with the issuer buys, sells or manages a stablecoin.

Rep. Garcia’s proposed bill describes stablecoins as investment contracts—and therefore securities—under the meaning provided in Section 2(a) of the Securities Act (15 U.S.C. § 77b(a)).  The bill also revises various other securities laws (including the Investment Company Act of 1940, and the Investment Advisers Act of 1940) to cross-reference the Securities Act definition of a stablecoin.  Rep. Nicolas’ proposed bill would require the U.S. Securities and Exchange Commission (SEC) to direct national securities exchanges to prohibit the listing of a security if the issuer, a director of the issuer, or an executive of the issuer bought or sold, or received compensation in the form of a managed stablecoin.

These bills were introduced the day before Facebook’s Mark Zuckerberg was scheduled to testify before the U.S. House Committee on Financial Services to answer questions about Facebook’s efforts to launch the blockchain-based payments system and stablecoin, Libra. See above story.

Please click here to read Rep. Garcia’s bill and here for Rep. Nicolas’ bill.

Bitfinex Files Discovery Request Related to $880 Million Loss

iFinex Inc., the parent company of cryptocurrency exchange Bitfinex, filed an application in the U.S. District Court for the Central District of California requesting to conduct discovery seeking to obtain documents and testimony from a California resident related to foreign proceedings in Poland, Portugal and the United Kingdom.  The application relates to $880 million in customer assets held by Bitfinex, which went missing in late 2018 allegedly as a result of Global Trade Solutions AG (also known as “Crypto Capital”), one of Bitfinex’s payment processors.

The application is based on a special provision of the United States Code, 28 U.S.C. 1782, that allows U.S. courts to assist with non-U.S. litigation.  Bitfinex believes that funds withheld by Crypto Capital may be in frozen bank accounts located in Poland, Portugal, the United Kingdom and the United States.  Bitfinex is seeking testimony and documents from a California resident concerning the location of $304 million of the frozen funds.  The application also describes the relationship between Bitfinex and Crypto Capital and the extent of Crypto Capital’s payment processing activities.  Specifically, from early 2017 through late 2018, Bitfinex customers transferred more than $1.5 billion to various bank accounts held or controlled by Crypto Capital in several countries, including bank accounts with U.S. banks.

This filing is unrelated to the New York Attorney General (NYAG) complaint against Bitfinex and affiliated companies that was filed in April 2019.  In the April complaint, the NYAG alleged that Bitfinex had covered-up the loss of nearly $1 billion in customer and corporate funds through its affiliated stablecoin operator, Tether.  Recently, Bitfinex successfully secured a temporary stay over document requests related to the NYAG inquiry, but the NYAG investigation remains ongoing.

Please click here for the discovery application.

CFTC Commissioner Indicates Ether Derivatives Are Likely in the Future

At a fireside chat on October 21, Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert stated that he believes that Ether futures contracts could be trading within the next year.  Chairman Tarbert’s statements come shortly after his announcement that the CFTC viewed Ether as a commodity and would be willing to approve certain Ether-based derivatives contracts in the future.

On the topic of digital asset securities, Chairman Tarbert said that he believes a digital asset could be sold as a security and then subsequently become a commodity.  He tempered his statement, however, by emphasizing that it was ultimately the sole purview of the U.S. Securities Exchange Commission to decide whether a digital asset is or is not a security.

Please click here for a news article regarding Chairman Tarbert’s statement.

New Bitcoin ETF Proposal Filed With SEC

On October 15, Kryptoin Investment Advisors filed an application for a new Bitcoin Exchange Traded Fund (ETF) with the Securities and Exchange Commission (SEC).  According to its SEC filing (on Form S-1, as an emerging growth company), the Kryptoin Bitcoin ETF Trust will invest in bitcoin, and is designed for investors seeking “exposure to bitcoin at a price that is reflective of the actual bitcoin market where investors can purchase and sell Bitcoin, less the expenses of the Trust’s operations.”  The Trust will hold bitcoin, but it will not buy and sell bitcoin, and only accepts subscriptions and redemptions from authorized participants in bitcoin.  The Trust will also accrue its management fee in bitcoin.  The shares will have a daily net asset value (NAV) based on the Chicago Mercantile Exchange Bitcoin Reference Rate.

In addition to its daily NAV, the Trust will also use the CME CF Bitcoin Reference Rate to calculate an intraday indicative value.  The CME CF Bitcoin Reference Rate is based on equally-weighted average of volume-weighted transactions from five constituent platforms.  The Trust’s bitcoin will be held by a third-party custodian, and the Trust will be insured against loss or theft.  As with some privately offered products, this product essentially securitizes bitcoin, and is structured as a passive “buy and hold” fund.  The filing does not disclose a trading or other investment strategy.

Please click here for the SEC filing.

International Developments

G7 Working Group Publishes Report on Stablecoins

On October 18, the G7 Working Group on Stablecoins issued its first report entitled “Investigating the Impact of Global Stablecoins” (Report).  The Report, among other things, describes the current state of stablecoins, their use internationally, and proposes various regulatory approaches for countries dealing with the benefits and drawbacks of stablecoins in commerce.

The Report summarizes the variety of stablecoins in the market and some of their commonalities.  In general, most stablecoins seek to stabilize the price of a digital asset by linking its value to that of a pool of other less-volatile assets.  The Report identifies the stablecoins that have achieved global adoption (GSCs).  Regardless of the form, the Report emphasizes that no GSC should be allowed to operate until the legal regulatory and oversight challenges posed by stablecoin technology have been addressed.

The Report highlights as key risks the risks to monetary policy, financial stability and the international monetary system itself.  The Report also identifies the risk of money laundering as an area of particular regulatory concern.  The Report notes that without proper safeguards, a GSC could render current efforts to combat cross-jurisdictional money laundering and terrorist financing ineffective.

Beyond identifying the risks posed by stablecoins, the Report also discusses the technology’s potential for increasing the efficiency and inclusiveness of financial services and payments.  According to the Report, stablecoins could replace or replicate the role of transaction accounts at financial institutions and serve as a stepping stone towards other financial products.

The Report includes a series of recommendations for participating countries, for example, enacting new regulations domestically to specifically address and clarify the regulatory requirements for stablecoin operators.  The Report also emphasizes the need for countries to establish effective cross-border and cross-agency enforcement mechanisms to combat the risk of regulatory arbitrage.

Please click here for the full Report.

Xi Jinping Emphasizes Blockchain Innovation

On October 25, Xi Jinping, General Secretary of the Communist Party of China, spoke before the Political Bureau of the Central Committee of the Communist Party of China regarding the importance of blockchain technology and his desire to accelerate the development of blockchain technology within China.  This speech was the first time that President Xi Jinping expressed his views regarding blockchain technology.

In his speech, President Xi Jinping stressed the need for more guidance and regulation of blockchain technology from the central government.  He also stated that he wished to see an integration of blockchain technology with the broader economy in financing loans for small and medium-sized enterprises, optimizing business processes, and promoting data sharing among businesses.  Despite the overall positive tenor of the speech, no specific legislative initiatives were outlined, and China’s ban of cryptocurrencies remains in effect within the country.

Please click here for a direct summary of the speech in Chinese and here for a U.S. news report.

Canadian Financial Regulator Green Lights Security Token Trading

On October 24, the Ontario Securities Commission (OSC), the largest securities regulator for Canada, approved a pilot program for a security token launch platform called TokenGX to offer security tokens on the Ethereum blockchain within the OSC’s regulatory sandbox.

In support of the pilot program the OSC stated that to facilitate innovation, the environment must be conducive to commercial tests of novel business models, products and services.  The TokenGX platform will have several limitations, including strict customer onboarding and compliance procedures and quarterly reporting to the OSC.  The OSC granted TokenGX a one-year window to operate in the sandbox ending one year from the first security token sale or April 16, 2021, whichever is sooner.

Please click here for the OSC decision.