U.S. Developments


House Passes Bill to Review How Blockchain Technology Can Improve FinCEN

The U.S. House of Representatives passed a bill sponsored by Anthony Gonzalez (R-OH) that requires the Director of the Financial Crimes Enforcement Network (“FinCEN”) to carry out a study on the status of implementation and internal use of blockchain and other emerging and innovative technologies to determine whether they can be leveraged to make FinCEN’s data analysis more efficient and effective, including ways to improve the dissemination of information it collects and stores to better support its investigations.

Representative Gonzalez stated that his “bill makes sure that we are using the best technology we have available to find and stop the money laundering that makes all these crimes not only possible, but financially profitable for cartels, traffickers, and terrorists.” The bill now resides with the U.S. Senate for consideration.

House Financial Services Committee Holds Hearing regarding Oversight of the SEC

The U.S. House of Representatives Committee on Financial Services held a hearing on September 24, 2019 relating to digital assets titled “Oversight of the Securities and Exchange Commission [SEC]: Wall Street’s Cop on the Beat.” As part of the hearing, the SEC delivered testimony that largely covered its mission, strategic plan, current initiatives and regulatory and policy agenda. It was the first time since 2007 that all five Commissioners testified before the Committee. The three-plus hour hearing can be viewed here.


FinCEN Director Speaks at FedID Forum and Exposition

Kenneth A. Blanco, Director of the Financial Crimes Enforcement Network (“FinCEN”) delivered prepared remarks at the 2019 Federal Identity (FedID) Forum and Exposition in Florida. Therein, Director Blanco discussed how illicit actors leverage identity to commit criminal acts and how FinCEN uses identity to protect national security. Director Blanco wants the private sector to work with the government to better utilize the huge troves of data maintained by companies like data brokers to help law enforcement “understand someone’s risk profile for being involved in illicit activity or other threats.” He also detailed and warned against vulnerabilities to criminal schemes such as account takeovers and business email compromise fraud that target financial institutions and their customers.

Director Blanco closed his remarks by discussing emerging technologies related to identity, and how such technology could strengthen law enforcement efforts. He noted that FinCEN strongly supports responsible innovation related to digital identity solutions in the financial sector, and that recent FinCEN Innovation Hours have provided FinCEN with opportunities to learn about these developments.

Former CFTC Chairman Now Part of The Chamber of Digital Commerce Board

The Chamber of Digital Commerce announced that former chairman of the U.S. Commodity Futures Trading Commission (“CFTC”), J. Christopher Giancarlo has joined its Board of Advisors. Perianne Boring, founder and president of The Chamber of Digital Commerce said, “Chris Giancarlo brings substantial knowledge and a shared commitment towards blockchain innovation to our Board of Advisors. His regulatory, legal, and financial markets expertise, coupled with his insightful approach toward encouraging advancements in technology, will be invaluable to the Chamber and our members as we continue to grow the blockchain ecosystem.”

Upon announcement, Giancarlo released the following statement: “The Chamber is at the epicenter of this emerging field of technology that can only be described as a movement. I’m looking forward to joining this group of Advisory Board leaders, from many fields and areas of expertise, whom are already working to promote the adoption of this transformative technology. It is my hope that together we can streamline and modernize the regulatory environment and encourage further blockchain innovation.”

According to their website, The Chamber of Digital Commerce is the world’s first and largest trade organization for the blockchain and digital asset community.

Kik to Shut Down Its Messaging Service; Kin Foundation to Continue On

Ted Livingston, CEO of Kik Interactive, announced that its ongoing dispute with the U.S. Securities Exchange Commission (“SEC”) has forced the team to refocus its resources. The new approach includes shutting down the Kik app, reducing headcount to “an elite 19 person team,” and converting Kin users into Kin buyers. Kik’s dispute with the SEC relates to its $100 million 2017 initial coin offering of the Kin token.

Mr. Livingston stated that moving forward, the team will focus on getting millions of people to buy Kin and to use it. He highlighted a three part strategy: (1) Enabling the Kin blockchain to support a billion consumers making a dozen transactions per day with less than 1 second confirmation times; (2) accelerating the adoption, growth and success of all developers in the Kin ecosystem; and (3) building a mobile wallet that makes it easy to buy Kin, exciting to use Kin and seamless to explore the Kin ecosystem.

SoFi’s Crypto Trading Platform Is Live

SoFi has entered the crypto trading market this week by launching its crypto trading platform. SoFi’s platform enables trading in Bitcoin, Ethereum and Litecoin. However, the platform is not available in certain states, including New York, at this time. SoFi has engaged Coinbase to provide crypto liquidity and to enable SoFi’s customers with the ability to track related price movements.

According to their website, SoFi charges a 1.25% markup on crypto transactions and offers a bonus for first-time qualifying purchasers.

Blockchain-based ID firm, Evernym, Receives Investment from Medici Ventures

An Overstock subsidiary, Medici Ventures, invested $2 million in Evernym, a blockchain-based identity firm. Evernym received the funding pursuant to a Simple Agreement for Future Equity. According to Jonathan Johnson, Overstock CEO and President of Medici Ventures, “Evernym is bridging the gap between the siloed approach to identity and true self-sovereign identity. Evernym’s platform allows every person, organization, and connected thing to have an independent identity … and will help advance our government-as-a-service technology stack for civilization.”

Evernym is led by its president, Steve Havas, and has had its service used by over 40 proof-of-concept or pilot projects to date.


SEC Charges the CEO of Fantasy Market with Orchestrating a Fraudulent ICO

The U.S. Securities Exchange Commission (“SEC”) has charged the founder and CEO of Fantasy Market, Jonathan Lucas, with operating a fraudulent initial coin offering (“ICO”) scheme. The SEC complaint alleged that Mr. Lucas promoted the sale of Fantasy Market Tokens by misleading prospective investors by making numerous materially false statements to induce investment.

Among other things, the complaint alleged that Mr. Lucas claimed to have a working-beta version of the platform, presented a management team that did not exist, and misrepresented his own experience. The SEC also noted that Mr. Lucas returned the investments raised to the investors after investor complaints began to receive media attention, however, the SEC still moved forward with the complaint and related enforcement action.

Thereafter, Mr. Lucas consented, without admitting or denying the allegations, to the entry of a final judgment against him that included a civil penalty, a 5-year ban on being an officer or director, and a 5-year conduct-based injunction largely prohibiting him from participating in any unregistered offering of securities. Mr. Lucas’ consent is subject to court approval.

International Developments


South Korean Exchange Upbit Delists 6 Privacy Coins

In an effort to block the possibility of money laundering and inflow from external networks, Upbit announced that it will end the trading support for Monero, Dash, Zcash, Haven, BitTube and PIVX at 10:00 (SGT) on September 30, 2019. Upbit stated that it “will continue to consider crypto-assets that represent anonymity functions as candidates for designation of investment warning crypto-asset.”

This announcement follows our previous discussion on South Korea’s announcement of possible regulatory reform and the June 2019 Recommendations from the Financial Action Task Force (“FATF”) that, among other things, require the following information to directly or indirectly accompany each virtual asset transfer: (i) originator’s name; (ii) originator’s account number; (iii) originator’s physical address, national ID number, customer ID number, or date of birth; (iv) the beneficiary’s name; and (v) the beneficiary’s account number (colloquially referred to as the FATF Travel Rule).

Cryptocurrency Holdings are Intangible Assets per the IFRIC

The London-based International Financial Reporting Interpretations Committee (“IFRIC”) published guidance in June 2019 applying international financial reporting standards (“IFRS”) to cryptocurrency. IFRS accounting standards are used when securities exchanges require domestic companies to prepare financial statements according to IFRS (most major jurisdictions except the U.S., Japan, and China).

The guidance concluded that entities should treat holdings of cryptocurrencies as intangible assets for accounting purposes when they are not held for sale in the ordinary course of business (i.e. as inventory). Intangible assets are defined as identifiable non-monetary assets without physical substance. The basis for the IFRIC’s conclusion includes: (1) cryptocurrencies are capable of being separated from the holder and sold or transferred individually – and therefore are identifiable and separately valued; and (2) cryptocurrencies do not give the holder a right to receive a fixed or determinable number of units of currency – and therefore are non-monetary. The guidance also indicated that cryptocurrencies may be inventory, and may be subject to the accounting treatment applicable to commodities in the hands of broker-traders.

Notably, the IFRIC defined cryptocurrency as something that is all of the following: (a) a digital or virtual currency recorded on a distributed ledger that uses cryptography for security; (b) not issued by a jurisdictional authority or other party; and (c) does not give rise to a contract between the holder and another party.

The IFRIC is responsible for setting the International Financial Reporting Standards. Domestic companies whose stock is publicly traded on exchanges based in the United States must use generally accepted accounting principles (“GAAP”). IFRS guidance does not directly impact GAAP but there has been a recent trend towards convergence of the two accounting standards.


Daimler Automatically Pays Supplier by Using the Blockchain-based Marco Polo Network

Daimler, the German automaker that owns Mercedes-Benz, completed its first transaction on the on the R3 Corda blockchain-based Marco Polo Network. The transaction was with its supplier of balancing systems, Schenck (a Dürr AG subsidiary). The transaction appears to use smart contracts to transfer funds between bank accounts. The payment was prearranged through a conditional commitment from Daimler’s bank and automatically triggered once the delivery and fulfillment data reconciled with the agreed-upon transaction data. As noted by the bank, the transaction completed in a matter of minutes instead of days.

Everledger Raises $20 million in Round Led by Tencent

U.K.-based startup Everledger has raised $20 million in a Series A funding round led by the Chinese internet company, Tencent. As part of the deal, Tencent will also join the Everledger’s board. Everledger assists businesses with data analytics to provide “clarity and confidence in marketplaces where transparency matters most.”