U.S. Developments

The Fed Chairman Comments on Potential for a US-backed Digital Currency

Jerome Powell, Chairman of the Federal Reserve, wrote to Congress this week discussing the merits of implementing a central bank digital currency (CBDC) in the U.S. The letter responds to a number of questions posed by lawmakers regarding the value that a digital currency would provide and implementation challenges that would need to be overcome. Two Congressmen had expressed concern that the U.S. is being left behind in the wake of technological advances.

Chairman Powell indicates that the U.S. is not currently developing a CBDC, but the Fed is monitoring development elsewhere. Chairman Powell noted that some of the motivating factors for  a digital currency in foreign countries do not necessarily exist in the U.S. Specifically, the demand for cash in the U.S. “remains robust” and there are fast and reliable digital payment services available that are not available in certain other countries.

Chairman Powell enumerated several challenges posed by a CBDC, including unanswered legal questions pertaining to rights of associated parties and privacy of transactions, policy issues relating to stability, and technical issues relating to information security. Moreover, Powell expressed skepticism for a CBDC in stating, “[i]t is not yet clear what additional value a general purpose CBDC could provide in the U.S.”

The SEC is Revisiting its Rejection of Bitwise Fund Proposal

In October, the SEC rejected the latest proposal by Bitwise Asset Management to create a cryptocurrency-based exchange traded-fund (ETF). The SEC is now reviewing that rejection.

The review came by the SEC’s own volition and without involvement from Bitwise. Under SEC rules, the SEC commissioners may grant review at their own discretion. At this stage it is unclear what triggered the review or how long the review process will take. The general public is invited to comment on the initial rejection until December 18, 2019. Prior to the Bitwise proposal, a number of other groups have sought to create  a mainstream investment product connected to virtual currencies that could be traded on a securities exchange.

Grayscale Files Form 10 for Bitcoin Trust

Grayscale filed a Form 10 registration statement for its Bitcoin Trust, which would make the company an SEC reporting company that files periodic reports (such as 10-K, 10-Q and 8-K).  Shares of the Grayscale Bitcoin Trust are currently offered solely in private placements by the issuer under Rule 506(c), making them “restricted securities,” or in secondary sales through the OTCQX over-the-counter quotation system under Rule 144 after, among other requirements, they have been held for a specified period.  By becoming a reporting company, this holding period would be reduced from twelve to six months. Although Shares may be acquired by authorized participants in exchange for a basket of bitcoin, Shares cannot be redeemed, so the Grayscale Bitcoin Trust does not operate exactly like an ETF. Form 10 registration does not require the Commission to grant an order, which the Commission has so far refused to do for bitcoin ETFs, like Bitwise, that have sought listings on actual securities exchanges.

Big Coin Mining Operations are Underway in Texas

In Rockdale, Texas, two Bitcoin mining operations target the title of the “world’s largest.” In late October, Bitmain, a Chinese ASIC manufacturer launched a 50-Megawatt Bitcoin mining operation in rural Rockdale. The Bitmain Bitcoin Mine intends to scale up to 300 Megawatts. Less than a month later, on November 7th, Whinstone US broke ground in Rockdale on a mining facility that will launch at 300-Megawatts and scale up to a full capacity of 1-Gigawatt.

A combination of cheap land and cheap electricity has led to these investments.  Whinstone US and Bitmain are both inhabiting the campus of a now-defunct aluminum manufacturing plant. Rockdale seeks to become an industrial hub and shape the future of coin mining operations.

CFTC Chairman Has Not Decided Whether Libra is a Security

Heath Tarbert, the Chairman of the US Commodity Futures Trading Commission (CFTC), is unable to classify Libra based on state of flux of the proposed crypto asset. Unlike Bitcoin, classified as a commodity, Libra doesn’t have the near decade of history of use. Accordingly, the CFTC does not know what exactly Libra will look like and how it will be used.

The Chairman stated, “Libra is developing and there are a bunch of unanswered questions – and also the way that it’s structured, linking it directly to a set of national currencies – a very different product [than Bitcoin].” Chairman Tarbert’s position on the matter is in contrast with the former chair, Gary Gensler, who had previously stated that Libra would be regulated as a security.

Vermont Utility Enables Renewable Energy Credit Trading on Blockchain

The blockchain platform LO3 Energy is operating an energy marketplace for the largest electricity utility in Vermont, Green Mountain Power (GMP). Vermonters will be able to buy and sell renewable energy credits with transactions stored on the Exergy blockchain operated by LO3.

GMP is targeting providing 100% renewable energy by 2030 and plans to use the marketplace to help achieve their goals. Today, 60% of the energy provided by GMP is renewable.

The CEO and founder of LO3 Energy noted, “As distributed renewables grow and the world becomes more and more digitized, the ability to manage local energy resources in this way will become increasingly crucial to our everyday lives.”

International Developments

China Outpaces the World in Blockchain Related Patent Filings

Chinese companies have submitted roughly three times as many Blockchain-based patent applications than U.S. companies in the past decade (to each respective patent office, e.g., the USPTO and SIPO). Between 2009 and 2018 (excluding newly filed and unpublished patent applications) Chinese companies have submitted roughly 7,600 Blockchain technology-based applications. Further, Chinese companies have filed roughly 60% of blockchain-based filings of the top 5 filing jurisdictions in the last decade (China, US, EPO, Japan, S. Korea).

Notably, the Chinese government has been incentivizing patent filings. Thus, to some extent, the volume of Blockchain-specific patents is a result of the emphasis on filing patents in general. However, in 2018, Chinese companies submitted only 47% of all patent applications filed across all subject matter areas in the same 5 jurisdictions. While 47% of the total filed applications in those jurisdictions is still a staggeringly high amount, the comparative 60% share of patent applications in the Blockchain space is noteworthy and demonstrates an emphasis in China on Blockchain technology.

Central Bank of China to Set Regulations for Blockchain Within the Financial Sector

The Vice President of the People’s Bank of China (PBoC) stated that Blockchain was amongst seventeen financial services subjects for which new or enhanced financial standards were being adopted.  Other relevant technology areas targeted for financial regulation include AI and cloud services.

The standards are part of a multi-year process by which China regulators are evaluating and imposing financial standards that are modern, rigorous and compatible with international financial standards.  Based on the emphasis on Blockchain patent filings (see above), China is demonstrating an aggressive effort to control and develop Blockchain technology.

South Korea Works Toward Registration of All Crypto Exchanges

A Subcommittee of the South Korean National Assembly made changes to the developing Special Financial Transactions Information Act to force crypto exchanges to register with the Financial Services Commission (FSC). The changes would further require crypto exchanges to use real-name accounts for their users. The law is designed  to reduce money-laundering.

The proposed  law, the Special Financial Transactions Information Act, moves the crypto-related industry out of unclear regulatory space and aligns them with traditional systems like banks. Current registered crypto-exchanges view the changes to the legal draft as healthy.

Jae-Jin Kim, secretary general of the Korea Blockchain Association views the Special Financial Transactions Information Act as “the first step in the development of consumer protection and a stable market.”

The UK Jurisdiction Taskforce (UKJT) Commented on Treatment of Cryptoassets and Smart Contracts Under English Law

A statement from the UK Jurisdiction Taskforce (UKJT) on the treatment of cryptoassets and smart contracts under English (and Welsh) law was released this week. The legal statement concludes that under English law: (i) cryptoassets are capable of being owned; and (ii) smart contracts can be, or be part of, binding legal contracts. Based on these conclusions, the statement determines that cryptoassets cannot properly be subject to a valid possessory interest (such a lien or a pledge) or a bailment but could be subject to an ownership interest (such as a mortgage or equitable charge) under English law. The statement determines that smart contracts could potentially form enforceable contracts, for example as forms of enforceable unilateral contracts in certain circumstances.

The UKJT is one of six taskforces of the LawTech Delivery Panel of the English Law Society. The Law Society is the advocacy body for solicitors as well as an advocate for English private law generally. The panel is an industry-led group that is tasked with consulting on the ‘digital transformation’ of the UK legal services sector. The statement does not have any force of law, but the statement may be influential. Given that English law is the most commonly used contractual governing law in the world, this is likely to be important for market participants that use English law documents, any potential legislative changes, and for other Anglo-common law jurisdictions that consider English law as persuasive authority.

A summary by Linklaters is available here.