New York Resident Indicted for Duping Investors with Fake ICO Scam
On November 6, the United States Attorney for the Southern District of New York announced a wire fraud charge against Asa Saint Clair, the operator of World Sports Alliance, which held itself out on its website as using sports to promote “economic development and social mobility” and claims an association with the United Nations. The U.S. Attorney, Geoffrey Berman, contends that World Sports Alliance is a “sham affiliate of the United Nations.”
According to the indictment, Saint Clair lured investors into loaning funds, through convertible notes, to World Sports Alliance so that the organization could conduct an ICO for a proprietary digital currency called IGOBIT. Saint Clair allegedly promised investors that they would receive guaranteed returns. According to the government, Saint Clair’s representations were false: Investor funds were not used to conduct an ICO and, instead, Saint Clair diverted the funds and used them to support a lavish lifestyle.
Hong Kong’s Securities Regulator Adopts Licensing Regime for Platforms Trading Security Tokens
On November 6, Hong Kong’s Securities and Futures Commission (“SFC”) published a position paper setting out a regime for licensing the operators of centralized virtual asset trading platforms operating in Hong Kong. The SFC defines centralized virtual asset trading platform operators as those that “provide trading, clearing and settlement services for virtual assets, and have control over investors’ assets.” A virtual asset, according to the SFC, is a “digital representation of value.”
Because the SFC only has jurisdiction over securities or futures contracts, the licensing regime applies only to trading platforms that want to trade in at least one virtual asset that is a security. Thus, if the trading platform only trades virtual assets that are non-securities, the trading platform would fall outside the SFC’s jurisdiction.
Trading platforms that apply for and obtain a license from the SFC will be subject to regulatory standards that the SFC compares to those imposed on licensed automated trading service operators and brokers. For instance, licensed trading platforms could offer their services only to “professional investors.” The SFC’s licensing conditions also require licensed trading platforms to establish market surveillance controls to detect market manipulation and abusive trading practices, store 98% of custodied virtual assets in cold wallets, and maintain an insurance policy that provides full coverage for virtual assets stored in hot wallets and substantial coverage—which the SFC suggests is 95% coverage—for virtual assets stored in cold wallets.
The SFC’s position paper can be found here.
British Columbia’s Securities Regulator Seizes Control of Canadian Exchange
On November 1, the British Columbia Securities Commission (the “BCSC”) announced the appointment of an interim receiver for the Einstein Exchange, a digital currency exchange based in Vancouver, BC, that allowed customers to trade digital assets, including some that the BCSC views as securities. The order appointing the receiver also authorizes the receiver to take control of the exchange’s property and take over the exchange’s operations.
The BCSC brought the application for a receiver after it received complaints from customers that they could not access the funds that they had stored with the exchange. As part of its investigation into the complaints, the BCSC demanded financial information and details about where the exchange stored its fiat currency and digital assets, which the exchange failed to provide. On October 31, the exchange’s counsel told the BCSC that the exchange planned to shut down shortly.
Although the exchange’s counsel said that the exchange possesses enough digital assets to process customer withdrawals, the BCSC believes that the exchange misused customer assets and does not have enough fiat currency or digital assets to pay back its customers.
According to the affidavit, the BCSC believes that the Einstein Exchange owes customers more than $12,000,000 ($16,000,000 CAD) worth of fiat currency and digital assets. The receivership, the BCSC hopes, will help secure the exchange’s assets.
UK’s Tax Authority Clarifies How Bitcoin, Business, and Tax Law Mix
The United Kingdom’s taxing authority, Her Majesty’s Revenue and Customs (“HMRC”), has published follow-on guidance clarifying how some digital assets held by businesses are taxed. Previously, HMRC issued similar guidance for individuals. The guidance only applies to what HRMC refers to as “exchange tokens,” a subset of digital assets, like bitcoin, that are meant to be used as a means of payment. HMRC says that additional guidance on the tax treatment of utility and security tokens is forthcoming.
The November 1, 2019 guidance adds detail to HMRC’s prior guidance and focuses on how existing UK tax rules will apply to exchange tokens. For example, the guidance describes how UK tax rules applicable to trading activity or applicable to intangible assets may apply to companies holding or transacting with exchange tokens. The guidance reiterates that hard forks are not generally treated as taxable events but rather are treated similarly to stock splits. The guidance also discusses methods available for determining cost basis in exchange assets upon disposition.
The new guidance also covers three new topics: how VAT applies, whether stamp tax applies, and how loans are treated. The guidance confirms that the disposition of exchange tokens should not incur VAT or stamp duties.
With respect to loans of exchange tokens, the guidance asserts that exchange token loans do not qualify as loans for UK tax purposes because under UK tax law, loans require a “money debt.” The guidance also states that a loan exists only where there is a “counterparty.” This discussion leaves open a question regarding the appropriate tax treatment of collateralized debt smart contracts under UK tax law.
The guidance can be found here.