U.S. Developments

Federal Reserve Governor Speaks on Stablecoins and Related Risks

On December 18, 2019, Governor Lael Brainard of the U.S. Federal Reserve delivered a speech entitled “Update on Digital Currencies, Stablecoins, and the Challenges Ahead.” In her prepared remarks, the governor discussed “global stablecoins” and their scalability potential. Comparing the rate of adoption for telephones, the internet, and payment processors (such as Venmo and other digital payment systems), the governor noted the “potential for ‘global stablecoins’ to scale rapidly,” especially when deployed by technology companies with “network advantages.”

Without the “requisite safeguards,” stablecoins could pose risks to consumers that regulators should carefully consider, according to the governor. Using Libra as an example, Brainard went on to discuss various “significant concerns,” such as anti-money laundering, counterterrorist financing, know-your-customer, financial stability, and other issues that she believes stablecoins raise.

She also briefly discussed central bank digital currencies and the challenges they pose. She noted that the Federal Reserve will continue to “analyze the potential benefits and costs of central bank digital currencies,” and it is currently working on a payment system (such as the FedNow Service) in the United States that is designed to improve the speed and cost of consumer payments.

Please click here to read the full speech.

The SEC Proposes Amendments to Expand the Accredited Investor Definition

On December 18, 2019, the SEC proposed amendments to its long standing “Accredited Investor” definition, a standard imposed by certain exemptions issuers often relied upon to avoid registration of their private security offerings. The rule proposal aims to expand the category of people that can qualify for the status and streamlines existing qualifications applicable to institutional investors and knowledgeable employees.

Among other things, the rule proposal seeks to allow, under specified conditions, certain individuals who hold professional certification or designations (such as Series 7, 65, or 82 license), “knowledgeable employees,” Indian tribes, family offices, and certain LLCs, registered advisers, and rural business investment companies (“RBICs”) to qualify as an Accredited Investor. It also adds the term “spousal equivalent” for purposes of pooling assets to meet the standard. Similarly, the proposal amends Rule 144A’s “qualified institutional buyer” definition to add certain LLCs, RBICs, and institutional accredited investors to the current list of entities that may rely on the definition.

At the opening meeting for the rule proposal, several of the commissioners gave a brief preview of their thoughts on the proposals. Commissioner Hester M. Peirce, who voted in favor of the proposal, noted that the Accredited Investor definition is “one of the most offensive concepts” in our federal securities regulations and has had a “corrosive effect” on everyday investors.  Commissioner Peirce stated that the current rule proposal takes steps in the right direction by focusing on “actual” sophistication as opposed to the current net worth based tests. Similarly, Commissioner Elad L. Roisman, in his opening statement, welcomed the change but expressed concerns that the proposal is not broad enough to include additional categories of people that should be included. In contrast, Commissioner Allison Herren Lee and Commissioner Robert J. Jackson, Jr., each voted against the proposal arguing, among other things, the proposal weakens guardrails put in place to protect investors from “high-risk” and “opaque” investments.

The rule proposal is subject to a 60-day public comment period.

Please click here to read the rule proposal.

Litigation Developments

An ICO Issuer Settles SEC Allegations of Unregistered Securities Offering

On December 18, 2019, a token issuer settled SEC charges that it engaged in an unregistered securities offering when it issued its tokens. The issuer issued the tokens to raise revenue to develop its blockchain technology, according to the SEC. The SEC contended these tokens were securities under a Howey analysis and the DAO Report because the offering created an expectation of future profits based on the issuer’s efforts to develop its blockchain platform and of increased value of the tokens sold. The issuer allegedly raised $12 million during the sales without registering the tokens with the SEC or relying on an exemption from such registration requirements.

The SEC ordered the issuer to pay a $250,000 penalty and to take certain remedial measures.

Please click here to read the enforcement order.

Indictment for Alleged “SIM Swapping” Theft of More Than $1 Million in Cryptocurrency

On December 18, 2019, the Manhattan district attorney indicted a 19-year-old man for allegedly stealing identities to fraudulently take control of victims’ cryptocurrency accounts. According to the press release, the defendant stole the identities of more than 75 individuals in more than 20 states by transferring their numbers to an iPhone he owned and then used that information to access corresponding cryptocurrency accounts with text-based two-factor authentication security. Defendant allegedly targeted his victims by accessing their Gmail, Dropbox and Yahoo accounts and ascertaining whether they owned cryptocurrencies. As a result of his scheme, defendant allegedly stole more than $1 million in cryptocurrency.

Please click here to read the press release.

International Developments

AMF Grants Its First Approval of an ICO Application

France’s financial regulator the Autorité des Marchés Financiers (“AMF”) whitelisted an initial coin offering (“ICO”) application – a first for the regulator. This approval is valid for a maximum of six months, according to AMF. Earlier in 2019, France implemented a regime for ICOs empowering the AMF to provide optional approval for certain “utility tokens” that meet a certain set of circumstances. The regime gives issuers the “option” to seek such approval and any approval is limited to the ICO itself and not the issuer.

Please click here to access the list.

The European Central Bank Issues Report Exploring Anonymity in CBDC

On December 17, 2019, the European Central Bank (“ECB”) issued a report discussing, among other things, “a proof of concept for anonymity in digital cash.” The report acknowledges the competing interest of consumers’ desire to engage in private transactions and regulators’ interest to guard against money laundering and the financing of terrorism (“AML/CFT”). While acknowledging this proof of concept is merely meant to contribute to the overall discussion of the topic and not an indication of any decision to issue any central bank digital currency (“CBDC”), the report aims to demonstrate that “it is possible to construct a simplified CBDC payment system that allows users some degree of privacy for lower-value transactions, while ensuring that higher-value transactions are subject to mandatory AML/CFT checks.” The proof of concept attempts to achieve this through digitizing AML/CFT compliance procedures that keep a limited amount of CBD transactions anonymous during a period; the report refers to these exemptions as “anonymity vouchers.”

Please click here to read the full report.

International Bank Regulators Seek Public Input on Prudential Treatment of Crypto-Assets

The Basel Committee on Banking Supervision of the Bank of International Settlements (the “Committee”) issued a discussion paper seeking input on prudential treatment of “crypto-assets.” The paper focuses on the rise of cryptocurrencies and their impact on the banking sector. The Committee restates its previous position that the “growth of crypto-assets and related services has the potential to raise financial stability concerns and increased risk faced by banks,” including “liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and financing risk; legal and reputational risk.” It also highlights that “cryptocurrencies,” despite the name, are not legal tender, lack, among other things, certain “standard functions of money,” and can be “unsafe” for use as a store of value or medium of exchange. As such, the Committee is of the view that banks that engage in cryptocurrency related services or that acquire such assets should take “a conservative prudential regulatory” approach in dealing with such exposure.  To that end, the Committee seeks comments from stakeholders on various issues including what general principles, considerations, and characteristics banks should consider in designing and applying conservative prudential regulatory treatments of such exposures. The Committee lists possible liquidity and capital requirements as an example of such considerations.

Please click here to read the full discussion paper.

Russian Citizens Charged for Allegedly Infecting State-Owned Computers to Mine Cryptocurrencies

According to Tass, a Russian government-controlled news agency, two Russian nationals were charged for allegedly mining cryptocurrencies through infecting state-owned computers with viruses.

Please click here for additional information.

Sweden Central Bank Engages Accenture for Its Pilot CBDC Product

According to a press release, Riksbank, Sweden’s central bank, is tasking Accenture with the development of certain features of e-krona, Sweden’s central bank digital currency pilot project. This would include the development of “user interface” and “simulation” of Sweden’s various payment systems.  This one-year agreement, which is to be signed at the end of the year and could be extended for a maximum of 7 years total, could also be expanded in scope should the central bank choose to extend or issue e-krona.

Accenture beat out 11 participants for this assignment because it offered the “best balance of price and quality,” according to the release.

Please click here for the press release.