U.S. Legislation

U.S. House Bill Seeks Classification of “Managed Stablecoins” as “Securities”

Texas Representative Sylvia Garcia introduced legislation in the U.S. House of Representatives that would amend the definition of a “security” within the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940 (collectively, the “Securities Laws”) to include “managed stablecoins.”

The definition of security in the Securities Laws currently includes, among other things, stocks, bonds, and “investment contracts.”  While the U.S. Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance recently provided no-action relief to Paxos Trust Company in connection with its U.S. dollar-backed stablecoin, the Paxos Standard, the regulatory status of other stablecoin products under the Securities Laws remains unclear.  For example, at this year’s SXSW conference, SEC Senior Advisor for Digital Assets Valerie Sczepanik noted that some stablecoins, in particular those with a central authority responsible for maintaining the digital asset’s stable value, may constitute securities. 

The “Managed Stablecoins are Securities Act of 2019” (H.R. 5197) would amend the definition of securities to include “managed stablecoins” under the Securities Act and Securities Exchange Act.  A “managed stablecoin” is a digital asset that (1) “is not a security registered under section 8(a) of the Investment Company Act of 1940,” and (2) satisfies one or more of the following:

(i)         The market value of such digital asset is determined, in whole or in significant part, directly or indirectly, by reference to the value of a pool or basket of assets, including digital assets, held, designated, or managed by one or more persons.

(ii)        One or more holders of such digital asset, directly or indirectly, are entitled to obtain consideration or other assets, including other digital assets and any sovereign currency of a foreign government or the United States, in exchange for the digital asset, the amount of which payment is determined, in whole or in significant part, directly or indirectly, on the basis of the value of a pool or basket of assets, including digital assets, held, designated, or managed by one or more persons.

In other words, a stablecoin that is not registered as an investment company that either (i) has a value that is significantly driven by reference to the value of a basket of assets; or (ii) entitles the holder to obtain a form of consideration with a value that is significantly driven by the value of a basket of assets in exchange for the digital asset.  This definition is broadly worded to encompass a broad swath of stablecoins that are not actively managed (“. . . held, designated, or managed by one or more persons”).

It is worth noting that the Texas Department of Banking has similarly expressed an interest in stablecoins.  The Department issued a supervisory memorandum on the treatment of stablecoins under the Texas Money Services Act in April 2019, interpreting the definition of “money or monetary value” to encompass sovereign currency-backed stablecoins.

U.S. Regulatory

Federal Stability Oversight Council Report Urges Regulators to Monitor Stablecoins and other Digital Assets

The Federal Stability Oversight Council (“FSOC”) published a report recommending that “federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and distributed ledger technologies.”  The FSOC explains that digital assets have not taken off as a widely adopted store of value at this time but stablecoins might change this trend.

The report notes that: “If a stablecoin became widely adopted as a means of payment or store of value, disruptions to the stablecoin system could affect the wider economy.  Financial regulators should review existing and planned digital asset arrangements and their risks, as appropriate.”

Gladius Closes Down in Wake of SEC Settlement

Gladius Network LLC (“Gladius”), a company that had reached a settlement with the SEC for offering digital assets without registering them as securities in February 2019, publicly announced that it has “ceased operations effective immediately” because it does not have sufficient capital to continue operating.  Pursuant to the terms of Gladius’s settlement with the SEC, Gladius was required to file a registration statement for its GLA tokens with the SEC.  However, the SEC did not impose a penalty on Gladius in connection with its illegal offering, in part, because Gladius self-reported the violation.

Director of the SEC’s Division of Investment Management Addresses Custody and Valuation Issues for Digital Asset Funds in Investment Company Institute Conference Keynote

The director of the SEC’s Division of Investment Management, Dalia Blass, delivered a keynote address at an Investment Company Institute conference that offers some guidance to funds that seek to invest in digital assets.  Director Blass used a recently approved closed-end interval fund that will employ a bitcoin futures strategy as an exemplar.  She addressed the following topics:

  • Valuation: Director Blass is comfortable with a fund valuing its bitcoin futures holdings at daily settlement prices reflected on a designated contract market registered with the Commodity Futures Trading Commission (“CFTC”).
  • Custody: Director Blass noted that funds need to address digital asset custody if they solely invest in cash-settled products, such as certain futures contracts.
  • Redemptions: Director Blass explained that by structuring the exemplar fund as a closed-end interval fund and not offering daily redemptions, the fund can avoid potentially large, unexpected liquidity demands over short periods.
  • Manipulation: Director Blass noted that the fund took steps to address the potential for manipulation in digital asset markets.  The fund did so by, among other things, including “prominent risk disclosures, offering the product only through registered investment advisers, and limiting the size and future growth of the fund, with an initial cap of $25 million.”

The fund referenced by Director Blass is presumably the NYDIG Bitcoin Strategy Fund, a portfolio of Stone Ridge Trust VI, the registration statement of which is available here.

Treasury Secretary Mnuchin Comments on a “Digital Dollar” and Anti-Money Laundering Compliance for Digital Asset Issuers

Despite calls from former CFTC Chairman J. Christopher Giancarlo and former LabCFTC Director Daniel Gorfine for the U.S. to issue a “digital dollar,” Treasury Secretary Steven Mnuchin stated at a House Financial Services Committee hearing that he and Federal Reserve Chairman Jerome Powell “agree that in the near future, in the next five years, we see no need for the Fed to issue a digital currency.”  Nevertheless, the Fed is purportedly studying the costs and benefits of doing so.  Chairman Powell recently stated that the Fed is “monitoring the activities of other central banks to identify potential benefits that may be relevant in the U.S. context.”

With respect to the private sector, Secretary Mnuchin reiterated that issuers of digital assets “need to be fully compliant” with the Bank Secrecy Act and anti-money laundering rules.

Member of Ethereum Foundation Charged with Evading North Korea Sanctions

The U.S. Attorney for the Southern District of New York charged a member of the Ethereum Foundation for violating the International Emergency Economic Powers Act by giving a presentation on digital assets at a conference in North Korea.  The defendant, Virgil Griffith, allegedly made a presentation in North Korea on the merits of blockchain technology and participated in a discussion on using blockchain technology to evade economic sanctions.

Griffith did not attend the conference in his capacity as a member of the Ethereum Foundation.  The Foundation released the following public statement:  “The Foundation is aware of the recent charges filed against Virgil Griffith . . . We can confirm that the Foundation was not represented in any capacity at the events outlined in the Justice Department’s filing, and that the Foundation neither approved nor supported any such travel, which was a personal matter.  We are continuing to monitor the situation as it develops.”

CFTC Chairman Hints at Future Guidance on Digital Assets from the CFTC

CFTC Chairman Heath Tarbert indicated in a speech at the Futures Industry Association Expo that the CFTC can be expected to release principles-based guidance on digital assets in “the next short period, six months or so.”

Former CFTC Chairman Giancarlo previously noted that “while our regulations were designed for environments that have been transformed, the principles underlying our regulations remain relevant – and remain enforceable.”  This guidance can be expected to clarify the application of existing laws and regulations to digital assets in the spirit of the CFTC’s proposed interpretation on actual delivery in retail virtual currency transactions.  Chairman Tarbert stated that the guidance is intended to “allow this industry to innovate and grow, but at the same time regulate responsibly.”

U.S. Litigation

Ripple Files Final Motion to Dismiss in Class Action Lawsuit on the Status of XRP under the Federal Securities Laws

On December 4, 2019, Ripple, the issuer of the digital asset XRP, filed a motion to dismiss the claims pending against it in a class action lawsuit for allegedly offering unregistered securities to members of the plaintiff class.

In its motion to dismiss, Ripple reiterates is argument that its sale of XRP began in 2013 and thus, the plaintiffs would have had to file their class action within three years of this date to be within the three-year statute of repose.  To the contrary, the plaintiffs did not file until 2018.  Additionally, Ripple argues that there is insufficient evidence that the lead plaintiff, Bradley Sostack, purchased XRP from Ripple, because he obtained it from “an unknown third party” on a digital asset exchange.

Ripple maintains that the statute of repose bars plaintiffs’ claim and therefore the issue of whether XRP is a security is immaterial.  The core issue is whether the statute of repose began to run at the time XRP were initially offered to the public for sale or subsequently offered to Sostack.  Ripple argues that the “first-offered” rule dictates that the statute begins to run at the time the instrument is first offered to the public (i.e., 2013).  Sostack argues that a new repose period begins to run in the instance of a subsequent offering.


New German Law Paves the Way for German Banks to Provide Digital Asset Services

A new law will enter force January 1, 2020 in Germany that is designed to regulate the manner in which German banks engage in digital asset services business.  The law is intended to clarify the legal treatment of digital assets and services within Germany.  Commentators note that this law will allow banks to offer digital asset services in compliance with know-your-customer and anti-money laundering requirements.

Russian Central Bank Backs a Ban on Digital Assets

A representative of the Russian Central Bank has stated that the Bank supports a country-wide ban on digital assets.  In the statement, the representative noted that “private cryptocurrencies cannot be equated with fiat money and cannot be legal tender . . . If it is decided to ban cryptocurrencies as a means of payment at the legislative level, we consider it appropriate to support this position.”

European Central Bank and Bank of International Settlements to Consider Benefits of Digital Assets

Outgoing executive board member of the European Central Bank (“ECB”), Benoît Cœuré, indicated that the ECB is examining the use of digital currency as an alternative to paper money.  He noted that “[a] digital currency of this sort could take a variety of forms, the benefits and costs of which the ECB and other central banks are currently investigating, being mindful of their broader consequences on financial intermediation.”

While Mr. Cœuré is stepping down from the ECB, he will transition to serving as head of the Innovation Hub at the Bank for International Settlements.  In this capacity, he intends to work with the ECB to study the merits of digital assets.