U.S. Developments

Federal and State Regulatory Developments

Bill in Hawaii State Senate Addresses Digital Assets Including Authorization for Banks to Serve as Qualified Custodians

SB 2594 before the Hawaii State Senate addresses a number of matters relating to digital assets.  In particular, it would classify digital assets under the Hawaii Uniform Commercial Code, specify the manner of perfecting a security interest in digital assets, authorize banks to hold digital assets in their custody, and authorize courts to hear claims relating to digital assets.  As for the banking portions, SB 2594 seeks to establish that banks can serve as “qualified custodians” as that term is defined under the rules of the Investment Advisers Act of 1940.  It also discusses situations in which a bank may undertake transactions with digital assets placed in its custody.  SB 2594 was introduced on January 17, 2020, and was referred on January 23, 2020 to the Hawaiian Senate’s Judiciary Committee and the Committee on Commerce, Consumer Protection, and Health.

A link to SB 2594’s tracking page can be found here.

Litigation Developments

Judge in SEC v. Kik Interactive Inc. Requires Deposition of Kik Executive and Sets an Updated Schedule

To continue our ongoing monitoring of developments in the SEC v. Kik Interactive Inc. litigation, following a hearing on January 22, 2020, the judge issued an order on January 23, 2020 (the Order) directing the U.S. Securities and Exchange Commission (SEC) to depose an executive of Kik Interactive Inc. (Kik) on the nature of Kik’s business from 2018 through the present.  In addition, the Order closes fact discovery on January 28, 2020, and sets deadlines in March and April, respectively, for the two parties to file motions for and oppositions to summary judgment.

A link to the Order can be found here (Note: a paywall may apply).

SEC Charges a Blockchain-Marketplace Company and its Founder for an Allegedly Fraudulent Offering of Unregistered Securities

The SEC charged a purported blockchain-marketplace company and its founder in federal court on January 21, 2020 for alleged violations of anti-fraud provisions and registration requirements of the federal securities laws.  In its complaint, the SEC alleges that the company and its founder raised approximately $600,000 from about 200 investors in an offering of an unregistered digital asset security.  The SEC also alleges that in the course of the offering, the company and its founder made several false statements to potential investors, including claims that the offering was SEC compliant.  According to the complaint, the company and its founder also misappropriated third-party content without approval or attribution.  Based on the allegations, the SEC charged the defendants with violating the anti-fraud provisions of the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934, as well as the registration provisions of the Securities Act.

A link to the SEC’s Litigation Release can be found here and a link to the complaint can be found here.

Blockchain Industry Groups Petition Court to File Amicus Briefs in SEC v. Telegram

To continue our ongoing monitoring of developments in the SEC v. Telegram Group Inc. litigation, two blockchain industry groups, the Chamber of Digital Commerce and the Blockchain Alliance, petitioned the court to submit amicus briefs on behalf of Telegram.  The briefs for both organizations discussed issues relating to when and how digital assets are or are not securities under the federal securities laws.  Another issue raised in the briefs was the separation of the digital asset itself from the agreement through which a purchaser can buy the digital asset.  The industry groups argued to the court that even if the sales instrument might be a security under the federal securities laws, the digital assets being sold by the instrument could represent securities, commodities, or something else.  The amicus briefs relate to motions for summary judgment by the SEC and Telegram on January 15, 2020.  The next hearing in the case is scheduled for February 18, 2020.

A link to the Chamber of Digital Commerce amicus brief can be found here, and a link to the Blockchain Alliance amicus brief can be found here.

International Developments

Report:  Japanese Lawmakers Considering Proposal for Issuance of Digital Currency

According to a report by Reuters on January 24, 2020, a group of lawmakers led by former economy minister Akira Amari is considering submitting a proposal for Japan to issue its own digital currency.  Per the report, the design of a Japanese digital currency has not been finalized, but several current and former government officials, including former Bank of Japan board member Takahide Kiuchi and parliamentary Vice-Minister for Foreign Affairs Norihiro Nakayama, stated that the digital currency could be a hybrid with involvement from the government and private industry.  The group of lawmakers could submit their proposal as early as February 2020.

A link to the Reuters report can be found here.

The World Economic Forum Releases a “Central Bank Digital Currency (CBDC) Policy-Maker Toolkit”

In connection with the 2020 annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, the WEF released a whitepaper entitled the “Central Bank Digital Currency Policy-Maker Toolkit” (the Toolkit) on January 22, 2020.  According to the WEF, because of interest in central bank digital currencies (CBDC), the organization sought to provide guidance based on input from various central banks, international organizations, academic researchers, and financial institutions.  The Toolkit itself seeks to provide guidance and information for CBDCs structured as “retail,” “wholesale,” “cross-border,” or “hybrid” as well as for large, small, emerging, and developed countries.  It discusses a CBDC evaluation process and suggests information for central banks’ consideration.  It also evaluates the role of blockchain technology within CBDC implementation and discusses governance, user-data privacy, financial inclusion, and security issues.

A link to the Toolkit can be found here, and a link to a press release announcing the Toolkit can be found here.

Several Central Banks Announce a Working Group to Assess CBDCs

Separate from the WEF’s Toolkit, several central banks announced the establishment of a working group to assess potential cases for CBDCs.  The working group will include the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank, the Swiss National Bank, and the Bank for International Settlements (BIS).  According to a press release from the Bank of England, the working group will specifically assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies.  It also expects to coordinate with other organizations such as the Financial Stability Board and the Committee on Payments and Market Infrastructures.

A link to a press release from the Bank of England can be found here.

Report:  Reserve Bank of India States in Court Filing that it has not Banned Virtual Currencies

On January 21, 2020, the Economic Times, a periodical in India, reported that it had reviewed an affidavit filed in September 2019 by the Reserve Bank of India (RBI) in a court case against the Internet and Mobile Association of India (IAMAI).  According to the report, the RBI states in the affidavit that it had not banned virtual currencies in India but rather had protected regulated entities from risks associated with the trading of virtual currencies.  The Economic Times reported that the specific risks mentioned by the RBI in its affidavit included terror financing and money laundering.  The IAMAI filed the current case to challenge the RBI’s April 2018 order that prohibited dealing in virtual currencies as well as prohibition the provision of certain services related to virtual currencies.  These services included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting tokens as collateral, opening accounts of exchanges dealing with tokens, and transfer/receipt of money in accounts relating to purchase/sale of virtual currencies.

A link to the Economic Times report can be found here.  A link to the RBI’s April 2018 order can be found here, and a link to our previous coverage of the April 2018 order can be found here.

Report:  South Korea’s Finance Ministry is Considering a 20% Tax on Virtual Currency Transactions

On January 20, 2020, the Yonhap News Agency, a periodical in South Korea, reported that the South Korean Ministry of Economy and Finance had ordered its office of income tax to consider a 20 percent tax on income from virtual currency transactions.  According to the report, the Ministry of Economy and Finance had submitted the taxation plan to its office of property tax.

A link to the Yonhap News Agency report can be found here.

The Canadian Securities Administrators Release Guidance on the Application of Canadian Securities Legislation to the Trading of Crypto Assets

On January 16, 2020, the Canadian Securities Administrators (CSA) issued a CSA Staff Notice to provide guidance (the Guidance) on the application of Canadian securities legislation to entities facilitating the trading of crypto assets.  The Guidance discusses factors that Canadian securities regulators consider when determining whether securities legislation (which includes both securities an derivatives legislation) applies to any entity that facilitates transactions relating to crypto assets, including buying and selling crypto assets.  For securities legislation to generally not apply, the Guidance provides that two factors must both be satisfied:  (1) “the underlying crypto asset itself is not a security or derivative”; and (2) “results in an obligation to make immediate delivery of the crypto asset, and is settled by the immediate delivery of the crypto asset to the [entity’s] user according to the [entity’s] typical commercial practice.”  The Guidance then discusses the “immediate delivery of a crypto asset” and “when a crypto asset has been immediately delivered.”  It also provides examples of where the securities laws do and do not apply.

The CSA is an umbrella organization of Canada’s 10 provincial and three territorial securities regulators.  It is primarily responsible for developing a harmonized approach to securities regulation across the country.

A link to the CSA Guidance can be found here.

English High Court Issues Decision Regarding Bitcoin

On December 13, 2019, the English High Court issued a judgment (which was publicly released on January 17, 2020) in a case relating to bitcoin brought by an insurer.  The insurer had paid out a bitcoin ransom after its insured customer (a Canadian insurance company) was the victim of ransomware.  The ransom was traced, in part, to a token exchange and the insurer sought to freeze specified assets related to the bitcoin.  In the judgment, the judge refers to the UK Jurisdictional Task Force’s legal statement as an accurate statement about whether crypto currencies are a form of property under English law and determined that bitcoin can be property under English law, at least for purposes of granting an interim injunction.

A link to the Decision can be found here.  A link to our prior coverage of the UK Jurisdiction Task Force statement can be found here.

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Photo of Tom Ahmadifar Tom Ahmadifar

Thomas Ahmadifar primarily advises clients on regulatory issues under federal and state securities, commodity, and banking laws. He counsels broker-dealers on matters before the SEC, FINRA and other SROs, including business expansions, changes of control, membership applications and the trading practice rules. In…

Thomas Ahmadifar primarily advises clients on regulatory issues under federal and state securities, commodity, and banking laws. He counsels broker-dealers on matters before the SEC, FINRA and other SROs, including business expansions, changes of control, membership applications and the trading practice rules. In his funds practice, Thomas advises clients in both the registered and private funds spaces.