Weekly Focus:

  • Ripple Faces New Litigation Related to XRP Token Sale
  • In Wake of Injunction, Telegram Discontinues Involvement with TON Blockchain
  • Blockvest Founder Seeks to Challenge Sanctions Granted in SEC Suit Related to ICO
  • Ohio State Lawmakers Contemplate Using Blockchain for Future Election Cycles
  • Square’s CashApp Q1 Earnings Show Surge in Bitcoin-Related Earnings
  • Turkey-Based Company iMiner Successfully Attains License to Operate in Iran
  • Dutch Central Bank Imposes Registration Requirement for Crypto Service Providers Under Newest Iteration of AML Legislation

U.S. Developments

Litigation

Ripple Faces New Litigation Related to XRP Token Sale

On May 1, 2020, Puerto Rico-based company Bitcoin Manipulation Abatement LLC (BMA) filed a lawsuit against Ripple Labs, Inc., XRP II, LLC and Bradley Garlinghouse. The suit alleges violations of federal and California corporate and securities laws, including issuing an unregistered offering of securities, unfair competition, and false advertising.

The case is Bitcoin Manipulation Abatement LLC v. Ripple Labs Inc., Case No. 3:20-cv-03022, in the U.S. District Court for the Northern District of California and the complaint may be viewed here.

In Wake of Injunction, Telegram Discontinues Involvement with TON Blockchain

In the wake of the latest ruling in its ongoing case with the SEC, Telegram has apparently been considering alternative approaches to its proposed Gram token issuance and has ultimately determined to not issue Gram tokens. On March 24, 2020, SDNY Judge Castel granted the SEC’s motion for a preliminary injunction barring Telegram from issuing its proposed Gram tokens. In his opinion, Judge Castel found “the SEC has shown a substantial likelihood of success in proving that the Gram Purchase Agreements, Telegram’s implied undertakings, and its understandings with the Initial Purchasers, including the intended and expected resale of Grams into a public market, amount to the distribution of securities, thereby requiring compliance with section 5.” Telegram subsequently provided notice of an intent to appeal the decision.

According to media reports, on April 30, 2020, Telegram issued a letter to investors in which it proposed alternative repayments to investors in lieu of the Gram token issuance. The letter allegedly stated that Telegram intended to honor its commitment to repay a certain percentage of the original investments of investors that had invested via Gram Purchase Agreements. The letter also noted that Telegram was offering “an alternative option to receive 110% of [investors’] original investment by April 30, 2021.” Further, the letter noted that, subject to regulatory conditions, purchasers who opted for the alternative option could receive repayment as “Grams or potentially another cryptocurrency on the same terms as those in their original Purchase Agreements.”

However, on May 4, 2020, subsequent media reports indicated that Telegram has since made changes to its purported alternative repayment offer due to an “uncertain reception from the relevant regulators.” Finally, on May 12, 2020, the founder of Telegram, Pavel Durov, announced that Telegram had “made the difficult decision not to proceed with TON” and that “Telegram’s active involvement with TON is over.” The announcement followed a media report that a version of the TON blockchain open-source software, titled “Free TON,” was launched on May 7, 2020, without the involvement of Telegram by third-party entities.

For additional information on the ongoing case, please see our November 15, 2019, January 17, 2020, January 24, 2020, January 31, 2020, April 3, 2020, and April 9, 2020, posts.

Blockvest Founder Seeks to Challenge Sanctions Granted in SEC Suit Related to ICO

In the latest development in the SEC’s suit against Blockvest LLC and Blockvest founder Reginald Buddy Ringgold III, both Ringgold and SEC filed additional briefs in response to Magistrate Judge Michael S. Berg’s report and recommendations in favor of the SEC’s motion for sanctions against Blockvest and Ringgold, which we previously discussed in our April 24 post.

The SEC initially filed a complaint in the Southern District of California in October 2018 alleging that Blockvest and Ringgold committed fraud in connection with an unregistered securities offering in the offer and sale of BLV tokens. The SEC also filed a motion for an emergency court order to prevent the planned ICO, which was granted. As previously discussed in our February 26, 2019, post, the trial judge initially found that the SEC had not established that the tokens constituted securities and then reversed the decision in February 2020. In both instances, the trial judge referred to declarations filed by Blockvest and Ringgold that were presumed to be declarations of Blockvest investors. The SEC has since argued that the declarations were false and filed a motion requesting that the trial court impose sanctions on Blockvest and Ringgold for their submissions of the declarations, and failure to subsequently withdraw the declarations. In support of its motion, the SEC stated “Defendants willfully misled the Court concerning a critical legal issue in this case through the submission of knowingly false and forged declarations. Under Ninth Circuit precedent, such conduct warrants the entry of default judgment against defendants under the Court’s inherent authority.” The SEC’s motion was granted in April 2020.

The case is SEC v. Blockvest LLC et al., Case No. 3:18-cv-02287, in the U.S. District Court for the Southern District of California.

Legislation

Ohio State Lawmakers Contemplate Using Blockchain for Future Election Cycles

As part of proposed election legislation, Ohio legislators raise blockchain as a potential medium to address voting security issues in future state elections. H.B. 560, which was primarily sponsored by Representatives Michele Lepore-Hagan (D) and Beth Liston (D) and co-sponsored by sixteen other Democratic legislators, was first introduced in March 2020 and referred to the State and Local Government Committee on May 5, 2020.

The bill calls on the Secretary of State to create a pilot program for transmitting votes cast by military overseas voters. Specifically, the bill notes that “[t]he pilot program shall use encrypted blockchain technology to transmit ballots in a manner that protects the security and integrity of the process and protects the voter’s privacy.”

Industry

Square’s CashApp Q1 Earnings Show Surge in Bitcoin-Related Earnings

Recent quarterly filings by CashApp recount earnings of $222 million on all its other fiat-powered services in Q1, while revenue from bitcoin was $306 million, thereby marking the first time that the company’s bitcoin earnings surpassed its fiat earnings. CashApp’s SEC filing also noted that the company’s revenue from bitcoin showed an increase of 367% versus its revenue of $65 million during the same time frame in 2019.

While CashApp’s transactional history shows a surge in bitcoin-related earnings, its overall profits remain tied to fiat-related transactions. CashApp’s letter to its shareholders noted: “[r]evenue from Cash App in the first quarter of 2020 was generated primarily by subscriptions and services. Cash App subscription and services-based revenue is primarily composed of transaction fees from Cash App Instant Deposit and Cash Card, with a small portion generated from interest earned on customer funds.” The letter noted that fiat-powered services generated $176 million in profits out of the $222 million in revenue, whereas the revenue from bitcoin resulted in $7 million gross profits.

International Developments

Turkey-Based Company iMiner Successfully Attains License to Operate in Iran

On May 7, 2020, Turkish mining company iMiner reported that it received approval to establish a mining farm in Iran. iMiner is a mining machine rental service company currently operating in Turkey, Russia, the U.S., and Canada. Under its agreement, iMiner is expected to be permitted to establish 6,000 bitcoin mining machines in Iran. The iMiner license serves as another indication of the Iranian government’s policy and approach to virtual currency-related businesses. For example, an iMiner blog post notes that the country is estimated to have at least 148,000 mining machines in operation.

Dutch Central Bank Imposes Registration Requirement for Crypto Service Providers Under Newest Iteration of AML Legislation

After the Dutch Parliament passed new anti-money laundering legislation last month, the central bank of the Netherlands, De Nederlandsche Bank (DNB), provided a reminder to crypto firms to register with DNB or face enforcement action. Under the legislation, firms that convert crypto and fiat or offer crypto custody services must register with the DNB. The DNB explains that crypto-to-crypto firms are not subject to the registration requirements. The legislation takes effect on May 18, 2020.