Weekly Focus:

  • Fifth Circuit Limits Privacy on Digital Asset Transactions
  • SEC Approves Digital Shares for Treasury Fund
  • CFTC to Develop Holistic Framework for Digital Asset Innovation
  • FATF Issues New Report on Stablecoins

Fifth Circuit Limits Privacy on Digital Asset Transactions

On June 30, the United States Court of Appeals for the Fifth Circuit (Fifth Circuit) ruled that FBI agents who subpoenaed a cryptocurrency exchange for records related to Richard Gratkowski’s payments to an illegal website didn’t violate Gratkowski’s Fourth Amendment rights. The court reasoned that users who transact in digital assets do not have an expectation of privacy under the Fourth Amendment, similar to account holders at ordinary financial institutions.

Lawyers for the defense argued that Gratkowski’s digital asset transaction information should receive Fourth Amendment protection, like cellphone location data. They argued that the transaction data was extremely sensitive in nature and could reveal deeply personal information about transaction counterparties including religious or political beliefs. The court took a different view, determining that the information was limited in scope and was more like bank records that do not receive Fourth Amendment protection. In issuing her opinion, Judge Haynes cited the third-party doctrine, a legal principle under which a person has no expectation of privacy over information that has been voluntarily divulged to third parties. Importantly, regulated cryptocurrency exchanges are often subject to similar legal obligations as incumbent financial institutions, which among other things, can require the institutions to divulge customer information to law enforcement.

Please click here for the Fifth Circuit opinion.

SEC Approves Digital Shares for Treasury Fund

On July 6, Arca, a digital asset investment company announced that its Arca U.S. Treasury Fund (Fund) received approval from the U.S. Securities and Exchange Commission to offer digital asset shares that represent ownership in the Fund to the public.

The Fund plans to invest 80% of its assets in U.S. Treasury securities and will leverage blockchain technology to provide efficient transaction settlement for investors. Participants in the Fund will receive quarterly interest payments in the form of digital shares, called “ArCoins” that are transmitted and stored on the Ethereum blockchain. As a blockchain token, the ArCoins can be transferred in peer-to-peer transactions. There are no share certificates, and because the shares can be transferred in peer-to-peer transactions using the Ethereum blockchain, the shares are characterized as “digital securities” in the Fund’s prospectus. Arca plans to leverage ArCoins to offer investors new ways to integrate ArCoin as an efficient transaction settlement alternative to the existing banking and payment networks.

Please click here for the Fund prospectus.

CFTC to Develop Holistic Framework for Digital Asset Innovation

On July 9, the U.S. Commodity Futures Trading Commission (CFTC) announced that it has finalized its strategic plan for 2020-2024, which includes a “holistic framework to promote responsible innovation in digital assets.”

The strategic plan calls on the CFTC to focus its work on five strategic goals, each with clearly defined objectives. Among other things, the strategic plan highlights recent CFTC achievements in digital asset regulation, including granting Designated Contract Market licenses for exchanges specializing in futures relating to digital assets. The plan commits to encouraging innovation and enhancing the regulatory experience for market participants. As part of this strategic goal, the CFTC plans to develop a framework for digital assets.

CFTC Chairman Heath Tarbert commented on the strategic plan and its inclusion of digital asset initiatives by stating that digital assets are an area where a principles-based regulatory approach concerning blockchain and digital asset innovation is particularly valuable. He went on to say that he hopes that the CFTC will “stay ahead of the curve by reacting more quickly to changes in technology and the marketplace.”

Please click here for a link to the CFTC Strategic Plan and here for the press release.

FATF Issues New Report on Stablecoins

 In June, the Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system, published a report on the risks of digital assets, commonly known as stablecoins. Stablecoins are described in the report as digital assets that are designed to maintain a stable value relative to an underlying asset or benchmark (e.g., U.S. Dollars). The report builds upon the FATF’s previous guidance regarding the money laundering and terrorist financing (ML/TF) risks posed by digital assets and the regulated institutions knowns as Virtual Asset Service Providers (VASPs) that offer exchange, issuance, and other services related to digital assets. This previous guidance also established revised FATF standards applicable to financial institutions and VASPs including confirmation of the applicability of the so-called “travel rule,” which requires financial institutions and VASPs to collect certain transaction information from counterparties to digital asset transactions.

In the report, the FATF assessed the potential ML/TF risks posed by stablecoins in three parts. First, the FATF reviewed the risks posed by digital assets and stablecoins, including risks related to their anonymity, global reach, the ease of structuring or layering transactions in digital assets, and the potential for stablecoins to reach mass-adoption. Second, the FATF analyzed the five largest stablecoins (Tether, USD Coin, Paxos, TrueCoin, and Dai) and two proposed stablecoins (Libra and Gram). The analysis determined that there were two broad categories of stablecoins: (1) centralized stablecoins that are offered by a single financial institution or VASP and (2) decentralized stablecoins that have less clearly identifiable central governance bodies. While noting that there are important structural differences between centralized and decentralized stablecoins, the FATF determined that its digital asset standards would apply equally to both categories of stablecoins. Finally, the FATF proposed enhancements to its existing standards for digital assets in consideration of the unique risks posed by stablecoins, including the potential risks posed by stablecoins reaching mass-adoption. The FATF also proposed future guidance on stablecoins and tailored advice to jurisdictions on the regulation of stablecoins in the future.

Please click here for a link to the FATF report.