Weekly Focus:

  • New York’s Financial Services Regulator Announces New Virtual Currency Initiatives
  • Proposed Consent Judgment Filed in Telegram Lawsuit
  • SEC Charges Offerors of AML BitCoin with Fraud
  • Judgment Entered in Shopin Lawsuit
  • Singapore Begins to Enforce Prohibition on Unlicensed Bitcoin Sales
  • Lawmakers in Spain Propose Amendment to the Country’s AML/CFT Laws

US Regulatory Developments

New York’s Financial Services Regulator Announces New Virtual Currency Initiatives

It has been five years since the New York Department of Financial Services (the NYDFS) issued the “BitLicense” regulations, establishing a mandatory licensing regime for virtual currency businesses.

The NYDFS commemorated the BitLicense’s anniversary with the announcement of a new partnership with the State University of New York (SUNY), a request for comments on a proposed conditional BitLicense framework, and final guidance regarding the adoption or listing of virtual currencies.

From the NYDFS press release:

[T]he New York State Department of Financial Services (DFS) and State University of New York (SUNY) have signed a Memorandum of Understanding (MOU) expressing their intent to launch a new SUNY-related virtual currency program, “SUNY BLOCK.” DFS also proposed a new conditional licensing framework that makes it easier for start-ups to enter the New York market. Once licensed by DFS, SUNY BLOCK will be able to support nascent virtual currency entities from local communities, including those started or run by students or alumni, through the proposed conditional licensing framework announced today.

The BitLicense regulations require that any person who engages in “any virtual currency business activity” (VCBA) obtain a license from the NYDFS. The regulations define VCBA to include enumerated activities “involving New York or a New York resident,” including: (1) receiving virtual currency for transmission or transmitting virtual currency, (2) storing, holding, or maintaining custody or control of virtual currency on behalf of others, (3) buying and selling virtual currency, (4) performing virtual currency exchange services, or (5) controlling, administering, or issuing a virtual currency. There are a few exemptions from the licensing requirement: (1) for persons that are chartered under the New York Banking Law and are approved by the superintendent to engage in VCBA; and (2) for merchants and consumers that utilize virtual currency solely for the purchase or sale of goods or services or for investment purposes.

SUNY Partnership

Under the Memorandum of Understanding (the MOU) between the NYDFS and SUNY, SUNY intends to establish a new entity that will obtain authorization from the NYDFS to engage in VCBA—either under a BitLicense or as an entity chartered under the New York Banking Law.

The SUNY entity would incubate businesses in local communities that seek to engage in VCBA but find it impractical to obtain their own BitLicense. The MOU explains that the SUNY entity would provide “to entities from local communities, including entities started or run by students or alumni, guidance and encouragement in applying for and receiving conditional BitLicenses from DFS.”

The Conditional BitLicense

The MOU dovetails nicely with the second release, a request for comments on a proposed framework for a conditional BitLicense (the RFC). The conditional license concept is likely a response to concerns that the licensing requirement has created a barrier to entry that is insurmountable for many smaller companies. The release acknowledges these industry grievances, prefacing the proposal with the following:

DFS recognizes that some firms may face actual or perceived hurdles in obtaining a BitLicense. These include a rigorous application process, which can involve a significant expenditure of time and resources for applicants fulfilling the regulatory requirements for strong governance, operational and compliance controls, and capital, among others.

The NYDFS proposes the following to lower the barrier to entry: BitLicensees and holders of New York limited purpose trust charters that are authorized to engage in VCBA, which it collectively defines as “VC Entities,” can work in collaboration with a startup, growth-stage company, or established company not yet conducting VCBA, enabling the non-licensed business to engage in VCBA under a “conditional license” for a period of time. The RFC sets out the conditional license application process, which notably does not require the applicant to maintain regulatory capital.

Ultimately, the non-licensed business would be expected to apply for a BitLicense or a limited purpose trust charter to continue engaging in VCBA. In the interim, the VC Entity would offer services and support to the non-licensed entity.

The NYDFS encourages industry comments on the proposed framework by August 10, 2020.

Adoption or Listing Guidelines

The NYDFS requires that VC Entities either: (1) obtain the agency’s certification each time that they adopt or list a new virtual currency; or (2) self-certify the listing pursuant to a coin listing policy. The NYDFS finalized its guidance on what such a coin listing policy, as a minimum, must contain. In particular, the coin listing policy must include certain governance provisions, a comprehensive risk assessment, and policies and procedures for monitoring of the coin.

The release notes that “a VC Entity cannot self-certify any coin that may facilitate the obfuscation or concealment of the identity of a customer or counterparty. Thus, for example, no privacy coin can be self-certified. A VC Entity also cannot self-certify any coin that is designed or substantially used to circumvent laws and regulations (for example, gambling coins).”

Other Items of Note

In addition to the three major announcements, the NYDFS also published: (1) a BitLicense FAQs webpage that answers some common questions regarding the need for a BitLicense; and (2) a notice regarding BitLicense application procedures that details two new practices that the NYDFS will employ when reviewing applications.

Litigation and Enforcement

Proposed Consent Judgment Filed in Telegram Lawsuit

The Securities and Exchange Commission (SEC) filed a proposed consent judgment in the SEC v. Telegram Group, Inc. lawsuit in the Southern District of New York on June 25 involving the offering of TON tokens, which the SEC maintained constituted an unregistered offering of securities. The consent judgment would require the defendant to pay an $18.5 million penalty for violations of Section 20(d) of the Securities Act of 1933 and disgorge $1.2 billion. It is worth noting that the disgorgement amount is limited to the unspent $1.2 billion portion of the total $1.7 billion that the defendant raised through the sale of TON tokens. The defendant will have 30 days to pay the $18.5 million penalty, if the consent judgment is accepted by the court.

The decision in Liu v. SEC, recently announced on June 22, might explain why the SEC is accepting these types of settlements. In an 8-1 decision, the U.S. Supreme Court affirmed the SEC’s right to seek disgorgement as a form of equitable relief but placed limits on the amount that qualifies as non-punitive, and therefore equitable, relief under 15 U. S. C. §78u(d)(5). However, the Court held that a disgorgement award that does not exceed the wrongdoer’s net profits and is awarded for victims qualifies as equitable relief under 15 U. S. C. §78u(d)(5).

SEC Charges Offerors of AML BitCoin with Fraud

The SEC filed separate complaints in the Northern District of California against NAC Foundation (and its Chief Executive Officer Marcus Andrade), and political lobbyist Jack Abramoff alleging that the defendants conducted a fraudulent, unregistered offering of AML BitCoin, a cryptocurrency product that the defendants claimed to be a new and improved version of bitcoin.

From the SEC press release:

The SEC alleges that Nevada-based NAC Foundation raised at least $5.6 million from more than 2,400 investors by selling tokens that could later be converted to AML BitCoin. According to the SEC’s complaints, NAC and its CEO portrayed AML BitCoin as superior to the original bitcoin, with anti-money laundering, anti-terrorism, and theft-resistant technology built into the coin on NAC’s own “privately regulated public blockchain.” The SEC’s complaints allege that in reality none of the touted capabilities existed and the development of AML BitCoin and its blockchain was in the very early stages.

The defendants offered ABTC tokens to the public through an initial coin offering between October 2017 and February 2018. They advertised that the ABTC tokens would be convertible one-to-one into AML BitCoin. The SEC complaints allege that the defendants “deceived investors in the offering by making it appear as if [they] had successfully developed the anti-money laundering, know-your-customer, and other security features of the AML BitCoin token” at the time that they sold ABTC tokens, when, in fact, they had not done so.

Furthermore, the defendants made allegedly false and misleading statements in press releases and promotional materials indicating that they were going to air a Super Bowl commercial for AML BitCoin, when in fact the advertisement had been rejected by the NFL and NBC. The ad spot would have portrayed AML BitCoin as immune to North Korean hackers.

The complaints further allege that the defendants misappropriated millions for personal use.

The SEC charges the defendants with violating the antifraud and securities registrations provisions of the federal securities laws. Additionally, the SEC charges Abramoff with broker-dealer registration violations. The U.S. Attorney’s Office for the Northern District of California is pursuing separate criminal charges against Andrade and Abramoff. The Office charges Andrade with wire fraud and Abramoff with conspiracy to commit wire fraud and lobbying disclosure violations.

The Wall Street Journal reports that the SEC is in settlement discussions with Abramoff, noting:

Mr. Abramoff agreed to settle related civil claims filed by the Securities and Exchange Commission, according to the regulatory agency. The settlement, subject to court approval, would require him to give back $50,000 in commissions and agree to be barred from working in the securities industry and as an officer or director of a public company, the SEC said.

Judgment Entered in Shopin Lawsuit

The U.S. District Court for the Southern District of New York entered a final judgment against Eran Eyal and UnitedData, Inc. d/b/a “Shopin” in a lawsuit relating to a $42 million initial coin offering of Shopin Tokens. The SEC’s complaint alleged that Eyal led investors to believe that he would develop a platform that would store and track customer profiles across various retailers. Eyal separately pled guilty to criminal charges brought by the New York Attorney General’s office. Pursuant to the judgment, Eyal must disgorge $457,040, which the court deemed satisfied by Eyal’s payment of approximately 3,105.78 ether tokens pursuant to a plea agreement in the Attorney General’s case.


Singapore Begins to Enforce Prohibition on Unlicensed Bitcoin Sales

In what is believed to be the first instance of enforcement of Singapore’s new virtual currency regulations, Singapore authorities brought charges against a 23-year-old woman for violating its prohibition on unlicensed bitcoin sales. The woman allegedly purchased around $2,400 in bitcoin but faces a maximum penalty of $125,000 in fines and three years’ imprisonment for the violation.

From the Singapore Police Force press release:

Investigations revealed that between 27 and 28 February 2020, the woman had allegedly provided a digital payment token service by receiving at least 13 fraudulent fund transfers amounting to S$3,350 in her bank account, which was then used to purchase Bitcoin. These transactions were done on the instruction of an unknown person in return for a commission. The monies deposited in her bank account turned out to be proceeds of crime from victims of online scams. The woman does not have a licence to carry on a business of providing any types of payment services in Singapore and is not an exempt payment service provider under the Payment Service Act 2019.

Section 5 of the Payment Services Act of 2019 makes it a crime to engage in the business of providing any type of payment service in Singapore without a license, unless an exemption applies.

Lawmakers in Spain Propose Amendment to the Country’s AML/CFT Laws

Spanish lawmakers proposed an amendment to Spain’s AML/CFT laws that would require virtual asset service providers (the term used to refer to virtual currency intermediaries in the Financial Action Task Force (FATF) recommendations) register with the Bank of Spain. The amendment is designed to facilitate compliance with the EU’s 5th Anti-Money Laundering Directive. Consistent with FATF guidelines, the majority of virtual currency exchanges, custodial digital wallet providers, and other virtual currency businesses will be required to register with the Bank of Spain within nine months of the amendment going into effect.