Weekly Focus:

  • Members of Congress Request SEC Clarity On Digital Securities Custody
  • Digital Asset ‘Stacks’ Plans 2.0 Launch as Non-Security
  • Secretary Mnuchin Emphasizes G7 Coordination on Digital Currencies
  • CFTC and SEC Leaders to Step Down
  • DOJ Indicts ICO Promoter for Tax Fraud, SEC Files Civil Suit
  • France Strengthens Anti-Money Laundering (AML) Requirements for Digital Asset Companies
  • Thailand Plans to Incorporate Blockchain into Tax Revenue Collection Systems

U.S. Developments

Members of Congress Request SEC Clarity On Digital Securities Custody

On December 9, a bipartisan group of representatives penned a letter to SEC Chairman Jay Clayton regarding the issue of broker-dealer custody of digital securities. In the letter, the representatives encouraged the SEC and FINRA to address digital asset custody in light of recent interpretive guidance from the Office of the Comptroller of the Currency (OCC) clarifying that national banks may provide custody services for digital assets.

The representatives noted that the SEC and FINRA previously recognized the need for regulated safekeeping services for cryptographic assets in a joint statement in 2019. However, the SEC has provided no guidance that would allow for FINRA to grant broker-dealer applications involving the custody of digital securities. The representatives stated that by failing to approve broker-dealer applications involving the custody of digital securities, the digital securities industry lacks the infrastructure needed to operate in a regulated way.

In order to remedy the situation, the representatives recommended that the SEC take three actions: First, to explicitly confirm that banks may act as good control locations for the custody of digital securities. Second, to advise FINRA on the requirements for broker-dealers to be able to custody digital securities for their customers as well as for their own account. And third, to instruct FINRA to approve broker-dealer applications that meet the requirements necessary to custody digital securities.

Please click here for the letter and here for the press release from Congressman Tom Emmer’s office.

Digital Asset ‘Stacks’ Plans 2.0 Launch as Non-Security

On December 7, Blockstack PBC, a digital assets company responsible for the issuance of the digital assets known as “Stacks,” announced that it would be launching a new version of the Stacks blockchain known as the “Stacks 2.0 blockchain” on January 14, 2021. The Stacks tokens serve as digital “fuel” to conduct transactions and to register and execute smart contracts on the Stacks blockchain. Blockstack initially issued the Stacks tokens in 2019 via an exempted public offering under the SEC’s Regulation A+, raising more than $23 million. As part of the offering, Blockstack classified the Stacks tokens as digital asset securities, subject to SEC financial reporting obligations and restrictions, including trading limitations with U.S. customers.

With the launch of its new blockchain, Blockstack is taking the position that the facts and circumstances relevant to the Howey test have changed sufficiently since its Regulation A+ offering, such that offers and sales of Stacks tokens should no longer be considered securities transactions involving an investment contract.  Among other changes associated with the launch of the Stacks 2.0 blockchain, Blockstack points to the fact that the issuer of the Stacks tokens will have relinquished its role of expending the requisite managerial efforts to the broader community at large. Blockstack’s announcement also states that the Stacks 2.0 blockchain will permit the mining of new Stacks tokens and will allow for the tokens to be traded by U.S. customers on non-securities exchanges.

Please click here for the announcement.

Secretary Mnuchin Emphasizes G7 Coordination on Digital Currencies

On December 7, U.S. Treasury Secretary Steven Mnuchin addressed the finance ministers and central bankers from the Group of Seven (G7) on the coordination of their response to the ongoing COVID-19 pandemic. As part of Secretary Mnuchin’s remarks, he emphasized the importance of G7 action on the threats posed by digital currencies. The group discussed the evolving landscape of crypto assets and national authorities’ work to prevent their use for illicit activities. The group also emphasized that there was strong support across the G7 on the need to regulate digital currencies and reiterated their support for the G7 joint statement on digital payments issued in October.

Please click here for the statement from the U.S. Department of the Treasury.

CFTC and SEC Leaders to Step Down

On December 10, SEC Enforcement Director Stephanie Avakian and CFTC Chairman Heath Tarbert, announced that they would be stepping down from their roles at their respective agencies. Both were heavily involved in the regulation of digital assets, each having an outsized role in the development and enforcement of securities and commodities regulations on the digital assets industry. Director Avakian presided over the SEC’s pursuit of digital asset firms, with her department bringing numerous enforcement actions against ICO token issuers, investment companies, and others in the digital assets industry. Chairman Tarbert was among the first regulators at the CFTC to acknowledge the role of digital assets play in the derivatives space, including Ether futures.

Please click here for the Director Avakian’s press release and here for Chairman Tarbert’s statement announcing his future plans.

DOJ Indicts ICO Promoter for Tax Fraud, SEC Files Civil Suit

The Department of Justice (DOJ) announced criminal tax evasion charges against the founder of the Oyster Protocol blockchain. In the course of the alleged fraud against investors, the promotor cashed out tokens for personal use. In its announcement of the charges, the DOJ quoted several statements by the promoter indicating that the promoter was aware of the tax consequences of the transactions. This case appears to be among the first cases with stand-alone tax evasion charges against an individual involved in cryptocurrency.

Please click here for the DOJ announcement.

International Developments

France Strengthens Anti-Money Laundering (AML) Requirements for Digital Asset Companies

On December 9, the French Ministry of Finance announced that it would be proposing new AML/CFT rules for companies that facilitate digital asset trading with French customers. The new requirements would, among other things, impose AML/CFT requirements on businesses that offer trading services for digital assets to other digital assets (so called “crypto-to-crypto” exchanges). Notably, the legislation imposes the same requirements on crypto-to-crypto exchanges as those currently imposed on digital asset to legal tender service providers (so called “crypto-to-fiat” exchanges). The AML requirements also include a prohibition on the use of anonymous accounts for trading on crypto-to-crypto exchanges. At the heart of the proposed regulation is a desire to better harmonize the French AML framework with FATF principles and to respond to new risks presented by the use of digital assets in France.

The untranslated announcement is available here and an English language news report regarding the announcement is available here.

Thailand Plans to Incorporate Blockchain into Tax Revenue Collection Systems

On December 7, the Bangkok Post reported that the Excise Department within Thailand’s Ministry of Finance plans to implement blockchain technology to improve its revenue collection systems in the coming year. According to Excise Department Director-General Lavaron Sangsnit, blockchain technology will be used to identify the price, import duty, and tax liability of imported products. The Director-General also stated that Thailand has already established a blockchain-integrated procedure for “assessing the tax returns of oil exports,” which is expected to be implement in the first quarter of 2021. The nation’s two other tax agencies, the Revenue Department and Customs Department, will also start rolling out blockchain systems in their operations, according to the report. Mr. Lavaron stated that tax evasion would be a lot harder with the blockchain integrations because the three departments will be able to coordinate when conducting tax audits.

The Bangkok Post article is available here.