Weekly Blockchain Focus
- House Passes Crypto Bills
- SEC delays decision on Valkyrie Bitcoin ETF – client
- 11th Circuit Tosses Crypto Case against rapper T.I.
- Biden nominee for Treasury Department pushes for crypto regulations
- China Continues Crackdown on Crypto
- South Africa Banks Block Crypto
- UK Financial Markets Regulator Issues Crypto Warning
- BIS Comments on Bitcoin
House Passes Crypto Bills
On Tuesday, the House of Representatives passed two bills related to cryptocurrency. The first bill, titled “Consumer Safety Technology Act,” is sponsored by Representative Jerry McNerney (D-Calif.). The bill directs the Consumer Product Safety Commission “to establish a pilot program to explore the use of artificial intelligence” and incorporates two previously introduced crypto bills that direct the Secretary of Commerce and the Federal Trade Commission “to study and report on the use of blockchain technology and digital tokens.” This bill was previously introduced in a session of Congress and was passed by the House on September 29, 2020, but it was never passed by the Senate. By reintroducing this bill to the Senate, Rep. McNerney and the bill’s bipartisan co-sponsors are giving it a second chance.
The two cryptocurrency bills that were incorporated into the Consumer Safety Technology Act are the Blockchain Innovation Act and the Digital Taxonomy Act. Both of these Acts mandate the FTC to report on “unfair or deceptive acts or practices in transactions relating to digital tokens.” Representative Darren Soto (D-Fla.) previously introduced the Digital Taxonomy Act in 2019 but did not receive a single vote. On the House floor, Rep. Soto emphasized the importance of protecting consumers against unscrupulous companies: “When we look at market volatility, the use of cryptocurrency for ransomware, and recent attacks like the Colonial Pipeline and tax evasion, it’s critical that we get on the front end of this.”
Rep. Soto also commented on the importance of the blockchain study commissioned under the Blockchain Innovation Act: “These recommendations will perform an education function to Members of Congress and will pave the way for a more actionable blockchain-focused legislation.”
The full text of the Consumer Safety Technology Act, which incorporates the Blockchain Innovation Act and the Digital Taxonomy Act, can be read here.
SEC delays decision on Valkyrie Bitcoin ETF – client
On Tuesday, the Securities and Exchange Commission (SEC) announced that it would be extending the review period for the Valkyrie Bitcoin Fund application, which was filed by Valkyrie Investments in January 2021. The SEC noted that its revised date for a decision on the Valkyrie Fund is August 10th. This decision follows last week’s announcement from the SEC that it would be delaying its decision for a second time on another bitcoin ETF, the VanEck Bitcoin Trust. In the VanEck filing from last week, the SEC asked for the public’s comment on VanEck’s application, specifically requesting interested parties to answer questions about how susceptible the bitcoin ETF would be to market manipulation and whether or not the regulatory landscape has changed significantly since 2016.
The Valkyrie Bitcoin ETF tracks the Chicago Mercantile Exchange (CME) Commodities Futures (CF) Bitcoin Reference Rate (BRR) used for Bitcoin futures traded on the CME. The reference rate is calculated using the one-hour volume-weighted average price of Bitcoin across given major exchanges: Bitstamp, Coinbase, Gemini, itBit, and Kraken.
The Valkyrie Bitcoin Fund S-1 can be read here. The SEC filing announcing the extension of the review window for the Valkyrie Bitcoin Fund can be read here.
11th Circuit Tosses Crypto Case against rapper T.I.
On Monday, the U.S. Court of Appeals for the Eleventh Circuit affirmed that an investor’s proposed class action accusing Atlanta-based rapper Clifford Joseph Harris Jr. (better known as “T.I.”) and his business partner, Ryan Felton, of securities law violations based on the sale of a cryptocurrency was untimely. The class action involved a 2019 securities claim, alleging that investors were schemed out of thousands after buying a digital token called FLiK in 2017, which was the cryptocurrency created to fund T.I.’s now-defunct movie-streaming startup that went by the same name (FLiK).
In an appeal from the U.S. District Court for the Northern District of Georgia, the Eleventh Circuit agreed with the lower court that the statute of limitations had expired. The plaintiffs, led by investor Kenneth Fedance, argued that the one-year statute of limitations should have been extended based on equitable tolling for fraudulent concealment, but the Court did not agree: “Fedance alleges that neither he nor putative class members could bring claims for the sale of unregistered securities within the one-year limitations period because Felton and Harris fraudulently concealed the facts necessary to reach the legal conclusion that FLiK Tokens were securities . . . But you cannot make fraudulent concealment mean ‘Whatever You Like’” referencing the title of a song by T.I.
The district court originally dismissed the claims against T.I. and Felton, finding that the one-year statute of limitations clock had started on the August 2017 purchase date of the allegedly unregistered securities. Once August 2018 passed, Fedance was foreclosed from bringing suit. The Eleventh Circuit noted, however, that the district court got it wrong with respect to equitable tolling. The Eleventh Circuit specifically stated that equitable tolling is available under sections 12(a)(1) and 15(a) of the Securities Act and that equitable tolling would have been available here in this case if, in fact, the cause of action was fraudulently concealed. But the Court noted that “Fedance had all the facts he needed to make that same legal conclusion well before then.” The Court also found that Fedance failed to identify any concealed facts. “Felton and Harris allegedly fooled Fedance and other token purchasers into thinking that FLiK would be wildly successful, but they did not fool those purchasers into thinking that they were buying FLiK Tokens as anything but an investment,” the Eleventh Circuit wrote in its opinion.
The Eleventh Circuit’s opinion can be read in full here.
Biden nominee for Treasury Department pushes for crypto regulations
In a hearing on Tuesday before the Senate Committee on Banking, Housing, and Urban Affairs, Brian Nelson, President Joe Biden’s nominee for Under Secretary of the Treasury Department’s division on terrorism and financial crimes, said he would prioritize implementing new regulations around cryptocurrency. Nelson said he would be focusing on enforcing the regulations under the Anti-Money Laundering Act of 2020 to prevent cryptocurrencies from undermining existing laws. “If I am confirmed, I will prioritize implementing the pieces of that legislation, including new regulations around cryptocurrency,” said Nelson. “I think that legislation provided new authorities — or clarified the law — that cryptocurrencies or currency in whatever form, be it virtual or fiat, is covered by the Bank Secrecy Act.”
The Financial Crimes Enforcement Network, or FinCEN, has previously relied upon the Bank Secrecy Act (BSA) to apply to cryptocurrencies in certain cases, even though the Bank Secrecy Act is a piece of legislation from 1970. Nelson praised the BSA, saying, “It reflected a balancing of regulating to prevent virtual currency and other types of new technology from undermining our anti-money laundering system while also being respectful of the fact we need to support responsible innovation and preserve that here in the United States.”
Brian Nelson’s full comments before the Senate Banking Committee can be viewed here.
China Continues Crackdown on Crypto
On Monday, the People’s Bank of China (PBOC) issued a statement saying that it has recently summoned a meeting with several domestic banks and mobile payment service providers, including the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China (ABC), the Construction Bank of China (CBC), Postal Savings Bank of China, the Industrial Bank, and mobile payments app AliPay. The meeting will cover the recent speculative activities around cryptocurrency trading, noting that these speculative activities have severely disrupted the balance of China’s financial system and provided for illegal capital outflow across the border, including money laundering activities.
In the statement, the PBOC also reiterated its 2017 position that no financial institutions should provide banking and settlement services for crypto-related transactions. The PBOC added that banks should check if any OTC traders are using services to provide crypto-related transactions and should “immediately cut off their payment and funding channels” if these OTC traders are found to be providing crypto-related services, such as fiat on-ramp channels for crypto channels.
Ever since the PBOC issued a ban on initial coin offerings in 2017, many exchanges in China have largely switched to crypto-to-crypto-only order books, making it difficult to exchange fiat for crypto. This led to Chinese crypto investors relying on OTC merchants to get between fiat and crypto using peer-to-peer networks. For example, User A would send crypto assets to User B after User B would wire an equivalent amount of Chinese yuan through mobile payment apps or bank transfers.
Shortly after the PBOC notice was published on Monday, the banks mentioned in the PBOC statement and AliPay each issued their own notices (see, e.g., statement from Postal Savings Bank) to their customers, saying that if any users were found dealing with cryptocurrency transactions, that those customers’ accounts would be immediately terminated and reported to the relevant authorities.
In recent weeks, the Chinese government has continued to crackdown on cryptocurrency activities. Last month, the finance committee under China’s State Council published its minutes, noting that “cracking down on bitcoin mining and trading activities” was of paramount importance. Following those comments, municipalities throughout China, including Xinjiang, Qinghai, and Sichuan all issued orders to their local-owned power grids to immediately cut off electricity supply to bitcoin mining facilities. Nearly two gigawatts of energy capacity were taken offline last week in Xinjiang, and Sichuan followed suit this week by shutting down 26 bitcoin mining farms. Since these mining shutdown orders were released, Bitcoin’s total network hash rate has declined by more than 30%.
South Africa Banks Block Crypto
Citing restrictions from the South African Central Bank, South African banks have limited customers’ ability to make payments to international exchanges. Users of international exchanges encountered banking restrictions as reported on Monday, June 21, 2021.
In a FAQ document, the South African Central Bank explained its restrictions against cross-border or foreign exchange transfers on crypto assets saying “[f]rom an exchange control perspective, the Financial Surveillance Department is unable to approve any transactions of this nature.” The document goes on to describe the administrative process in place to allow purchases from abroad.
The change in payments to foreign exchanges follows an announcement earlier this month that the Financial Sector Conduct Authority would begin to regulate crypto assets in a phased and structured approach. South Africa has separately established an innovation program that includes a regulatory guidance unit, sandbox program, and ‘innovation accelerator’ to support Fintech companies.
UK Financial Markets Regulator Issues Crypto Warning
Last week, the United Kingdom’s Financial Conduct Authority (FCA) released research showing that the number of investors who are buying crypto-assets has risen since 2020. The number of UK investors who own some form of digital currency has risen from 1.9 million to 2.3 million. With the popularity of crypto on the rise, however, the FCA warned that the public’s working understanding of how cryptocurrency works is declining, noting that “some crypto-users may not fully understand what they are buying.”
The FCA also noted that it is moving towards tougher regulations on cryptocurrencies. For example, the FCA was recently granted more power to regulate advertisements issued by unauthorized businesses, including those promoting cryptocurrency investments. The FCA has also toughened its supervision of crypto-asset companies by requiring these companies to submit thorough reports that disclose details about how the companies are combatting money laundering activities.
The full research note from the FCA can be read here.
BIS Comments on Bitcoin
The Bank of International Settlements (BIS), a Switzerland based group representing central banks worldwide, issued its Annual Economic Report on Wednesday, June 23, 2021. This report included a chapter dedicated to central bank digital currencies (CBDCs), and discussing their substantial benefits.
The BIS report noted settlement finality, liquidity, and integrity as advantages of CBDCs, alongside increasing competition, access, and innovation. The BIS also noted the opportunities for CBDCs to improve cross-border payments when coupled with digital identification, and the potential to limit exchange risk.
Discussion of other digital assets, naming Bitcoin and stablecoins generally, was overall negative. The BIS report also discussed the entry of ‘big techs’ into financial services, and the network effects that can lead to risk for consumers. The full BIS report is available here.