Regulatory and Legislative Developments

U.S. Developments

Denver to Implement Blockchain-Based Elections for Overseas Voters

Denver moves to become the second U.S. jurisdiction to implement a blockchain-based voting system for overseas voters. Active duty military and other eligible overseas voters will be able to use a mobile phone application in the next election to cast their vote on municipal issues.

Denver plans to use Voatz, a mobile application used by West Virginia in the 2018 mid-term election, where an estimated 144 overseas voters made use of the application. Voatz only runs on newer-model smartphones and verifies a voter’s identity by using facial recognition software and, when available, fingerprint analysis. Voatz records votes by using the HyperLedger blockchain framework first created by IBM and now supported by the Linux foundation.
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U.S. Developments

Regulatory Updates

CFTC Plans Public Meeting Addressing Fintech, Including Blockchain Technology

On March 27, 2019, the Commodity Futures Trading Commission (CFTC) Technology Advisory Committee will host a public meeting  at the CFTC headquarters in Washington, DC. The Technology Advisory Committee plans to use the meeting to listen to presentations and consider actionable recommendations from various subcommittees. The subcommittees that will be represented are Automated and Modern Trading Markets, Distributed Ledger Technology and Market Infrastructure, Virtual Currencies, and Cyber Security. For those who cannot attend in person, the CFTC will provide a conference call line and a live webcast. The CFTC will accept written comments through April 3, 2019.
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Cryptocurrency owners must face death—be it their own, or that of anyone else with custody of the owner’s cryptocurrency or other digital assets. We received a stark reminder of this when the Canadian exchange QuadrigaCX recently filed court papers[1] indicating it may have lost access to nearly $200 million USD of its customers’ Bitcoin, Ether and other cryptocurrencies. The exchange claimed to have used cold wallets to store its portion of customers’ vital cryptocurrency offline. After the owner of the exchange died, however, the exchange has apparently struggled to access this cryptocurrency and related fiat deposits, and customers may forever lose their assets housed on the exchange.[2]
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U.S. Developments

Regulatory Updates

SEC Settles Enforcement Action with Gladius Network

On February 20, 2019, the U.S. Securities and Exchange Commission (“SEC”) announced the settlement of charges against Gladius Network LLC (“Gladius”) for conducting an unregistered securities offering.  Gladius conducted a presale and public sale of digital tokens called “GLA” in late 2017, raising approximately $12.7 million to finance the development of a network where peers would rent out to other peers spare computer bandwidth and storage space on their computers and servers to defend against cyberattacks and to increase content delivery speed in exchange for GLA.  Gladius did not register its sale of GLA or sell the tokens under an exemption from registration requirements. 
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U.S. Developments

Regulatory Updates

SEC Commissioner Peirce Says Guidance on Crypto Token Sales Is Coming

In a speech at the University of Missouri School of Law, Hester Peirce, one of the SEC’s commissioners, said that the agency is working on “supplemental guidance” to help projects determine when securities laws might apply to crypto token sales. The commissioner said that the traditional standard for determining whether something is a security—the Howey Test—can sometimes be “overbroad” and that there is a “need to tread carefully” as token offerings do not always resemble traditional securities offering. She did not give any indication as to when the guidance might be issued, however.

Read the full speech here.
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The International Swaps and Derivatives Association (ISDA) has published the first in a series of guidelines for what it colloquially refers to as “smart derivatives contracts” (the Guidelines).* A smart derivatives contract is a derivative that incorporates software code to automate aspects of the derivative transaction and operates on a distributed ledger, such as a

U.S. Developments

Florida Court of Appeals Rules That Direct Sales of Bitcoin Constituted Money Transmission and the Sale of Payment Instruments

Reversing the order issued by the Miami-Dade County Circuit Court, the Florida Court of Appeals issued an opinion on January 30 in the case of Florida v. Espinoza in which the appellate court ruled that an individual’s sale of bitcoin for cash constituted money transmission and the sale of payment instruments. Largely basing its conclusions on definitional interpretation of the terms “payment instrument” and “money transmitter” under Florida statute, the court of appeals found that the sales of bitcoin involved a “medium of exchange” with “monetary value,” and thus bitcoin fell within the definition of “payment instrument.” The court of appeals relied on similar analysis to conclude that Mr. Espinoza’s sales qualified as money transmission and that, since Mr. Espinoza was not licensed to act as a money services business, he could be charged with engaging in unlawful money transmitter services.
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Arizona’s financial technology (“fintech”) sandbox (“Sandbox”), the first of its kind in the United States, has been open for several months and has accepted three participants.  A month after the program’s launch, Arizona’s Attorney General announced his approval of the first participant, payment platform Omni Mobile, Inc.[1]  Two other companies providing consumer lending services, Sweetbridge NFP, Ltd. and Grain Technology, Inc., joined Omni as Sandbox participants shortly thereafter.[2]  Arizona’s Sandbox may serve as a helpful illustration of what entrepreneurs can expect in Arizona (should they also wish to participate in the Sandbox) as well as in other states that decide to implement similar programs.[3]  To that end, this client update provides an overview of regulatory sandboxes generally, Arizona’s Sandbox, and potential future developments.
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U.S. Developments

Kik Publicizes Response to Possible SEC Enforcement

On January 27, the Wall Street Journal published an article describing the impending legal battle over cryptocurrency Kin and its 2017 ICO. That same day, Ted Livingston, the founder and CEO of Canadian company Kik Interactive (Kik) and the developer behind Kin, published the Wells Notice he received from the Securities and Exchange Commission (SEC) on November 16, 2018, as well as Kik’s response.
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U.S. Developments

Cboe Withdraws and Then Submits a Proposed Rulemaking for a Bitcoin ETF

On January 22, 2019, Cboe BZX Exchange (Cboe) withdrew its proposed rulemaking with the U.S. Securities and Exchange Commission (SEC).  Had the proposal been approved, Cboe would have been allowed to list shares of bitcoin electronically-traded funds (ETFs) backed by VanEck and SolidX.  On January 30, 2019, Cboe submitted a new proposed rulemaking to list the VanEck and SolidX bitcoin ETFs.
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