Regulatory and Legislative Developments

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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U.S. Developments

 Flood of State Virtual Currency Legislation

Since the start of the new year there have been roughly nine virtual currency bills introduced or passed in four different states. Overall, the bills demonstrate a growing interest among the states in supporting virtual currency businesses through the codification of blockchain terminology for legal effect or by proposing regulatory exemptions for certain virtual currency activities. The bills also show that many state legislatures are interested in learning about how blockchain and distributed ledger technology (DLT) can support state governments.


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U.S. Developments

Regulatory Updates

Texas Clarifies that Stablecoins Backed by Sovereign Currency Qualify as “Money” Under Money Transmission Statute

The Texas Department of Banking recently issued a Supervisory Memorandum clarifying how its money transmission statute applies to stablecoins backed by sovereign currency. The Department reiterated—consistent with its 2014 guidance—that Texas’s money transmission statute only regulates “money” or “monetary value” and that most virtual currencies fall outside the statute’s scope. But the Department stated that stablecoins backed by sovereign currency, such as Tether, qualify as “money” or “monetary value.” Under Texas’s statute, money or monetary value includes either sovereign-issued currencies or claims that can be converted into such currencies. The Department concluded that, unlike most virtual currencies, stablecoins backed by sovereign currency are money or monetary value because they represent claims that can be redeemed for currency. The Department explained that, as a result, entities doing business in Texas that hold stablecoins backed by sovereign currency for third parties—such as custodial wallet providers or intermediated exchanges—will most likely need a Texas money transmission license.


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