U.S. Developments

Telegram Submits Answer to SEC Complaint Regarding TON Blockchain Network

On November 12, Telegram Group Inc. (Telegram) submitted its answer and affirmative defenses to a complaint filed against it by the U.S. Securities and Exchange Commission (SEC) in federal court. The SEC previously filed an emergency action against Telegram and received a temporary restraining order to prohibit the launch of the Telegram Open Network (TON) blockchain and the issuance of “Grams,” the company’s virtual currency.

In its answer to the SEC complaint, Telegram argues that its offering of investment contracts known as “Simple Agreements for Future Tokens” or “SAFTs” were compliant with the federal securities laws and offered pursuant to a valid exemption from the registration requirements under the Securities Act of 1933. The company also maintains that its actions regarding the SAFTs were consistent with the guidance offered by the SEC at the time and were conducted in good faith based upon the public comments made by SEC officials at the time. Specifically, Telegram cites various SEC statements and actions on the subject.
Continue Reading Blockchain Week in Review: Week of November 15, 2019

U.S. Developments

Litigation

New York Resident Indicted for Duping Investors with Fake ICO Scam

On November 6, the United States Attorney for the Southern District of New York announced a wire fraud charge against Asa Saint Clair, the operator of World Sports Alliance, which held itself out on its website as using sports to promote “economic development and social mobility” and claims an association with the United Nations. The U.S. Attorney, Geoffrey Berman, contends that World Sports Alliance is a “sham affiliate of the United Nations.”

According to the indictment, Saint Clair lured investors into loaning funds, through convertible notes, to World Sports Alliance so that the organization could conduct an ICO for a proprietary digital currency called IGOBIT. Saint Clair allegedly promised investors that they would receive guaranteed returns. According to the government, Saint Clair’s representations were false: Investor funds were not used to conduct an ICO and, instead, Saint Clair diverted the funds and used them to support a lavish lifestyle.

The press release from the United States Attorney’s Office can be found here and the indictment here.
Continue Reading Blockchain Week in Review: Week of November 8, 2019

U.S. Developments

Mastercard and Food Co-Op Work Together on Food Visibility Blockchain Solution

Envisible, a company that is dedicated to supply-chain visibility in food systems, has teamed up with Mastercard’s blockchain-based Provenance Solution to offer a food tracking system. The system is called Wholechain and will allow customers to know more about the source of the food they consume and its journey to their table.

Topco Associates, one of the largest group purchasing organizations in the U.S., is a notable early adopter of the system. Topco’s food co-op includes almost 50 member-owners – including supermarkets, wholesale distributors, and pharmacy companies – that collectively bring in about $170 billion in sales annually.

Topco has begun working with its member grocery chains, starting with Food City, to pilot the use of the technology. The first of several species to be tracked will be salmon, cod, and shrimp.

Read more about the launch here.
Continue Reading Blockchain Week in Review: Week of November 1, 2019

U.S. Developments

Mark Zuckerberg Testifies Before U.S. House of Representatives Regarding Libra

On October 23, Facebook, Inc. CEO, Mark Zuckerberg, testified before the House Committee on Financial Services regarding Facebook’s efforts to launch Libra, a blockchain-based payments system.  Mr. Zuckerberg’s testimony described Libra as a tool for financial inclusion, which would also comply with relevant U.S. regulatory requirements.

Early in his testimony, Mr. Zuckerberg promised that Libra would not launch anywhere in the world until it had received approval from regulators in the United States.  Later, he asserted that Facebook would be willing to quit the Libra project if the product launched prior to receiving regulatory approval.  Mr. Zuckerberg also addressed concerns related to consumer protection over the financial information generated via the Libra network.  He said that Facebook was in the process of building compliance systems for the Calibra wallet application.  He also noted that Facebook was building out strong consumer protections, customer support, and password recovery services designed to ensure that Libra met or exceeded consumer protection standards.
Continue Reading Blockchain Week in Review: Week of October 25, 2019

U.S. Developments

U.S. Federal Regulatory Developments

CFTC, FinCEN, and SEC Leaders Release a Join Statement on Digital Assets

On October 11, 2019, the heads of the Commodity Futures Trading Commission (“CFTC”), Securities and Exchange Commission (“SEC”) and Financial Crimes Enforcement Network (“FinCEN”) issued a joint statement reminding those involved with digital assets about their obligations to protect against money laundering and terrorist financing, as required by the Bank Secrecy Act (“BSA”). The statement clarifies that AML/CFT regulations apply to “financial institutions” as defined under the BSA and includes certain introducing brokers, broker-dealers, money services businesses, and SEC-registered mutual funds. Financial institutions under the BSA definition must, among other things, establish and implement anti-money laundering programs and certain recordkeeping and reporting programs, according to the statement.
Continue Reading Blockchain Week in Review: Week of October 11, 2019

U.S. Developments

Regulatory

VanEck/SolidX Bitcoin ETF Proposal Withdrawn.

Facing an October 18 deadline for the Securities and Exchange Commission (“SEC”) to approve or disapprove, Cboe BZX Exchange withdrew the proposed rule change to list and trade SolidX Bitcoin Shares issued by VanEck SolidX Bitcoin Trust on September 13, 2019. The decision had already been delayed on March 29, 2019, and August 12, 2019. This same exchange-traded fund (“ETF”) proposal was also withdrawn in January 2019 after the government shutdown threatened to force a rejection of the proposal. Cboe BZX Exchange gave no explanation for the withdrawal of the proposed rule change in the September 17, 2019, filing. According to Gabor Gurbacs, the VanEck director of digital asset strategies, the company is still working to bring a Bitcoin ETF to market in the United States.
Continue Reading Blockchain Week in Review: Week of September 20, 2019

U.S. Developments

VanEck and SolidX to Offer Bitcoin ETF to Qualified Institutional Buyers

On September 3, 2019, VanEck Securities Corp. and SolidX Management LLC announced that they are seeking to use Rule 144A of the Securities Act to issue shares in the VanEck SolidX Bitcoin Trust to qualified institutional buyers. According to a joint statement by the companies, the shares would be the first Bitcoin product for institutional investors that are cleared and would feature the same creation and redemption process common to traditional exchange-traded funds (“ETFs”).

Under the proposal, SolidX will be the sponsor of the Bitcoin Trust while VanEck will market the fund. BNY Mellon will be the daily fund accountant, administrator, and transfer agent. A syndicate of underwriters has provided $125 million of insurance according to the head of VanEck’s ETF products. From September 5, 2019 the shares will be quoted on OTC Link ATS, a Securities and Exchange Commission (“SEC”)–regulated alternative trading system.
Continue Reading Blockchain Week in Review: Week of September 6, 2019

U.S. Developments

Enforcement and Litigation Developments

Craig Wright Faces Sanctions

Craig Wright, the self-proclaimed inventor of Bitcoin, has been tied up in litigation since February 2018 related to his partnership with the late David Kleiman.  The case alleged that Wright worked to seize bitcoin owned by Kleiman after his death.  On August 27, 2019, in response to plaintiffs’ motion to compel, a magistrate judge ordered sanctions against Wright for his “continued non-compliance” with court orders to provide information about Wright’s bitcoin holdings.
Continue Reading Blockchain Week in Review: Week of August 30, 2019

U.S. Developments

Veritaseum Founder Provides Response to Asset Freeze Order

Responding to an emergency application filed by the Securities and Exchange Commission, Judge LaShann DeArcy Hall of the United States District Court for the Eastern District of New York issued an order on August 12, 2019, freezing Veritaseum accounts and digital assets and ordering founder Reggie Middleton to provide a response to the SEC’s allegations. On the day of the filing, defense counsel asked for permission to file a response prior to a ruling being issued. The Court ruled the same day. On August 19, Mr. Middleton filed a response with the court defending against the SEC’s claims of securities fraud stating among other things that the SEC did not have any evidence that he was attempting to hide company funds by transferring digital assets from one account to another, which Mr. Middleton claimed was done to fund Veritaseum operations.
Continue Reading Blockchain Week in Review: Week of August 19-23, 2019

U.S. Regulatory

Kik Files Answer to SEC Complaint

On August 7, Canadian messaging company Kik Interactive Inc. (“Kik”) filed its answer to the U.S. Securities and Exchange Commission’s (“SEC”) complaint filed in the Southern District of New York.  In its 131-page answer, Kik argues for a narrow reading of the Howey test and maintains that the SEC has taken quotes out of context and misrepresented documents and testimony in its treatment of the facts in the complaint.

Kik responds to each of the allegations asserted by the SEC in its complaint, in turn, denying those that support the view that Kin tokens constitute securities under the Howey test and that Kik violated the securities laws in any way.  Kik maintains that, although the Howey test is a “flexible” standard, it is “far from limitless” and should not be broadly interpreted by the court.  In addition, Kik argues that the DAO Report should not be considered fair warning to Kik as a digital currency issuer because the facts are meaningfully distinguishable as a community currency.
Continue Reading Blockchain Week in Review: Week of August 9, 2019