- Posts by Thomas K. Potter, IIIPartner
Tom Potter is a Partner in the firm's Nashville office and has over 35 years of experience representing business interests in securities and corporate disputes.
Tom represents broker-dealers and investment bankers in disputes ...
The People’s Bank of China (“PBOC”) announced this morning that it is banning crypto currencies and related services, including “trading, order matching, token issuance and derivatives for virtual currencies are strictly prohibited.” CNBC and other outlets reported that the ban also extends to overseas exchanges serving Chinese residents: “’Overseas virtual currency exchanges that use the internet to offer services to domestic residents is also considered illegal financial activity,” the PBOC said, according to a CNBC translation of the comments.” ...
The Deposit Trust & Clearing Corp. (“DTCC”) released a February 24 roadmap for shortening the settlement cycle for US equities by half over the next two years. The proposal anticipates DTCC’s completion of its “Project ION” using distributed ledger technology (“DLT”) to integrate and speed clearing and settlement processes. Moving to a shorter settlement cycle would reduce industry costs, market risk, and lower margin requirements.
The clearing and settlement process was front and center at the House Financial Services Committee’s February 18, 2021 hearing ...
The Commodity Futures Trading Commission’s (“CFTC”) Final Interpretive Guidance on the “actual delivery” exception to regulatory jurisdiction for digital assets became effective June 24, 2020. See 85 Fed. Reg. 37734. The CFTC unanimously adopted the Guidance in March: Retail Commodity Transactions Involving Certain Digital Assets, Rel. 8139-20 (Mar. 23, 2020).
The Final Guidance adopts the 2017 Proposed Interpretation with some minor changes. The “actual delivery” exception to CFTC regulatory jurisdiction still requires unencumbered physical ...
Paxos Settlement Service announced February 20, 2020, that it has commenced P2P settlement of US-listed equity trades over a private, permissioned blockchain with Credit Suisse and Instinet (a Nomura Bank subsidiary). Paxos expects Societe Generale will join soon.
Paxos is registered with the New York Department of Financial Services and regulated as a limited-purpose trust company.
Late last year, Paxos obtained SEC No-Action relief from clearing-agency registration, limited to a “Feasibility Study No-Action Phase” restricted to a maximum of seven participants for 24 ...
Former Louisiana deputy sheriff and Russian resident Steven Seagal agreed to a Cease and Desist (“C&D”) Order by the SEC, finding violations of the non-touting provisions of Securities Act § 17(b) and imposing civil penalties for acting as a Twitter and Facebook “brand ambassador” for cryptocurrency Bitcoiin2Gen without disclosing it was a paid endorsement.
The Order required Seagal to forego such opportunities for any issuer for three years, disgorge his endorsement fees and pay a civil penalty of a like amount over the coming year.
In 2017, the SEC’s Office of ...
SEC Commissioner Hester Peirce earlier this month proposed a draft SEC Rule 195 as a safe-harbor for developmental token offerings, providing a registration exemption for three years to allow the token’s network to achieve “maturity.”
Proposed Rule 195.
In proposing the Rule, Commissioner Peirce stressed that it is a developmental concept and welcomed direct input. She also said it might work better as a no-action position.
The Rule would provide a three-year non-exclusive exemption to allow Initial Development Teams (“IDT”) an “incubator” period during which a ...
In a July 30 speech in Singapore, SEC Commissioner Hester Peirce compared renegade red pandas’ penchant for life “outside the fence” to the Fin-Tech innovation currently frustrating regulators’ efforts to keep up.
Eschewing calls for international regulation, she also compared the efforts of multiple national regulators to the oft-cited role of U.S. states as “laboratories of democracy.” Cataloging some to date, she cited:
- Singapore’s regulatory “clarity”
- Thailand’s 2018 regulatory framework
- Japan digital asset offering legislation and 2017 ...
Last week, the SEC’s Corporate Finance division issued its second no-action letter supporting a digital token issue. On July 25, 2019, the Staff agreed it would not recommend enforcement action over the issuance of Quarters tokens for online gaming.
The issuer, Pocketful of Quarters, Inc. (“POQ”), states its use case as addressing “in-game currency fragmentation” by creating a “universal gaming taken” to solve “the inability to use gaming credits, coins or other units of value purchased in, or earned playing, one online video game in other online games.”
The IRS announced this week that it is in the process of sending out 10,000 letters during the next month, reminding taxpayers with cryptocurrency accounts about their tax obligations arising from such transactions.
In March 2018, Coinbase was compelled by federal court order to reveal information on customers engaging in digital currency transactions of $20,000 or more during 2013-2015. The Service dropped the other shoe with this week’s announcement, presaging a more robust enforcement effort (expect some criminal tax prosecutions). The announcement, IR-2019-132 (July ...
The SEC recently issued an investor alert warning about crypto advisory and trading websites. The alert cautions investors to be especially wary of web-based cryptocurrency sites with any of these red flags:
- Outsized “guaranteed” investment returns.
- Complicated jargon or difficult-to-understand technologies.
- Unlicensed sellers.
- Sounds too good to be true.
- Unsolicited offers.
- Urgency to act.
…in short, the usual hallmarks of many scams.
The advisory comes on the heels of an indictment against two Nigerian citizens for wire fraud and conspiracy to commit ...
The Financial Stability Board ("FSB") recently released a Crypto-assets Regulators Directory providing background and mandate information for the principal regulatory agencies touching upon digital-asset issues in its constituent jurisdictions.
The Directory covers the FSB’s G20 members, plus Hong Kong, Singapore, Spain, and Switzerland, together with a number of international financial institutions (e.g., the IMF, World Bank, OECD, Basel Committee, and International Organization of Securities Commissions). The Directory will be distributed at this week’s G20 ...
Late last week, the SEC issued a no-action letter widely hailed as its first on a blockchain-based digital token for private jet services. In its TurnKey Jet letter, the Commission Staff indicated it would not recommend enforcement action over the operation of a private, permissioned, centralized blockchain network and smart-contract infrastructure for clearing and payment using a utility-token effectively functioning as a pre-paid jet card (or streetcar token).
See TurnKey Jet, Inc. (Apr. 3, 2019), here.
And the request, here.
CoinDesk reports that the no-action process took ...
This week, the SEC's Division of Investment Management issued a letter seeking industry and public input on custody issues arising from digital assets.
The "Custody Rule," Rule 206(4)-2 under the Advisers Act of 1940, provides it is a fraudulent act or practice to have custody of client assets, unless an adviser complies with Custody-Rule requirements, including among others, by a qualified custodian subject to annual independent audits.
The Division’s recent Guidance Update on custody issues focused on inadvertent custody (e.g. where boilerplate in the adviser’s ...
Earlier this week, SEC Enforcement staff lost a bid for a preliminary injunction against a prospective ICO in its pre-offering testing phase.
Blockvest was preparing for an ICO of "BLV" tokens. Its website touted the endeavor as the "first licensed and regulated tokenized cryptocurrency exchange and index fund based in the United States," and showed pictures of the seals of the SEC, CFTC, NFA, and others. It also claimed to be regulated by the fictitious "BEC" (Blockchain Exchange Commission), which not coincidentally appeared to share the same Washington address as the SEC.
So how ...
Last Friday, November 16, the SEC issued a pair of settled actions setting a de facto standard of compliance for unregistered ICOs wanting to "come in from the cold." In each of them, the ICO offeror paid a $250,000 monetary penalty, registered its ICO as security, and entered a rescission undertaking respecting all tokens issued to date.
The first was a settled action by Paragon Coin - a digital token ("PRG") unregistered offeror in the cannabis industry. Paragon agreed to cease and desist, file a registration statement, and publicly offer rescission of the ICO. The Commission cited ...
On November 8, the SEC filed its first settled enforcement action against a cryptocurrency trading platform for operating as an unregistered exchange trading securities, in violation of the Securities Exchange Act of 1934.
"EtherDelta" was a platform offering matched-book secondary market trading of ERC-20 tokens, many of which had issued in unregistered initial-coin-offerings ("ICOs") having attributes of "securities" under the Howey investment-contract analysis. The Howey test was applied by the SEC in its July 2017 Section 21A Report, The DAO, to conclude that digital ...
After Bitfinex, the CFTC issued its Proposed Interpretation on "Retail Commodity Transactions Involving Virtual Currency." Proposed Interpretation, 82 Fed. Reg. 60335 (CFTC Dec. 20, 2017). Although the comment period closed March 20, 2018, the CFTC has taken no further action on the Proposed Interpretation to date.
The CFTC will assert Commodities Exchange Act regulatory jurisdiction over any "entity or platform [that] offers margin trading or otherwise facilitates the use of margin, leverage or financing arrangements for their retail market participants…." Id. at 60337 ...
In a series of 2015 decisions, the CFTC determined that virtual currency is a commodity subject to its jurisdiction.
In a 2016 settled enforcement action, the CFTC took the position that an unregistered platform administering and providing margin trading contracts in crypto-currencies to non-eligible ("retail") users violated the provisions of the Commodities Exchange Act, In the Matter of BFXNA, Inc. d/b/a Bitfinex, No. 16-19 (CFTC Jun 2, 2016), where:
- Bitfinex controlled the keys to the customer and escrow wallets involved in the margin lending.
- Bitfinex used book-entry ...
The 2011 Dodd-Frank Act amended the CFTC's jurisdiction to authorize regulation of
"retail commodity transactions offered 'on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis.' Dodd-Frank [Publ. L. No. 111-203] § 742, 124 Stat.  at 1732-33 (codified at 7 U.S.C. § 2(c)(2)(D)[(i)])."
CFTC v. Hunter Wise Commodities, LLC, 749 F. 3d 967, 970 (11th Cir. 2014). The Hunter Wise Court held those amendments in fact expanded the CFTC's jurisdiction. But that expanded ...
Prior to Dodd-Frank, the CFTC and Courts recognized a distinction between traded futures contracts subject to CFTC jurisdiction and individualized non-exchange-traded contracts for the present sale of a cash commodity for deferred or future delivery (a "forward contract" or just "forward"). Forwards are exempt from CFTC jurisdiction. Unlike futures, cash forwards contemplates actual physical delivery, contain individualized terms, involve a commodity of intrinsic value (itself, not just the contract), and are not transferable or traded contracts.
Generally, a cash ...
On September 11, FINRA announced its filing of an enforcement action accusing a Massachusetts broker of fraud and registration violations arising from his sale of an unregistered cryptocurrency, "HempCoin." It is FINRA's first cryptocurrency enforcement action.
FINRA alleges Timothy Ayre of fraudulently attempting to bolster his worthless public shell company, Rocky Mountain Ayre, Inc. (RMTN in the OTC pink sheets). Ayre alleged repackaged HempCoin as a security backed by RMTN common stock, marketing it as "the world's first currency to represent equity ownership" in a ...
This is Part 3 of a seven-part series of posts looking at some broad legal issues affecting crypto-currencies.
A. Regulatory Catch-Up.
As is often true of emerging technologies, the crypto-rush of the last few years has left regulators of all types struggling to catch up. The resulting confusion increases entrepreneurial and transactional risks, and also increases fraud risks (about the only thing all regulators agree about).
Various United States federal regulators have expressed interest in crypto-currencies, and claimed some jurisdiction over,
- The Securities and Exchange ...
On September 11, the SEC announced a pair of settled cryptocurrency enforcement actions. The first was against an unregistered digital-asset hedge fund. The second shut down an "ICO Superstore" as an unregistered broker-dealer.
Crypto Asset Management LP ("CAM") ran an unregistered investment company while falsely marketing it as the "first regulated crypto asset fund in the United States." The unregistered offering raised $3.6 million over four months in late 2017, violating the '33 Act. Because the offering proceeds were used to buy digital assets that constituted over 40% of ...
This is Part 2 of a seven-part series of posts looking at some broad legal issues affecting crypto-currencies.
State and federal regulators, especially the SEC, have moved aggressively to halt unregistered initial coin offerings ("ICOs") as unregistered securities sales, where the tokens involved have the attributes of equity in return for money, goods, or services. The SEC first asserted its jurisdiction over token ICOs in its § 21(a) Report on The DAO. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Rel. No. 34-81207 (SEC, July ...
This is Part 1 of a seven-part series of posts looking at some broad legal issues affecting crypto-currencies.
DLT vs Territorial Law.
Fiat currencies have declared value stemming from governmental regulation. And "governments" typically are territorial jurisdictions, exercising the fundamentally territorial concepts of law and regulation.
Cyber-currencies function on the blockchain, a distributed ledger technology ("DLT"). Because DLT is - and fundamentally must be - decentralized and distributed, it defies conventional notions of, and structures for, the ...
- China Bans Crypto Currencies and Related Services
- DTCC Proposes Path to T+1 Settlement Cycle in Two Years
- CFTC Final Guidance on "Actual Delivery" CEA Exemption for Cryptocurrency
- Paxos Starts Blockchain Settlement of US Equities
- Social Media Crypto “Influencer” Not Above the Law
- Proposed SEC Rule 195 Token Incubation Safe-Harbor
- Renegade Pandas, Competitive Regulation and a Token Safe-Harbor?
- POQ No-Action Letter: DLT “Arcade Tokens” Aren’t Securities
- IRS Sends Out 10,000 Cryptocurrency Tax Letters
- State Law Fintech Roundup