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.” ...
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 ...
As fintech and blockchain transactions continue to grow in popularity, they are receiving increased attention at the state level, whether through fintech sandboxes, crypto-friendly legislation, or other initiatives aimed to encourage fintech innovation and economic development. Below is a roundup of just some of the recent fintech activity at the state level:
- This week, New York entered into a Memorandum of Understanding with Israel on fintech cooperation. The agreement is intended to encourage fintech innovation in both New York and Israel by providing support to fintech ...
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 ...
As the 116th Congress continues its work in the first session, several new and revived bills have been introduced concerning blockchain and cryptocurrencies. Two of these bills seek to add a formal definition to important terms in the realm of blockchain and cryptocurrencies. Both of these bills has bipartisan support and seeks to add a more formal definition to well-known terms.
The first bill, called the "Blockchain Promotion Act," was introduced in February and has bipartisan sponsors from both the Senate and the House of Representatives. It calls for the Department of Commerce ...
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 ...
This term, Congress is set to consider several bills—each with bipartisan sponsorship—targeting the fields of blockchain, cryptocurrency, and fintech. This spurt of legislative activity indicates an increased awareness by lawmakers of both the opportunities for innovation in these fields and the potential pitfalls and risks for illicit use posed by these new technologies. The following are several of the bills that have been introduced this term to date which aim to promote blockchain and cryptocurrency:
- The Blockchain Regulatory Certainty Act (H.R. 528), introduced in ...
The Securities and Exchange Commission issued a Sources Sought Notice on January 31, 2019, seeking a private vendor "to support the goal of acquiring data for the most widely used blockchain ledgers."[1]
In the notice, the SEC did not specify or name the ledgers it wanted to acquire data from; however, the requirement that they gather data from the "most widely used" ledgers suggests that the SEC would want the vendor to be able to gather data from cryptocurrencies such as bitcoin and ethereum.
This step towards data gathering, likely in the realm of cryptocurrencies, is an interesting ...
According to an initial registration statement published on January 10, the cryptocurrency index fund provider Bitwise Asset Management has applied with the U.S. Securities and Exchange Commission ("SEC") to form a new bitcoin-backed exchange-traded fund ("ETF"). The Bitwise Bitcoin ETF Trust seeks approval to issue and redeem shares that trade on the NYSE Arca, Inc. stock exchange in blocks of 25,000 shares. If approved, the Bitwise Bitcoin ETF Trust will be the first of its kind.
Bitwise Asset Management's SEC Form S-1 states that the Bitwise Bitcoin ETF Trust will track the ...
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 ...
Burr & Forman was a sponsor at the recent Distributed Health conference held in Nashville, Tennessee, with members of the firm's Blockchain, Cryptocurrency and E-Transactions team participating as speakers and attendees. The conference featured presentations and panel discussions from innovators and thought leaders, ranging from payers and providers to pharmaceutical manufacturers and policymakers. This fostered a collaborative forum for stakeholders in the healthcare and blockchain space.
Matt Kroplin, a partner in Burr's Nashville office, spoke on a panel about the ...
On October 3, 2018, the Securities and Exchange Commission sued Blockvest LLC and its founder Reginald Buddy Ringgold, III for falsely claiming that its initial coin offering had been approved by the SEC. The complaint, filed in the United States District Court for the Southern District of California, Case No. 18-CV-2287-GPC, sought a return of improperly obtained funds as well as a temporary restraining order to "halt the fraudulent offer and sale of unregistered securities" by Blockvest and to freeze the assets of both Blockvest and Ringgold.
The SEC's complaint alleges that ...
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. [1376] 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 ...
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 ...
Mick Mulvaney's tenure as acting director of the Consumer Financial Protection Bureau ("CFPB" or "the Bureau"), a position he has held since November of 2017, is coming to an end. It is anticipated that President Trump's nominee, Kathleen Kraninger, will take over as the Bureau's director once confirmed by the Senate. In a speech to the Women in Housing and Finance group on May 29, 2018, Mulvaney announced that the Bureau is working closely with the Commodity Futures Trading Commission to implement a "regulatory sandbox" that will enable financial technology ("FinTech") firms to ...
The cryptocurrency Tether has recently announced that it has been the target of a hack causing the loss of approximately $30 million worth of its tokens.
In response to the hack, Tether provided the following statement, "$30,950,010 USDT was removed from the Tether Treasury wallet on November 19, 2017 and sent to an unauthorized bitcoin address. As Tether is the issuer of the USDT managed asset, we will not redeem any of the stolen tokens, and we are in the process of attempting token recovery to prevent them from entering the broader ecosystem." In addition, Tether has identified the ...