Blockchain Legal Resource

On July 22, 2020, the Office of the Comptroller of the Currency (OCC) published an interpretive letter clarifying the authority of national banks to provide cryptocurrency custody services for customers. This latest guidance is just one of many recent developments coming out of the OCC focused on modernizing the regulatory framework at the national level.  Since Brian Brooks took over as acting Comptroller of the Currency on May 29, 2020, the agency has announced a number of significant initiatives designed to allow national banks to capitalize on technology and innovation.

As part of its ongoing effort to supervise broker-dealers conducting transactions in digital assets, FINRA recently issued Notice 20-23. The Notice encourages FINRA members to continue to keep FINRA updated on a firm’s activities relating to digital assets that have not been previously disclosed.

As we previously reported, for over a year the New York Attorney General has been seeking to enforce an investigative subpoena under New York’s expansive Martin Act against cryptocurrency exchange Bitfinex and its affiliated companies that issue the Tether stablecoin. Bitfinex and its affiliates have raised a number of procedural challenges to the NYAG’s authority to conduct its investigation.  In a case addressing important issues about the scope of the NYAG’s investigative authority over cryptocurrency businesses, a New York appellate court on July 9, 2020, rejected Bitfinex’s challenges and authorized the NYAG investigation to proceed.

On June 30, 2020, the full Senate Committee on Banking, Housing, and Urban Affairs held a virtual hearing entitled “The Digitization of Money and Payments.” The hearing focused on stablecoins and the prospects for a US central bank digital currency, or CBDC.

On June 24, 2020, the New York Department of Financial Services (DFS) announced a series of five initiatives involving virtual currency. The announcement was timed to coincide with the five-year anniversary of the launch of New York’s BitLicense for operators of certain virtual currency businesses.

As recently report on the Hunton Privacy & Information Security Law Blog, the European Commission (“the Commission”) submitted its first report on the evaluation and review of the EU General Data Protection Regulation (“GDPR”) to the European Parliament and Council. The report is required under Article 97 of the GDPR and will be produced at four year intervals going forward.

Last week, the Office of the Comptroller of Currency (the OCC), the primary federal regulator of national banks, issued an advanced notice of proposed rulemaking relating to the regulation of digital activities in banking, and in particular their activities involving cryptocurrency and distributed ledger technology.  The OCC is soliciting public feedback on how national banks and their customers are currently utilizing new digital technologies to inform future updates to OCC regulations and allow banks to better harness new technologies and innovations.  The OCC has requested public feedback by August 3, 2020.

Recently, staff of the US Senate’s Permanent Subcommittee on Investigations prepared a memorandum for subcommittee members in advance of its April 30, 2020 “Roundtable on Continuity of Senate Operations and Remote Voting in Times of Crisis.” The memo provides a description of Senate proposals to allow senators to participate and vote remotely during crises such as the ongoing COVID-19 pandemic, with an emphasis on potential technological solutions such as blockchain.

On March 28, 2020, the Commodity Futures Trading Commission (CFTC) issued final interpretive guidance (Guidance) clarifying its position with respect to retail commodity transactions and the “actual delivery” exception in the context of digital assets.

On April 14, 2020, the Financial Stability Board (FSB) issued a consultative paper entitled “Addressing the Regulatory, Supervisory and Oversight Challenges Raised by ‘Global Stablecoin’ Arrangements.” The paper considers various risks and vulnerabilities of global stablecoins, or GSCs, which are defined to include a crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets, in each case with a potential reach and adoption across multiple jurisdictions and the potential to achieve substantial volume. The white paper then surveys existing regulatory, supervisory and oversight challenges, particularly in the cross-border context; contemplates the role of international standard setters in GSC governance; and makes high-level recommendations for regulatory, supervisory and oversight responses.

On March 24, 2020, federal Judge P. Kevin Castel issued a long-anticipated opinion in the SEC’s ongoing efforts to block Telegram’s $1.7 billion initial coin offering. Judge Castel found that Telegram’s planned distribution of Gram tokens constitutes a securities offering under federal law for which no exemption from registration is available. He therefore granted the SEC a preliminary injunction blocking Telegram from distributing its Gram tokens to investors.

On March 9, 2020, Rep. Paul Gosar (R-AZ) introduced H.R. 6154, the Crypto-Currency Act of 2020.  The bill is the latest effort to provide federal oversight to the burgeoning market for crypto-assets.

On February 20, 2020, the federal Office of the Comptroller of the Currency (OCC) announced a Bank Secrecy Act enforcement action against a federal savings bank (Bank). This is one of the first, if not the first, public enforcement actions against a bank related to banking cryptocurrency-related operations. Banks that currently provide banking services to cryptocurrency-related companies, or are considering providing banking services to such companies in the future, should carefully review this enforcement action and consider where the quality of the bank’s AML compliance program is commensurate with these high-risk customers.

As we previously reported, the US Treasury Department recently announced its 2020 National Strategy for Combating Terrorist and Other Illicit Financing (the 2020 Strategy). The 2020 Strategy identifies the US government’s top anti-money laundering and countering the financing of terrorism (AML/CFT) priorities and serves as a roadmap of Treasury’s plan to stay ahead of evolving illicit finance threats. Additionally, the 2020 Strategy provides private sector financial institutions a window into upcoming legislative efforts and enforcement trends, which should in turn inform compliance efforts through the coming years. Digital assets feature heavily in the 2020 Strategy.

At the conclusion of its February meeting in Riyadh, the Group of Twenty (G20) Finance Ministers and Central Bank Governors issued a communiqué discussing a wide range of topics, including digital assets and stablecoins. The G20 reiterated its view that technological innovations can deliver significant benefits to the financial system and the broader economy. It remains vigilant to potential risks arising from financial innovations, including those risks related to financial stability, consumer and investor protection, anti-money laundering and countering the financing ...

As has been widely reported, SEC Commissioner Hester Peirce (aka “Crypto Mom”) recently delivered a thoughtful speech entitled “Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization,” including with it a model rule on digital token sales. The model rule has made waves in the crypto community because it proposes a three-year safe harbor from SEC registration while a development team builds out a functional, decentralized network.

Most retailers have yet to fully embrace blockchain technology. Perhaps for good reason. Applying new technology, particularly that aimed at changing legacy systems, comes with certain risks. That being said, cryptocurrencies and blockchain have the potential to transform retail and commercial real estate. As previously shared by the Hunton Retail Industry Law Blog, blockchain can be used to streamline inventory management, administer consumer loyalty programs and authenticate high-value assets or the supply chain, generally. Blockchain can also be used more simply to boost consumer sales or process tenant rent payments. Shifting away from the consumer end of retail, below are some novel ways blockchain technology, specifically tokenization, can modernize real estate acquisitions, dispositions and financing.

On January 1, the Blockchain Technology Act went into effect in the state of Illinois, creating a statewide framework for the use of blockchain technology and blockchain based contracts, or “smart contracts.” Similar to other recent state legislation addressing the use of blockchain and smart contracts, the Act recognizes the validity of smart contracts and blockchain based records and signatures in commerce. The legislation also prevents smart contracts both from being denied legal effect and from being excluded as evidence in a legal proceeding solely because a blockchain was used to create, store or verify the contract.

In connection with its annual meeting in Davos, Switzerland, on January 24, 2020, the World Economic Forum announced the creation of a Global Consortium for Digital Currency Governance. The initiative is touted as the first of its kind “to bring together leading companies, financial institutions, government representatives, technical experts, academics, international organizations, NGOs and members of the Forum’s communities on a global level.” The consortium will focus its efforts on developing solutions for what it describes as a fragmented regulatory system ...

In 2019, Hunton Andrews Kurth LLP’s structured finance and securitization team closed a number of substantial transactions, developed novel structures for our clients and advised on important tax, regulatory and other industry developments, including emerging uses of blockchain solutions.

On January 16, 2020, Reps. Suzan DelBene (D-Washington) and David Schweikert (R-Arizona) introduced H.R. 5635, the Virtual Currency Tax Fairness Act of 2020. Under current IRS guidance, taxpayers who sell virtual currency must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses. Taxpayers can also recognize gains due to fluctuations in exchange rates between virtual currencies and fiat currencies. H.R. 5635 would provide some relief from this tax treatment to encourage small consumer transactions in virtual ...

In an investor alert issued on January 14, 2020, staff in the Securities and Exchange Commission’s Office of Investor Education and Advocacy warned investors in initial exchange offerings (IEOs) to “use caution before investing  . . . through online trading platforms.”  According to the SEC staff, “Claims of new technologies and financial products, such as those associated with digital asset offerings, and claims that IEOs are vetted by trading platforms, can be used improperly to entice investors with the false promise of high returns in a new investment space.”

As reported last week on our Privacy and Information Security Law Blog, 2019 was the “Year of the CCPA” as companies around the world worked tirelessly to comply with the California Consumer Privacy Act of 2018.

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In a recent op-ed, Gita Gopinath, the IMF’s chief economist, posited that “digital currencies will not displace the dominant dollar.” In particular, the dollar’s status is supported by the “institutions, rule of law, and credible investor protection” that the United States provides. She also expressed her view that a synthetic hegemonic currency—a digital basket of reserve currencies recently proposed by outgoing Bank of England governor Mark Carney—faces steep obstacles to implementation. While the world would benefit from a greater role for the euro and the renminbi, Gopinath suggests that their institutions require greater development. Instead, the US may be developing an advantage in making the dollar the dominant digital currency through its efforts to combat money laundering and terrorism.

On December 10, 2019, FinCEN Director Kenneth Blanco delivered prepared remarks to a banking conference held in Washington, DC. Among topics he discussed were trends in suspicious activity reporting (SARs) since FinCEN published updated guidance on convertible virtual currency (CVC) in May 2019.

On December 11, 2019, the New York Department of Financial Services (DFS) published proposed guidance regarding adoption or listing of virtual currency by holders of a BitLicense. Specifically, under the proposed guidance, DFS seeks comment regarding two proposed changes affecting coin listings, both of which are intended to streamline and expedite the process.

On December 10, 2019, the Swiss Financial Market Supervisory Authority (FINMA) published its inaugural report on market risk in the Swiss economy. The report provides an overview of what FINMA believes are the most important risks currently facing Swiss supervised institutions and describes the resulting focus of its supervisory activity.

At a mutual fund industry conference held on December 3, 2019, Dalia Blass, director of the Securities and Exchange Commission’s Division of Investment Management, previewed a new structure for registered mutual funds seeking to invest substantially in digital assets and related investments.

In particular, Director Blass indicated that an unnamed registered closed-end interval fund with a bitcoin futures strategy is preparing to launch. As a result of recent industry feedback and engagement, and in response to issues the SEC staff previously identified:

• The fund expects to ...

The Federal Reserve Board’s most recent semi-annual Financial Stability Report, issued November 15, 2019, includes a lengthy discussion of potential systemic risks posed by stablecoins. In the report, the Fed observed that innovations fostering faster, cheaper and more inclusive payments could complement existing payment systems and improve consumer welfare if appropriately designed and regulated. But the Fed also warned that the emergence of global stablecoin payment networks introduces important challenges and risks related to financial stability, monetary policy, money laundering and terrorist financing, and consumer and investor protection.

On October 28, 2019, staff in the SEC’s Division of Trading and Markets provided a no-action letter to Paxos Trust Company, LLC permitting it to pilot a blockchain-based clearance and settlement platform for a limited number of U.S.-listed equity securities for 24 months. The staff’s action enables the further development and commercialization of a blockchain platform for clearing and settling U.S. securities trades.

In the wake of the recent controversy surrounding the proposed Libra cryptocurrency, two members of Congress have begun circulating draft bills that would tighten federal regulation of certain stablecoins.

On October 3, 3019, the Liechtenstein Parliament unanimously approved the Token and TT Service Provider Act (the Act). The Act, sometimes referred to as “TVTG” based on its German acronym, provides a comprehensive framework regulating the issuance, storage and conveyance of blockchain tokens in Liechtenstein. According to Liechtenstein’s embassy in Washington, Parliament’s approval began a 30-day public comment period that runs through November 8, 2019. If there is no adverse public comment by the citizens of Liechtenstein, the embassy anticipates that the Act will take effect soon thereafter.

Today the CFTC, SEC and FinCEN issued a joint statement on digital assets. In particular, the joint statement reminds persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). The entire joint statement is available here.

On October 9, 2019, the Internal Revenue Service (Service) released Revenue Ruling 2019-24. The revenue ruling considers whether taxpayers should realize gross income under two common scenarios involving cryptocurrency and includes a number of illustrative examples. The Service concluded that a so-called “hard fork” on a cryptocurrency blockchain does not create taxable income if a taxpayer does not subsequently receive new units of cryptocurrency, but taxable ordinary income is generated by “airdrops” following a hard fork that delivers new units of cryptocurrency to a taxpayer.

On September 19, 2019, the House of Representatives by voice vote approved H.R. 2613, a bipartisan bill entitled the “Advancing Innovation to Assist Law Enforcement Act.” The bill instructs the director of FinCEN to study and prepare a report to Congress on emerging technologies, including blockchain, in an effort to combat money laundering and other forms of illicit finance. Though somewhat modest in scope, the bill is among the first to be approved by one of the chambers of Congress on the topic of blockchain.

On September 24, 2019, the House Financial Services Committee held an oversight hearing entitled “Oversight of the Securities and Exchange Commission: Wall Street’s Cop on the Beat.” The format of the hearing was somewhat unusual in that the sole witnesses were the five sitting SEC commissioners. Though it is common for the SEC chair to testify before Congress, the other commissioners testify very infrequently, and the assembly of all five at a single hearing is extremely rare, with the last such joint testimony coming back in 2007. While the hearing covered a wide range of issues related to securities regulation and enforcement, it also touched on a number of topics of particular interest to crypto and blockchain businesses, including the application of the securities laws to digital assets.

On September 13, 2019, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions targeting three North Korean state-sponsored malicious cyber groups responsible for North Korea’s malicious cyber activity on critical infrastructure. As part of the sanctions, OFAC alleges that the entities conducted successful operations targeting more than 16 organizations across 11 countries, including the SWIFT messaging system, financial institutions and cryptocurrency exchanges.

The Federal Trade Commission reached a settlement with the promoters of chain-based cryptocurrency schemes—Thomas Dluca, Louis Gatto, Eric Pinkston and Scott Chandler—in which the defendants promised recruits big rewards in exchange for a small payment of bitcoin or Litecoin. In reality, the defendants’ schemes, promoted through YouTube videos, social media and in conference calls, depended on continual recruitment of new participants to generate revenue. Under the FTC settlement, each defendant is permanently banned from operating, participating in or ...

As we first reported in April, the New York Attorney General has been locked in a complicated dispute with a virtual currency exchange operator over the authority of the Attorney General to investigate its activities.  In its defense in court proceedings, the crypto exchange asserted that the Attorney General lacked both personal jurisdiction and subject matter jurisdiction over it because of its efforts to avoid doing business in New York state.  In a ruling ultimately siding with the Attorney General, a New York trial court on August 19 permitted the regulatory investigation to continue.  The judge’s opinion underscores the difficulty faced by crypto entrepreneurs seeking to avoid contacts with U.S. customers in order to avoid the jurisdiction of U.S. courts and regulators.

The Senate Committee on Banking, Housing, and Urban Affairs and the House of Representatives’ Financial Services Committee each held recent hearings to discuss cryptocurrency and, in particular, the proposed creation of a new digital currency by a prominent US technology company. Both hearings primarily focused on what economic and security concerns a new, privately issued digital currency may raise, how best to regulate the new currency and what role the US and Congress could play in advancing or hindering the growth of cryptocurrencies and blockchain technology more generally.

Continuing a cryptocurrency oversight program begun in 2018, on July 18, 2019, FINRA issued Regulatory Notice 19-24. Under Notice 19-24, FINRA has requested that broker-dealers notify their FINRA Regulatory Coordinator if the member firm, or its associated persons or affiliates, engages, or intends to engage, in activities related to digital assets, including digital assets that are not securities.

On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel (collectively, the Staffs) issued a Joint Statement on Broker-Dealer Custody of Digital Asset Securities. For purposes of the Joint Statement, “digital asset” refers to any asset that is issued and transferred using distributed ledger or blockchain technology, and a “digital asset security” is any digital asset that is also a security for purposes of the federal securities laws. The Joint Statement discusses several provisions of the federal securities laws applicable to registered broker-dealers that may be implicated when such entities custody digital asset securities.

On June 18, 2019, the Commodity Futures Trading Commission (CFTC) announced the commencement of a civil enforcement action (the Complaint) against two United Kingdom-based defendants, a purported Bitcoin trading company and its principal (collectively, the Defendants). The CFTC alleges that the Defendants perpetrated a wide-ranging fraud involving at least $147 million in Bitcoin from more than 1,000 customers.

Nevada is the latest state to adopt statutory amendments accommodating blockchain. In the first two weeks of June, Nevada enacted the following new laws:

• SB161 – The act creates a regulatory sandbox in the Department of Business and Industry for any use of a new or emerging technology, or any novel use of an existing technology, to address a problem, provide a benefit or otherwise offer or provide a financial product or service that is determined by the Director of the Department not to be widely available in Nevada. The act is effective June 13, 2019 for the purpose of adopting any regulations and performing any other preparatory administrative tasks necessary to carry out the provisions of the act, and on January 1, 2020, for all other purposes.

As reported in the Hunton Andrews Kurth LLP Privacy & Information Security Law Blog posted on June 6, 2019, Hunton’s Centre for Information Policy Leadership (“CIPL”) on May 31 issued a white paper on GDPR One Year In: Practitioners Take Stock of the Benefits and Challenges (the “White Paper”). In addition, CIPL submitted the White Paper along with a separate response to the European Commission’s questionnaire to prepare for the June 2019 stocktaking exercise on the application of the EU General Data Protection Regulation (“GDPR”).

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In May 2019 the Australian Securities and Investments Commission (ASIC) issued Information Sheet 225, “Initial Coin Offerings and Crypto-Assets” (IS 225). IS 225 provides helpful guidance for Australian entrepreneurs considering whether to raise funds through an initial coin offering (ICO) and for businesses that are involved with crypto-assets such as cryptocurrency, tokens or stable coins in Australia.

On May 9, 2019, FinCEN, the U.S. federal agency charged with combating money laundering, issued two new interpretive documents of interest to the crypto community. The first is interpretive guidance titled “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies” (the “Guidance”). The second document is an “Advisory on Illicit Activity Involving Convertible Virtual Currency” (the “Advisory”).

On May 2, 2019 US Department of Treasury’s Office of Foreign Assets Control (OFAC) published “A Framework for OFAC Compliance Commitments” (the Framework), which provides a specific outline of what OFAC considers to be essential elements of an effective sanctions compliance program.  Crypto businesses should consider the applicability of the Framework to their products.

Read our full alert here.

As this short video explains, the “initial exchange offering,” or IEO, is the latest innovation in the offer and sale of cryptocurrencies. By partnering with a crypto exchange to aid in marketing and listing efforts, issuers engaging in an IEO hope to obtain better visibility and liquidity for their products. But like the ICOs they seek to replace, IEOs raise a host of potential issues under the US federal securities laws.

On April 18, 2019, the Financial Crimes Enforcement Network (“FinCEN”) announced its first enforcement action against a peer-to-peer virtual currency exchanger, which also included its first civil monetary penalty against a virtual currency exchanger, for failure to file Currency Transaction Reports (“CTRs”). According to FinCEN’s order, the respondent’s virtual currency exchange operated as an unregistered money service business (“MSB”), had no written policies or procedures for ensuring compliance with the Bank Secrecy Act (“BSA”), and failed to report both suspicious transactions and currency transactions. To settle the enforcement action, the respondent paid a $35,000 civil monetary penalty and agreed to an industry bar that would prohibit him from providing money transmission services or engaging in any other activity that would make him a “money services business” under FinCEN regulations.

In a letter released to the public on April 10, 2019, New York’s Department of Financial Services (DFS) denied Bittrex’s two separate applications to engage in a virtual currency business and to engage in money transmission activity in New York state. The action came after an extended trial period in which DFS sought to “address continued deficiencies and assist Bittrex in developing appropriate controls and compliance programs commensurate with the evolving nature of the sector.”

After months of teasing, on April 3 staff of the Securities and Exchange Commission (“SEC”) issued a long-awaited Framework for “Investment Contract” Analysis of Digital Assets. The Framework provides further guidance under the SEC’s Howey test as to whether digital assets constitute securities under federal law.

Writing with former SEC commissioner Troy Paredes, Hunton Andrews Kurth partner Scott Kimpel provides a complete survey of the federal securities laws’ impact on offerings of security tokens.

Read the full article here.

The latest state to confront the utility token issue, Colorado, recently enacted the Digital Token Act (the Act). The Act amends the provisions of the Colorado Securities Act that require the registration of all securities offerings in the state unless an exemption is available. Specifically, the Act provides a conditional exemption from registration for certain utility tokens qualifying as “digital tokens” that have a “consumptive purpose.” It also provides limited relief from broker-dealer registration for intermediaries effecting transactions in such digital tokens.

Hunton Andrews Kurth attorney, Mayme Beth Donohue, member of the firm’s blockchain working group, was recently interviewed as part of the University of Virginia’s new podcast series, Common Law, exploring cutting-edge issues about the future of law. Mayme discussed various practical applications of blockchain, including supply chain management, product authenticity and blockchain-based mortgages, and how in-house lawyers should think about issue spotting blockchain implementations.

An audio recording of the interview is now available.

The Council of Institutional Investors (CII) and Templum, Inc. (Templum) each recently submitted comments to the SEC to call for the agency to embrace blockchain technology in a variety of contexts regarding the registration and transfer of securities. The dominant system for clearance and settlement of securities in the United States has its roots in the “paperwork crisis” of the early 1970s, and the resulting regulatory regime based on immobilization of securities is largely inconsistent with a blockchain-based system of traceable shares.

The 116^th Congress is off to a busy start, and various members in both the House and Senate have introduced a wide range of bills impacting blockchain technology and digital currencies. Some of the bills would provide greater regulatory certainty to operators of blockchain businesses, while others focus on preventing the use of digital currency to facilitate unlawful behavior. A few of the bills were introduced in the last congress but did not pass. Though passage of any bill is never assured, we have summarized a number of the most recent bills of interest to blockchain developers and the crypto community.

To date, virtual currency exchanges in the United States have structured their operations in an effort to avoid being required to register as an exchange with either the Securities and Exchange Commission or the Commodity Futures Trading Commission. While these efforts may be entirely legal, without the regulatory protections of exchange registration, they could create enhanced risks for customers, particularly in the case of a fund’s insolvency or collapse. A recent federal case highlights these risks and provides a roadmap for asserting personal jurisdiction over a virtual currency exchange.

In a case being closely watched by the crypto community, a California federal judge reversed his earlier decision and, on reconsideration, issued a preliminary injunction against ICO issuer Blockvest LLC. Although the SEC has a high success rate in litigated cases, its action against Blockvest was notable because the judge initially declined to grant the SEC’s request for a preliminary injunction, then ruling that “at this stage, without full discovery and disputed issues of material facts, the Court cannot make a determination whether the BLV token offered to the 32 test investors was a ‘security.’” After reviewing new evidence, the judge subsequently reversed his position and found that Blockvest had indeed issued a security.

On January 30, 2019, a Florida appellate court reversed the trial court’s dismissal of State v. Espinoza, instead holding that a Bitcoin business was both a money transmitter and a payment instrument seller, subject to Florida’s statutes governing money services businesses. The decision contrasts with recent guidance in Texas and Pennsylvania regarding cryptocurrencies, where virtual currencies in those states were not deemed money under applicable state statutes and businesses that conduct transactions exchanging virtual and sovereign currencies do not generally require a currency exchange license.

The Pennsylvania Department of Banking and Securities recently issued guidance under the Money Transmitter Act (“MTA”) for entities engaged in various forms of virtual currency business in the commonwealth. The MTA, like similar statutes in other states, requires entities engaged in a money transmitter business to obtain a license, maintain minimum net worth standards, pay a surety bond, be subject to periodic examinations, and take other actions to safeguard customer funds. As we previously reported, many of these statutes were not drafted with virtual currency businesses in mind, which has created various compliance challenges for the crypto community.

On January 7, 2019, the United States Patent and Trademark Office (USPTO) issued further guidance on patent subject matter eligibility, which should ease some of the burden placed on patent applicants seeking to obtain U.S. patents on certain technology, including blockchain technology.

A vigorous competition among the states to regulate digital assets has begun to develop. Some states, such as New York, have adopted regulations that take a very proscriptive approach to regulation in the interest of consumer protection. States like Wyoming, on the other hand, see an opportunity to stimulate the local economy and take a far more permissive view of digital assets. Two bills now under consideration by the Wyoming Legislature seek to further expand the digital asset economy in the state.

Not only do operators of virtual currency businesses face a growing body of overlapping federal regulations, but they must also contend with a patchwork of state laws as well. Compliance with state money transmitter laws, which typically provide for licensure and supervision of various non-bank financial services companies that handle cash on behalf of consumers, has become a hot-button issue for members of the crypto community. 

The year 2018 was a busy one for the SEC in the digital asset space, with the agency cementing its role as the primary de facto regulator of crypto finance in the United States.  The SEC’s enforcement division was operating at full speed, bringing a series of enforcement cases in the crypto space with an emphasis on fraud and scams involving digital assets.  Notably, the SEC brought first of its kind cases involving digital securities against an unregistered broker-dealer, an unregistered investment company and an unregistered token exchange.  The SEC also took action against an airdrop of securities, while at the same time providing general guidance on when the federal securities laws apply in the first place.

In a recently published Request for Information (“RFI”), the Commodity Futures Trading Commission (“CFTC”) seeks public comment on the underlying technology, opportunities, risks, mechanics, use cases, and markets related to Ether and the Ethereum Network. According to the CFTC, the public input from this request will help to advance its mission of ensuring the integrity of the derivatives markets as well as monitoring and reducing systemic risk by enhancing legal certainty in the markets. In particular, the RFI seeks to understand similarities and differences ...

Congressmen Darren Soto (D-FL) and Ted Budd (R-NC) recently introduced two bipartisan bills to address virtual currency price manipulation and maintain the United States’ leadership in the cryptocurrency industry. In a joint statement citing the New York Attorney General’s recent report on crypto exchanges and other recent media reports, the members announced that:

“Virtual currencies and the underlying blockchain technology has a profound potential to be a driver of economic growth. That’s why we must ensure that the United States is at the forefront of protecting consumers and the financial well-being of virtual currency investors, while also promoting an environment of innovation to maximize the potential of these technological advances. This bill [sic] will provide data on how Congress can best mitigate these risks while propelling development that benefits our economy.”

The Commodity Futures Trading Commission (“CFTC”) recently published a detailed primer on smart contracts. The Primer discusses their functionality, use cases, regulatory environment and potential risks. It describes a “smart contract” as a set of coded computer functions that (1) may incorporate the elements of a binding contract (e.g., offer, acceptance, and consideration), or (2) may execute certain terms of a legal contract, or (3) allows self-executing computer code to take actions at specified times or based on reference to the occurrence or non-occurrence of an action or event (e.g., delivery of an asset, weather conditions, or change in a reference rate). The Primer also observes that a smart contract may not be a legally binding contract, which is a critical distinction for developers and entrepreneurs (and their counsel) in the digital economy.

The acting general counsel of the Federal Election Commission (“FEC”) recently published for public comment a draft advisory opinion under the Federal Election Campaign Act and related FEC regulations regarding mining cryptocurrencies for the benefit of political committees.  According to draft Advisory Opinion 2018-13, a service provider has proposed to provide services to political committees to enable individuals to use the processing power of internet-enabled devices to mine cryptocurrencies, with the political committees receiving the mined cryptocurrency. A “political committee” is broadly defined under FEC regulations to include a wide variety of groups that have paid money or provided anything else of value to influence a federal election.

At a recent securities regulation conference, Bill Hinman, Director of the SEC’s Division of Corporation Finance, indicated that the agency intends to release “plain English” guidance around the issue of whether an ICO is a security. The SEC has provided guidance on these issues in its DAO Report and Hinman’s own prior speech, and as we have frequently blogged, has been actively enforcing perceived violations of the federal securities laws. The idea behind the plain English guidance appears to be to consolidate the SEC staff’s views into a single “how to” document for use by the lay person.

As we have previously blogged, state and provincial securities regulators across the U.S. and Canada have been actively policing the marketplace for ICOs and security token offerings, supplementing efforts at the federal level in the United States undertaken by the SEC. Texas and Massachusetts have been particularly active on this front, and New York recently issued a blistering report on the status of crypto exchanges. Colorado and North Dakota are among the latest states to announce enforcement actions against crypto businesses.

Hunton Andrews Kurth partner Scott Kimpel, chair of the Firm’s blockchain working group, recently participated in a panel discussion hosted by the Washington Legal Foundation regarding the latest legal issues associated with ICOs and security token offerings. Co-panelists included Alan Cohn, formerly of the Department of Homeland Security and Daniel Alter, former general counsel of the New York Department of Financial Services.

Recently, California Governor Jerry Brown signed into law Assembly Bill No. 2658 for the purpose of further studying blockchain’s application to Californians. In doing so, California joins a growing list of states officially exploring distributed ledger technology.

A recent bipartisan letter from Members of Congress seeks clarification from SEC Chairman Jay Clayton as to the status of digital tokens and cryptocurrencies under the federal securities laws. The signatories expressed their view that not all digital tokens should be deemed securities, and voiced their concern that the SEC should not use its enforcement mechanism alone to craft policy on this issue. Instead, the Members advocated in favor of formal SEC guidance to clear up “uncertainties which are causing the environment for the development of innovative technologies in the United States to be unnecessarily fraught.”

On September 27, 2018, the Securities Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) charged an international securities dealer with illegally offering and selling to U.S. investors security-based swaps funded with bitcoins and related violations of the Commodities Exchange Act. The broker, 1pool Ltd., a.k.a. 1Broker, and its CEO, Patrick Brunner, were both named in the complaint filed by the SEC with the U.S. District Court for the District of Columbia. 

Interest in the crypto economy continues to grow in Congress. On September 25, 2018, Representative Warren Davidson (R-OH) hosted a roundtable, “Legislating Certainty for Cryptocurrencies,” with more than 50 financial institutions and crypto start-ups invited to attend. Additionally, the House Financial Services Committee has scheduled a hearing on financial innovation on September 28, 2018, entitled Examining Opportunities for Financial Markets in the Digital Era.

A new report from the New York Attorney General (“NYAG”) summarizes the findings of its recent Virtual Markets Integrity Initiative (the “Initiative”). The NYAG concluded that crypto trading platforms vary significantly in their risk management strategies and in the ways they fulfill customer responsibilities. The NYAG also identified three broad areas of concern: (1) potential conflicts of interest, (2) lack of serious efforts to impede abusive trading activity, and (3) limited protections for customer funds.

On September 10, 2018, the New York Department of Financial Services (“DFS”) authorized Gemini Trust Company and Paxos Trust Company to each offer a price-stable cryptocurrency, also known as a stablecoin, pegged to the U.S. dollar. Both Gemini and Paxos hold limited purpose trust company charters under the New York Banking Law and are authorized to offer services for buying, selling, sending, receiving and storing virtual currency. Gemini is controlled by the Winklevoss brothers, whose application for a Bitcoin ETF was recently denied by the SEC.

On September 11, 2018, capital markets regulators announced a series of cases that are the first of their kind in the digital assets space.

The SEC announced its first case charging unregistered broker-dealers for selling digital tokens. According to the SEC’s order, the defendants operated a self-described “ICO Superstore” that solicited investors, took thousands of customer orders for digital tokens, processed investor funds, and handled more than 200 different digital tokens in connection with both ICOs and the defendants’ own secondary market activities. The defendants also promoted the sale of approximately 40 digital tokens in exchange for marketing fees paid by digital token issuers. Because the digital tokens issued in the ICOs and traded by defendants included securities under the SEC’s DAO Report, the SEC concluded that the defendants’ market activities required broker-dealer registration with the SEC.

On September 9, 2018, the SEC announced the temporary trading suspension of two securities known as Bitcoin Tracker One (“CXBTF”) and Ether Tracker One (“CETHF”). According to the SEC’s order, the broker-dealer application materials submitted to enable the offer and sale of these products in the United States, as well as certain trading websites, characterize them as “Exchange Traded Funds.” According to the SEC, other public sources characterize the instruments as “Exchange Traded Notes.” By contrast, the SEC observed that the issuer of these securities characterizes them in its offering materials as “non-equity linked certificates.” CXBTF and CETHF are listed and traded on the NASDAQ/OMX in Stockholm and have recently been quoted on OTC Link (formerly known as the “pink sheets”) in the U.S. The SEC temporarily suspended trading in these securities in light of apparent confusion among market participants regarding the characteristics of these instruments.

As we previously reported, in May 2018, more than 40 state and provincial securities regulators in the United States and Canada launched a coordinated enforcement sweep of the ICO market dubbed “Operation Cryptosweep.” On August 28, 2018, the North American Securities Administrators Association (“NASAA”) published a press release with an update on the progress of this initiative. According to NASAA, more than 200 active investigations of ICOs and cryptocurrency-related investment products are currently underway, and blue sky regulators have brought 46 enforcement actions to date.

This post has been updated. 

On August 22, 2018, following its recent decision denying the application of the Winklevoss Bitcoin Trust, the SEC denied applications for nine more Bitcoin ETFs. The orders involving applications by Cboe BZX and NYSE Arca (here and here) are similar to each other and cite many of the same reasons for denial. As with the Winklevoss application, the SEC went out of its way to emphasize that “its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an ...

A recent settled SEC enforcement action against an ICO issuer (the “Company”) and its promoter calls into question the viability of the “airdrop” model of distributing digital tokens to investors. In the ICO context, an “airdrop” generally refers to the widespread distribution of digital tokens to community members either for free or in exchange for performing menial tasks. Whether such a distribution model runs afoul of the federal securities laws has been the subject of much debate in recent months, and the SEC’s case provides additional insight into their analysis of the issue. While a narrow path for airdrops may remain, the case will significantly curtail their current use.

On August 9, 2018, the World Bank issued a press release highlighting what it described as the “World’s First Blockchain Bond.” It will be issued in Australia and, according to news reports, will be called a BONDI—both in honor of the famous Australian beach and also a clever acronym for “Blockchain Offered New Debt Instrument.” The issue size is approximately AUD $100 million (about USD $74 million).

Current regulations in the United States limit the ability of securities to trade exclusively over a blockchain, but over time we believe they will become more commonplace ...

On August 6, 2018, the Federal Trade Commission ("FTC") published a notice seeking public comment as to whether broad-based changes in the economy, evolving business practices, new technologies or international developments might require adjustments to competition and consumer protection law, enforcement priorities and policy. The notice, published in the Federal Register, does not specifically mention blockchain or distributed ledger technology specifically, but the broad list of topics that the FTC lists as areas in which it seeks comments could easily accommodate market developments due to the emergence of blockchain technology and related applications. 

Recently, the federal Office of the Comptroller of the Currency (“OCC”) announced that it is now accepting applications for national bank charters from nondepository banking institutions. Numerous consumer groups and state banking agencies have publicly expressed their dissatisfaction with the concept of a national “FinTech charter,” and it is likely one or more of these groups will sue the OCC over the legality of the new form of charter. However, assuming that the OCC prevails in the oncoming litigation, the FinTech charter may present an attractive alternative to ...

In a terse press release issued July 26, 2018, the Swiss Financial Market Supervisory Authority ("FINMA") announced that it has launched enforcement proceedings against an ICO issuer based on evidence that the company may have “breached financial market law.” According to FINMA, the proceedings focus in particular on possible breaches of Swiss banking law resulting from the potentially unauthorized acceptance of public deposits. FINMA noted that, in the context of its ICO, the subject company “accepted funds amounting to approximately one hundred million francs from more than 30,000 investors in return for issuing EVN tokens in a bond-like form.”

On July 27, 2018, the Justice BN Srikrishna committee, formed by the Indian government in August 2017 with the goal of introducing a comprehensive data protection law in India, issued a report, A Free and Fair Digital Economy: Protecting Privacy, Empowering Indians (the “Committee Report”), and draft data protection bill called the Personal Data Protection Bill, 2018 (the “Bill”). Noting that the Indian Supreme Court has recognized the right to privacy as a fundamental right, the Committee Report summarizes the existing data protection framework in India, and recommends that the government of India adopt a comprehensive data protection law such as that proposed in the Bill.

In a lengthy order issued on July 26, 2018, by a 3-1 vote the U.S. Securities and Exchange Commission (“SEC”) denied an application by the CBOE Bats BZX Exchange, Inc., (“BZX”) seeking to list and trade shares of the Winklevoss Bitcoin Trust. The denial marks the culmination of a two-year effort by the Winklevoss brothers to launch the first bitcoin-based exchange-traded fund, or ETF, in the United States. In denying the application, the SEC cited various concerns about the lack of oversight in the underlying bitcoin market, and ruled that BZX did not demonstrate that bitcoin and bitcoin markets are uniquely resistant to manipulation, or that alternative means of detecting and deterring fraud and manipulation are sufficient in the absence of a surveillance-sharing agreement with a significant, regulated market related to bitcoin.

On July 11, 2018, in an emergency cease and desist order, the Texas securities commissioner took action against several individuals and affiliated companies based in Utah to halt the offering of unregistered cryptocurrency mining investments to Texas residents. The order alleges numerous violations of the registration and antifraud provisions of the Texas Securities Act. 

As reported on the Hunton Privacy & Information Security Law blog, on June 28, 2018, the Governor of California signed AB 375, the California Consumer Privacy Act of 2018 (the “Act”). The Act introduces key privacy requirements for businesses, and was passed quickly by California lawmakers in an effort to remove a ballot initiative of the same name from the November 6, 2018, statewide ballot. We previously reported on the relevant ballot initiative. The Act will take effect January 1, 2020.

While ICO issuers have understandably been focused recently on the latest pronouncements from the Securities and Exchange Commission (“SEC”) and other regulators, a second group of potential litigants has largely avoided notice. Seeing a potential bonanza, private plaintiffs law firms have become aggressive in soliciting disgruntled investors as clients and filing lawsuits against issuers of digital tokens.

The Securities Exchange Commission (“SEC”) and Commodities Futures Trading Commission (“CFTC”) are not the only U.S. government agencies exerting regulatory jurisdiction over initial coin offerings (“ICOs”) and cryptocurrencies. In an article written by Hunton Andrews Kurth lawyers in Crowdfund Insider, Richard Garabedian and Shaswat Das discuss the Financial Crimes Enforcement Network's (“FinCEN's”) guidance, enforcement actions and related compliance issues. In 2013, FinCEN, a bureau of the U.S. Department of Treasury, began issuing guidance on virtual currency, explicitly stating that virtual currency exchangers and administrators are money transmitters and must comply with the Bank Secrecy Act (“BSA”) and related regulations. Most recently, on February 13, 2018, FinCEN sent a letter to U.S. Senator Ron Wyden that sought to clarify its role as a regulator of virtual currencies and ICOs. In the letter, FinCEN asserted that individuals involved in certain ICOs must register as money services businesses (“MSBs”) and consequently comply with the corresponding BSA and anti-money laundering (“AML”) compliance requirements. The FinCEN letter notes that ICOs that are otherwise regulated by the SEC or CFTC should comply with the AML and related requirements imposed by those agencies. Despite this attempt at clarifying the state of regulatory play for ICOs and virtual currencies, federal and state MSB registration requirements remain fluid and should be evaluated on a case-by-case basis for ICOs and those issuing cryptocurrencies.

On June 14, 2018, Bill Hinman, Director of the SEC’s Division of Corporation Finance, delivered a speech to an industry conference providing additional insights into how SEC staff analyze crypto assets under the Supreme Court’s Howey test. Since issuing the DAO Report nearly one year ago, the SEC has largely avoided providing additional guidance on the rapidly evolving world of ICOs. Hinman’s remarks represent a welcome departure from this position and provide critical insights into several areas of interest to the crypto community. 

Last week, SEC Chairman Jay Clayton gave an interview during which he provided his thoughts on initial coin offerings (“ICOs”) and cryptocurrencies. He applauded the “incredible promise” of distributed ledger technology as a driver of efficiencies, and also attempted to clarify the SEC’s position on its role in regulating ICOs and token offerings.

Enterprises around the world are actively implementing a wide variety of blockchain solutions to improve efficiencies, enhance user experiences and lower transaction costs.  But the private sector’s development of distributed ledger technology is often outpacing the legal and regulatory regimes that impact it.  In the United States, numerous regulators have asserted jurisdiction over blockchain applications, frequently in redundant or even contradictory ways.  With the Blockchain Legal Resource blog, we at Hunton Andrews Kurth plan to keep track of the most notable legal ...

Last week, the Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight and Division of Clearing and Risk issued a joint staff advisory providing guidance to exchanges and clearinghouses for listing virtual currency derivatives products.

The advisory relies on established rules and regulations as it clarifies the CFTC’s priorities and expectations in its review of new virtual currency derivatives products.  In the press release announcing the advisory, the CFTC stated its intent to exercise “appropriate oversight, while encouraging innovation and growth in these products.”

2018 continues to be a busy year for initial coin offerings, notwithstanding recent announcements from capital markets regulators in the US.  In this alert, we chronicled developments at the Securities and Exchange Commission, Commodity Futures Trading Commission, state securities regulators and others.