Blockchain Legal Resource

Blockchain, or distributed ledger technology (“DLT”), is already proving to be a game-changer for businesses globally and across sectors. But is it secure? And can insurance help protect against risks and, thus, help advance the development of this technology?

Recently, Canadian investment firm First Block Capital Inc. reported that FBC Bitcoin Trust, which the firm bills as the “first and only open-ended bitcoin fund approved by Canadian regulators,” has achieved mutual fund trust status under Canada’s Federal Income Tax Act. Units of a mutual fund trust are considered qualified investments under registered plans such as Registered Retirement Savings Plans (“RRSPs”) and Tax-Free Savings Accounts (“TFSAs”).

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.

Recently, several states have passed legislation allowing the use of smart contracts and blockchain technology in various commercial contexts. A “smart contract” is commonly defined in such legislation as an event-driven program or computerized transaction protocol that runs on a distributed, decentralized, shared and replicated ledger that executes a contract or any provision(s) of a contract by taking custody over and instructing transfer of assets on the ledger. 

On August 28, 2018, as reported in Business Insurance, Lloyd’s of London underwriters have agreed to insure digital currency storage company, Kingdom Trust Co., against theft and destruction of cryptocurrency assets. The cover comes after almost a decade-long search by Kingdom Trust for insurance to cover its cryptoassets. According to Business Insurance, Kingdom Trust sees the availability of insurance as a key factor in bringing institutional investors into the marketplace by dispelling concerns about lack of traditional safeguards in the emerging cryptoasset space.

Recently, the International Law Section of the New York State Bar Association published its annual International Law Practicum issue featuring an extensive collection of articles discussing cryptocurrency regulation in various jurisdictions around the world. Hunton Andrews Kurth partner Torsten Kracht served as editor of the issue, and associate Mayme Donohue contributed an article called “Blockchain and Cryptocurrency: An Introduction and Primer.”

Articles are reprinted with permission by the New York State Bar Association, One Elk Street, Albany, NY 12207.

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 ...