Blockchain Legal Resource

On March 31, 2022, the staff of the Division of Corporation Finance and the Office of the Chief Accountant of the SEC issued Staff Accounting Bulletin (SAB) No. 121 (SAB 121), which “adds interpretive guidance for entities to consider when they have obligations to safeguard crypto-assets held for their platform users.” SAB 121 highlights the enhanced technological, legal and regulatory risks associated with safeguarding digital assets, as compared with more traditional asset classes. Specifically, SAB 121 asserts that a company is subject to “significant increased risks... including an increased risk of financial loss” when that company controls the cryptographic keys associated with a user’s digital assets. As a result, the staff believes that reporting companies should quantify and disclose that obligation, and record a liability and corresponding asset on their balance sheets at fair value.

In a settled enforcement case announced August 9, 2021, the SEC fined Poloniex, LLC, a crypto trading platform, for operating an unregistered securities exchange. Then, on August 10, 2021, the CFTC and FinCEN announced a settled enforcement case against crypto exchange BitMEX for anti-money laundering violations and failure to register with the CFTC as a trading platform. The cases highlight US regulators’ increased focus on cryptocurrency exchanges.

On May 11, 2021, staff in the Division of Investment Management (IM) at the Securities and Exchange Commission issued a statement (the Statement) on “Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market.” The Statement provides a series of warnings to retail investors about certain risks associated with investments in registered mutual funds whose portfolios include Bitcoin futures. But the Statement also provides further insight into the way SEC staff analyze the market for Bitcoin Futures more broadly.

A recent rulemaking petition to the SEC requests that the agency issue a concept release on nonfungible tokens, or NFTs. The petition is hopeful that an SEC rulemaking paired with an opportunity for public input will resolve regulatory uncertainty for parties looking to create NFTs and facilitate their sale.

A recent Bloomberg article reported that average prices for nonfungible tokens, or NFTs, are down approximately 70 percent from recent highs.  NFTs are the latest innovation in digital assets and encompass digital representations of unique works of art, music, or other goods and experiences stored on blockchain.  Unlike other digital assets such as bitcoin, in which each bitcoin is the same as every other one (and thus “fungible”), each NFT is theoretically unique and different from every other one (and thus “nonfungible”).  A wide range of NFTs have begun to enter the marketplace over the past several months.  A digital work of art represented by an NFT recently sold at auction for over $69 million, and even a professional sports league has begun to issue NFTs.  A fascinating debate about the social and economic utility of NFTs has emerged, but what are some of the legal issues associated with this new digital asset class?

As has been widely reported, President Biden has nominated Gary Gensler to be the next chairman of the Securities and Exchange Commission.  After becoming one of the youngest partners at a leading Wall Street investment bank, Gensler transitioned into government service as a senior official in President Clinton’s Treasury Department and as the chairman of the Commodity Futures Trading Commission under President Obama.  While at the CFTC, Gensler was the principal architect of the sprawling Dodd-Frank Act’s provisions regulating the swaps markets, and he worked tirelessly to implement new CFTC rules regulating the space.  He has deep experience both in the financial markets and as a regulator.

The Wyoming Division of Banking issued a No-Action Letter (NAL) in October 2020 in response to a request from a Wyoming-chartered public trust company seeking the Division of Banking’s position on the ability of the company to custody digital assets as well as hold itself out as a “qualified custodian.” The NAL prompted the Staff of the Securities and Exchange Commission to issue a public statement seeking public comment on matters concerning the definition of “qualified custodian” under the Investment Advisers Act of 1940 (the “Advisers Act”) and Rule 206(4)-2 thereunder (the “Custody Rule”).

On Monday, September 21, 2020, the Office of the Comptroller of the Currency (“OCC”) issued an interpretive letter on the authority of national banks and federal savings associations to hold stablecoin reserves (the “OCC Interpretive Letter”). That same day, the Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology (“FinHub”) issued a statement on the OCC’s interpretive letter. While not an official joint statement, the federal agencies were clearly aligned as FinHub’s statement on the OCC Interpretive Letter was posted on its website before the OCC published its letter.

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.

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 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.

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.