Crypto Regulations Recap — October 2018

Hope you all enjoyed October’s low volatility. Here’s the top U.S. legal crypto news from the past month:

• Coinbase Dismissal — On October 23, a federal judge dismissed a lawsuit against Coinbase involving insider trading charges in connection with its listing of Bitcoin Cash. Some believe Coinbase employees knew about the listing and traded on that inside information. The lawsuit was mostly dismissed because the plaintiff didn’t adequately explain the legal basis for the claims; you can check out the nuances in the dismissal here.
• SEC Creates FinTech/ICO Office — On October 18, the Securities and Exchange Commission (“SEC”) announced the a new division aimed at FinTech startups. The Strategic Hub for Innovation and Financial Technology (aka “FinHub”) will act as a contact point for entrepreneurs and regulators and, while generally focused on FinTech, the office will specifically handle initial coin offering (“ICO”) and blockchain issues.
• SEC Suspends Trading of Company’s Shares — On October 22, the SEC suspended trading of the securities of American Retail Group, Inc. after the company claimed it was planning an ICO that was “officially registered” with the SEC. Except, y’know, the fact that it wasn’t. Awkward timing for the company, considering that just a week and a half earlier the SEC warned investors about ICO-related companies claiming they have SEC endorsements.
• SEC Halts ICO — On October 11, SEC obtained a court order to halt an ICO that falsely claimed it had SEC approval. The main actor behind the ICO created a fictitious agency, the “Blockchain Exchange Commission”, that impersonated the SEC and even linked to the agency’s site.
• FinCEN Cautions Crypto Exchanges Against Iranian Use of Crypto — On October 11, the Financial Crimes Enforcement Network (“FinCEN”) urged crypto exchanges and service providers to better detect transactions that may be circumventing the U.S.’s economic sanctions on Iran, as well as anti-money laundering laws.
• CFTC Warns Smart Contract Coders on Prediction Markets — On October 16, at a speech in Dubai, Commodity Futures Trading Commission (“CFTC”) Commissioner Brian Quintenz warned that smart contracts that enable prediction markets would fall under the CFTC’s jurisdiction. The CFTC has historically prohibited prediction markets as contrary to public interest, and Commissioner Quintenz explained that the programmers that build certain prediction markets could be prosecuted if it was reasonably foreseeable the contracts could be used for a prohibited purpose (e.g. terrorism or assassination).
• CFTC Wins Bitcoin Ponzi Case — On October 18, the CFTC won a suit against a company and its CEO for running what was, in effect, a Ponzi scheme with Bitcoin. The defendants successfully solicited $600,000 from 80 customers and told customers they would earn the money back through the company’s trading algorithm. However, new clients’ funds were used to pay out existing clients. A federal judge ordered the company and its CEO to pay $2.5 million in penalties and restitution, and imposed permanent trading and registration bans.
• IRS Urged to Give Crypto Guidance — On October 24, the Information Reporting Program Advisory Committee (“IAPAC”) released its periodic report that lays out areas the Internal Revenue Service (“IRS”) should improve upon. This year’s report specifically urged the IRS to issue further guidance on crypto taxation.

TAKEAWAYS FROM OCTOBER

• Insider Trading — The crypto industry is rife with insider trading, and it’ll likely be a big focus for the SEC in the near future. Whether insider trading laws apply, of course, depends on whether a token counts as a security or commodity.
• IRS Pressure — IAPAC’s report urging the IRS to provide crypto tax guidance continues to add pressure on the agency, adding to efforts like the letter Congressional representatives sent to the IRS in September.
• Prediction Markets — Most regulation has focused on what a token is (security? commodity? something new?) and basic violations (e.g. fraud or sale of unregistered securities). You can expect to see prediction markets and other idiosyncratic features of the cryptospace facing increasing examination, as regulators’ efforts become more granular.
• Regulators Warning and Cracking Down on Impersonators — Regulatory impersonators seem to be increasing in frequency, and the (actual) regulators are stepping up efforts to raise awareness about and pursue these imposters.

RECENT RESOURCES

• Securities Law Overview — Messari released a great, concise “Securities Law & Crypto” write up this month. If you want to know more about how US securities laws apply to crypto than just the “what counts as a security?”, it’s a highly recommended read.
• Blockchain for Law — If you’re an attorney working in the cryptoscape, check out Stevie Ghiassi’s “Blockchain for Law”, a great network for crypto attorneys.

EVENTS

• World Blockchain Forum — Nov. 8–9 in New York, NY.
• Token Forum — Nov. 9 in Seattle, WA.
• Empire Startups FinTech Conference — Nov. 13 in San Francisco, CA.
• Blockchain for Finance Conference — Nov. 24–15 in Boston, MA.
• Blockchain Expo North America — Nov. 28–29 in Santa Clara, CA.
• Washington Elite AI Blockchain Summit — Nov. 30 — Dec. 1 in Washington, D.C.