Crypto Regulation Update — May 2019

This update is brought to you by Bridge Protocol (BRDG) as part of a series on cryptocurrency regulations.

Bridge is a RegTech company specializing in identity services and compliance for Know-Your-Customer (KYC), Anti-Money-Laundering (AML) and more on the blockchain.

Read last month’s update here.

United States

  1. Tether, leading “stablecoin” is NO longer backed by $1 USD for every coin, plus slew of legal issues. A New York judge has ordered Bitfinex, a cryptocurrency exchange that shares a parent company with the “stablecoin” Tether, to turn over a bunch of documents to New York Attorney General Letitia James. James announced the order in a Thursday press release. She also unsealed her office’s legal filings requesting the order. The company has been unable to recover $851 million in cash it had entrusted to a payment processor called Crypto Capital.
Tether said that the filings from New York’s attorney general were “written in bad faith and are riddled with false assertions.” According to Tether, the missing $851 million “are not lost but have been, in fact, seized and safeguarded.” The company added that “both Bitfinex and Tether are financially strong.”

2. Financial Crimes Enforcement Network (FinCen) makes statement and enforcement action against Silk Road facilitator. On April 18th, FinCEN made public an “assessment of civil money penalty” (meaning a fine, but done in an administrative action by the agency and not in a criminal case filed in court) against Eric Powers for being an unregistered money services business (MSB) and not having a written anti-money laundering plan and reporting suspicious transactions as required by the MSB regulations.

According to FinCEN, Mr. Powers was engaged in money transmission but he wasn’t following the rules.

3. Securities and Exchange Commission (SEC) are hiring a “Financial Analyst Cryptocurrencies.” The SEC posted a new role. The responsibilities include:

“The Crypto Specialist provides expertise and coordinates TM activities regarding crypto and digital asset securities. Duties include coordination with Division staff to establish a comprehensive plan to address crypto and digital asset securities; engage with other Divisions and Offices on such matters; serve as the Division’s point of contact for domestic and international regulators, market participants, and the public; provide expert level comment on policy and workstreams.”

Compensation for the role is between $144,850 and $238,787 annually… applicants can make the determination if that is worth the price to set global precedent.

4. Token Taxonomy Act (TTA) reintroduced to Congress. Ohio U.S. Representative Warren Davidson has reintroduced the Token Taxonomy Act to congress, a bill which aims to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude “digital tokens” from the definition of a security. The full bill can be viewed here.

Important to note that one of the supporters of the bill, Warren Davidson (R-OH) serves on the House Financial Services Committee and Washington insiders believe this gives the bill a much better chance of making it to the Senate.

5. SEC agrees aircraft charter startup TurnKey Jet’s tokens are NOT securities. The SEC responded to a no-action request from TurnKey Jet, which means it does not recommend an enforcement action against the company. It came with a plethora of conditions that must be met in order to keep that letter in their pocket:

  • TKJ will not be used to develop the TKJ platform, network, or app
  • The TKJ platform, network, or app will be developed prior to the sale of the TKJ token
  • TJK tokens will be immediately usable when they are sold
  • The transferring of TKJ tokens is restricted to the TKJ platform
  • TKJ will sell its tokens at a price of one USD, and “each token will represent a TKJ obligation to supply air charter services at a value of one USD per token”
  • If TKJ repurchases the tokens, they can only do so below face value
  • TKJ tokens are marketed to emphasize utility, not its potential to increase in market value

6. SEC publishes new guidance around digital assets, many legal experts claim it’s a “nothing-burger” of information.

The latest comments were crafted by Bill Hinman, the director of Division of Corporation Finance and Valerie Szczepanik, senior advisor for Digital Assets and Innovation, who stressed that the framework is not supposed to be an exhaustive overview of the law.

It’s just an “analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.”
Preston Byrne, who labeled the new guidance as a “legal…nothingburger.”

Though an important start toward regulating the crypto industry, the critics say the framework contained little information about how the SEC plans to be more active in regulating the space. Instead, it highlighted the obvious and left the rest to a guessing game.

WorldWide

  1. According to Reuters, the National Development and Reform Commission (NDRC) of China has drafted a proposal that MAY ban Bitcoin mining.

The NDRC is responsible for economic planning, which includes the administration of a list of industries for restriction or elimination. Consequently, details of the latest list propose the removal of cryptocurrency mining. The reasons cited include failure to obey regulations, mining is unsafe, and the environmental impact it has.

The agency is taking comments as part of a larger environmental protection worry. Bitcoin and cryptocurrency mining was mentioned as part of the “ban.” Comments close on this proposal on May 7th, so as of right now, this public list isn’t even finalized. When finalized, and assuming mining remains in the elimination section, some Chinese provinces may choose to avoid prioritizing this motion.

2. The Chinese Currency (RMB) will eventually become a cryptocurrency. Donald Tapscott, executive chairman of the Blockchain Research Institute, stated that the official Chinese currency, the renminbi (RMB), will become a cryptocurrency in an interview with Bloomberg on April 17.

Tapscott met and spoke with vice-chairman of the Communist Party of China; President Xi Jinping thinks blockchain is one of the most important technologies for the future of their country.

3. CEO of Binance concerns over compliance whether it is an ICO or IEO.

In a recent interview, CZ (CEO of Binance) emphasized that while Initial Exchange Offerings (IEO) may indeed offer the benefit of having a third-party do due diligence on projects, regulatory compliance issues are no less onerous for the new model of offering than for ICOs:

“Regulatory compliance does not change regardless of if you do an ICO or IEO. If you issue a token representing shares of your company, then it is a security (in most countries), and you need to do some work on compliance.”

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