Regulatory and Compliance Updates — June 16 — June 30
This post is the latest in our updates on regulatory and compliance developments in the blockchain and cryptocurrency industries, covering June 16- June 30.
🇺🇸 United States
New ethics guidance announced by the U.S. Office of Government Ethics on June 19 will require government officials to report their cryptocurrency holdings. According to the guidance, virtual currency counts as “property held… for investment or the production of income” which is required to be reported, unlike “real currency.” Similar guidance from the House Ethics Committee will require members of Congress to publicly disclose any digital token holdings worth more than $1,000 dollars. (link)
Crypto and Crime
There was a decent amount of talk/activity during the last few weeks in the area of cryptocurrency and various forms of crime. The U.S. congress held hearings regarding the use of cryptocurrency in illicit activities. Among other discussions, an official from the Secret Service gave testimony on June 20th in which he advocated that new action be taken by congress or regulators to maintain the ability of law enforcement to access information related to privacy-enhancing cryptocurrencies and services to obscure transactions on a blockchain. (full testimony) In other congressional testimony from a hearing on June 26, various speakers argued that foreign governments could use cryptocurrency as part of efforts to influence the U.S. political system. (link). On June 26, the House of Representatives unanimously passed a bill that would require the U.S. Government Accountability Office to study the use of virtual currencies in drug sales and human trafficking. The bill would still need to be passed by the Senate and signed by the president in order to become binding law. (link)
An official from the FTC, which has jurisdiction over consumer protection, gave a speech on June 25 in which he claimed that U.S. consumers will lose more than $3 billion in cryptocurrency from scams and frauds by the end of 2018. (link) An FBI agent, speaking at an event in New York on June 28, stated that the FBI has over 130 open cases tied to cryptocurrency, related to crimes like human trafficking, drug sales, kidnapping and ransomware attacks. The FBI has also seen an increase in extortion cases related to virtual currencies. However, the agent also noted that this represents a small percentage of the FBI’s overall case load. (link) As a result of one of these FBI investigations, two individuals in Maryland were indicted for using the dark web for drug distribution (they sold drugs in exchange for bitcoin) and subsequent money laundering. The government seized approximately $17 million in bitcoin and is seeking to permanently confiscate $5.6 million of that as illegal drug proceeds. (link) In news relating to an older dark web case, the U.S. Supreme Court denied an appeal by Ross Ulbricht (of the Silk Road marketplace) challenging his life imprisonment. (link). In Europe, Spanish police, working with Europol, arrested eight people and seized $5.2 million worth of bitcoin in one of the largest drug busts in European history. (link)
SEC
In testimony before a congressional committee, Chairman Jay Clayton of the Securities and Exchange Commission (“SEC”) briefly discussed digital assets and ICOs. In the testimony, Clayton indicated that he believes the SEC has taken a balanced approach to the industry that both fosters innovation and protects investors. He also said he believes the SEC is providing adequate guidance in the area of ICOs, citing the July 2017 DAO report, and, interestingly, the recent speech from William Hinman, director of the Corporate Finance Division, as examples of the SEC’s guidance.
In previous updates, we discussed the enforcement action of the SEC and Department of Justice (“DOJ”), including criminal indictments, against the leadership behind the Centra ICO, which was famously backed by celebrities like Floyd Mayweather and DJ Khaled and whose whitepaper included various fraudulent claims. In addition to this government-driven action, Centra is being sued by ICO investors in a Florida court. On June 25, the judge ruled on a motion to freeze the defendants’ assets. Among other things, the plaintiffs claimed that the sale of tokens in the ICO was an unregistered sale of securities. The defendants responded that the plaintiffs are not entitled to the relief sought, and also claimed that their assets have already been seized by the government. Applying the Howey test, the court found, consistent with the SEC and DOJ’s views in their (link)
The SEC and the Commodity Futures Trading Commission (“CFTC”) announced that they signed a memorandum of understanding on June 28 that updates the arrangement governing the coordination between the two agencies. The agreement allows the two agencies to share non-public information related to specific entities where the “regulatory interests” of the agencies overlap, even if the entity is not registered with both the CFTC and the SEC. This letter, combined with the CFTC’s recent moves to increase its access to underlying trading information from cryptocurrency exchanges, could increase the likelihood that the SEC will also access such data in the future.
Ohio
Ohio’s legislature passed a cybersecurity law that includes several provisions related to blockchain technology. The bill provides that a record or contract secured through blockchain technology is considered to be an “electronic record”, and that a signature secured through blockchain technology is considered to be an “electronic signature” under Ohio law. These changes have the effect of making blockchain transactions the legal equivalent of paper contracts signed by hand. Several other states, such as Delaware and Colorado have passed similar laws. However, there is significant debate about whether these laws are in fact helpful to the development of blockchain technology. (link)
Florida
The state of Florida announced its intention to appoint its very own crypto czar to oversee the blockchain industry. According to the announcement, the new position will include examining how various laws apply to ICOs, developing future policy and supervising the registration of ICOs with Florida’s Office of Financial Regulation. On the last point, the announcement states that ICO and cryptocurrency companies will be required to register, but it was not clear whether this is a requirement under current law or if this is a new regulation that Florida intends to enact in the future. (link)
New York
New York’s Department of Financial Services approved several additional entities and granted them BitLicenses (required to do virtual currency-related business in NY state), bringing the grand total of approved entities up to nine. (link)
Trading Products
Several new cryptocurrency-related trading products became available or advanced the process to becoming tradeable. The Toronto Stock Exchange will list a new blockchain-based ETF that has holdings in various blockchain and is intended to allow investors to get exposure to the industry as a whole rather than take the risks of investing in individual companies. Similar ETFs have lost approximately 20% since launching earlier this year. The SEC is evaluating a proposal that would allow the Cboe derivatives exchange to list an additional bitcoin ETF. Interested parties have three weeks to give comments on the proposal. The UK cryptocurrency exchange Crypto Facilities launched a litecoin futures product, only a few months after launching Ethereum futures.
🇨🇳 China
On June 28, A Chinese court ruled on the use of blockchain technology as evidence. The plaintiff, a media company, was suing a technology firm for copyright infringement, and had encoded screenshots and pictures of the allegedly unauthorized use on a blockchain-based evidence deposition platform. This raised the issue of whether evidence encoded on a blockchain should be viewed as authenticated by a court (similar to a notarized). The ruling took a balanced approach, with the judge stating that “it should maintain an open and neutral stance on using blockchain… We can’t exclude it just because it’s a complex technology. Nor can we lower the standard just because it is tamper-proof and traceable.” In the case at hand, the judge found that because the blockchain app was reliable and did not have conflicts of interests, its use was sufficient to be used as evidence in court. (link)
🇯🇵 Japan
Japan had a particularly active couple of weeks. On June 22, a Japanese court ruled that Mt. Gox (formerly the largest bitcoin exchange that was hacked in 2014, losing 850,00 bitcoins then valued at $473 million) can be removed from bankruptcy proceedings. This decision makes it possible for former customers to receive cryptocurrencies that are currently worth approximately $1 billion. These funds had been held for almost four years as part of the bankruptcy proceedings. The court also ruled that those seeking refunds in the form of bitcoin would be paid in that form. Previously, customers were expected to receive the monetary value of their lost bitcoins at the time of the hack. As the price of bitcoin was only $483 at the time, this change represents a significant victory for those trying to collect. (link)
Japanese regulators also continued to increase the pressure on the country’s regulated exchanges, which have seen increasing regulatory scrutiny over the past few months since the hack of the Coincheck Exchange. The Financial Service Agency (“FSA”) issued “business improvement orders” to at least five of the exchanges, ordering them to tighten their procedures for identifying suspicious transactions and other compliance processes. In the wake of these orders, the CEOs of two of the exchanges resigned from their positions as vice presidents of the Japan Virtual Currency Exchange Association (“JVCEA”), the self-regulatory organization for the exchanges. Earlier in the month, the JVCEA had announced plans to release voluntary regulations for its exchanges that include an insider-trading ban and would prohibit trading in privacy-oriented tokens like Monero and Zcash. No official release of the rules appears to have been made.
In another example of the effect of increasing regulatory stringency in Japan, the HuobiPro exchange announced that it would stop offering services to Japan-based investors starting in July. Japanese law prohibits most virtual currency-related business unless done through a licensed exchange and has been reluctant to grant new licenses. HuobiPro had initially attempted to partner with a licensed exchange, but the plan was abandoned in March. (link).
🇰🇷 South Korea
South Korean regulators added additional requirements that require domestic banks to monitor accounts held by cryptocurrency exchanges. In part, these rules are intended to ensure that exchanges do not move investor funds to their own operating accounts, a practice that some exchanges have been accused of in the past. (link)
🇰🇭 Cambodia
Regulators in Cambodia announced that investors are required to have a license in order to engage in purchase, selling or trading activities in cryptocurrency. The regulators, which included the nation’s central bank, securities regulator and the national police, stated that trading causes risks to the public and society as a whole. The announcement does not specify what sort of license is needed or how an investor would go about obtaining one. (link)
🇨🇦 Canada
Canadian securities regulators took a survey of 2,500 consumers in Ontario to find out how much they understand cryptocurrencies. The survey found that 5% of Ontarian consumers hold cryptocurrency and 1.5% have participated in an ICO. Most spent small amounts of money in these investments (of those who had purchased, half spent less than $1,000 and 90% spent under $10,000. When asked six true-or-false questions about bitcoin, only 3% correctly answered all questions and 34% answering a majority correctly. Consumers who actually hold cryptocurrency did better, with 72% identifying a majority correctly and 15% getting all six right. (link)
🇲🇹 Malta
Malta’s three blockchain-related bills passed their second reading in parliament. The bill provides a new regulatory framework for virtual assets that do not fit existing securities laws. The framework includes requirements for information that must be included in a white paper, the appointment of an agent to be responsible for updating regulators with respect to decentralized networks, as well as other regulations specifically designed for virtual and decentralized assets. (link)
🇵🇱 Poland & 🇮🇪 Ireland: Banks vs. Blockchain
In past updates we have noted many conflicts between established banks and the blockchain/ cryptocurrency industries in which banks refuse to open accounts for companies operating in the space. Usually the arena for these conflicts are local courts. In an interesting new approach, the Polish Bitcoin Association group appealed to the country’s anti-trust authority, asking them to investigate at least 15 banks who refuse to give accounts to blockchain companies. The organization argues that denying these account applications amounts to an illegal restriction on competition. (link)
The founder of an Irish bitcoin broker that closed in April made similar accusations against banks in that country, accusing a banking organization of discriminating against cryptocurrency and blaming the banks for forcing the brokerage to close. (link)
🇬🇧 United Kingdom
The Bank of England wrote a letter to financial institutions notifying them that cryptocurrency assets are risky. The letter provided several recommendations for handling that risk, including recognizing that crypto-assets are a new and evolving asset class that should be considered by high-level managers, making sure that compensation and incentive policies do not encourage excessive risk taking, acquiring relevant expertise (including technical and operational expertise) and doing extensive due diligence before taking on any cryptocurrency -related risk.
🇺🇦 Ukraine
While fraudulent ICOs, pump-and-dumps using non-existent trades and scams involving impersonated individual wallet addresses are relatively common in the cryptocurrency space, authorities uncovered another creative approach in this genre as four individuals in the Ukraine were arrested for allegedly faking at least six entire exchanges and stealing funds from users. Some of the fake sites existed for long enough to be indexed on the Wayback Machine portal. (link)
This update has been prepared by the Orbs Ltd. legal team for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact legal counsel licensed in their jurisdiction. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Orbs Ltd. in response to this update.
