Regulatory and Compliance Updates, May 9–20
As part of our continuing efforts to help our community stay on top of all relevant developments, below are updates on regulatory and compliance issues in the blockchain and cryptocurrency industries for the period between May 9 and May 20.
🇺🇸 United States
SEC Regulation
The Securities and Exchange Commission (SEC) has been fairly talkative over the past few weeks, making various speeches and other public announcements, although none of these statements gave any clear or substantive indication of how the SEC intends to rule on specific outstanding questions.
In a speech at a conference, one of the SEC commissioners indicated that the SEC would prefer not to implement a regulatory sandbox, in which developers and regulators would work closely together, but instead views itself as a lifeguard at the beach, sitting off to the side so as to allow innovation to happen and only intervening in emergencies.
https://corpgov.law.harvard.edu/2018/05/10/beaches-and-bitcoin-remarks-before-the-medici-conference/
In addition, SEC and Commodity Futures Trading Commission (CFTC) representatives at the Consensus conference in New York made statements indicating that they intend to be flexible and do not want to hinder innovation. The SEC also indicated that it is open to speaking to and working with ICO issuers, as well that they intend to primarily take enforcement actions against those who act in bad faith and do not try to comply with the law.
https://www.coindesk.com/us-regulators-say-want-avoid-hindering-blockchain-innovation/
The SEC also “launched” its own fake ICO for purposes of educating investors about potential issues with cryptocurrency investments. The parody website includes a white paper and other standard features of ICO issuances.
https://www.howeycoins.com/index.html
In enforcement activities, the SEC and Department of Justice (DOJ) secured indictments in their prosecution of the team behind the behind the high-profile $25 million Centra ICO, which was promoted by celebrities like DJ Khaled and Floyd Mayweather. In the indictments, the SEC reiterated its position that ICO tokens are generally securities. The indictments allege that the sale of Centra tokens therefore constituted a sale of unregistered securities. Furthermore, the defendants are accused of committing serious fraud. One prominent allegation was that the team claimed they had partnerships with Visa and Mastercard, which never existed. In addition, the ICO promotional materials and whitepaper included fabricated team members who did not exist, complete with impressive made-up biographies and fake pictures. Centra also promised to pay ICO purchasers a dividend but did not have any intention to do so.
State-Level Enforcement
Regulators in Texas continued their string of prosecutions against allegedly fraudulent cryptocurrency investment schemes, issuing cease-and-desist orders to three businesses it accuses of offering unregistered securities and committing fraud while doing so.
https://www.coindesk.com/crypto-investment-schemes-hit-with-cease-and-desists-in-texas/
https://www.coindesk.com/jennifer-aniston-prince-charles-falsely-used-to-promote-crypto-scam/
Seminole County in Florida became the first US jurisdiction to accept payments in cryptocurrency. Residents will be able to use bitcoin and bitcoin cash to pay for property taxes, driver’s license fees, tags and titles.
http://www.seminoletax.org/forms/bitcoin-announcement.pdf
Litigation to Watch
In USA v. Zaslavskiy, which began in September 2017, the SEC and DOJ brought both civil and criminal charges against an individual who raised approximately $300 thousand in two ICOs for cryptocurrencies that were supposedly backed by real estate and diamonds. According to the SEC and DOJ, the cryptocurrencies (which were never actually issued) qualified as securities and the defendant committed fraud in his offer to sell them. The defendant submitted a motion to dismiss the criminal charges against him and the SEC and the DOJ responded. While it is unlikely that the defendant will prevail, he does raise some untested arguments and the court’s stance on these issues could provide openings for future cases.
First, the defendant argues that “currencies” are expressly not considered to be securities under the securities laws, and cryptocurrencies count as currencies in part because they are a “medium of exchange.” The government agencies argued in response that the cryptocurrencies at issue in this case never existed and so never served as a “medium of exchange”, among other arguments. However, it is unclear how they would respond in a case where the cryptocurrency actually was used as a medium of exchange. Second, the defendant argues that the cryptocurrencies would not qualify as securities under the famous Howey test because, among other things, they would exist in a decentralized ecosystem and their value would depend on the efforts of everyone participating, not just the defendant. Again, the government response is largely based on the fact that the ecosystem never existed and could not have existed without further efforts by the defendant to build the platform, acquire the underlying assets and issue the cryptocurrencies. It is unclear how the SEC and DOJ would react if such a decentralized platform was actually operating.
Finally, the defendant argues that the US laws regarding cryptocurrency are vague and confusing, with different agencies applying different rules, and therefore it is against the constitution for him to be prosecuted. The court did not set a deadline on when it will rule on the motion to dismiss. If the case is not dismissed, the trial will be in January.
Cryptocurrency Futures
The past few weeks saw some advances for regulated assets that are related to cryptocurrency. The first ethereum futures are being developed in the UK, and the developers have made a deal with important regulated US exchanges to create a daily ETH reference price, which could facilitate these ether futures being available in the US markets (bitcoin futures have been available, including in the US market, for several months). In addition, in the US the CFTC licensed two new products that allow bitcoin holders earn a yield in fiat on their bitcoin holdings.
https://news.bitcoin.com/ethereum-futures-in-us-one-step-closer-as-cme-deal-is-struck/
🇪🇺 European Union
On May 14, the EU council adopted a new directive updating the EU rules on anti-money laundering (“AML”) and terror financing (“CFT”). The new directive includes virtual currency exchanges and custodian wallet providers within the definition of “obliged entities” that must comply with the EU’s AML/CFT rules, with the same requirements as banks and other traditional financial institutions. These rules include registering with the national AML authorities, customer due diligence controls, monitoring transactions and reporting suspicious activity to the government. The directive also requires EU nations to create central databases of virtual currency users’ identities and wallet addresses.
A board member of the EU’s central bank, speaking at a conference, suggested that the central bank should require the banks it supervises to isolate activity relating to cryptocurrency from other activities and hold additional capital in reserve to back these activities.
🇮🇱 Israel
The Tel Aviv district court made an initial ruling in favor of a bitcoin holder in a case against Bank Hapoalim, which had refused to allow the holder to deposit money he had received from selling bitcoin into his account with the bank. Bank Hapoalim argued that accepting such deposits would expose them to risks, including exposure to violations of anti-money laundering law. The court applied the relatively recent Supreme Court decision in the Bits of Gold case and ruled that the bank was required to accept the deposit and that refusing to do so would unreasonably harm the depositor, in part because this particular case did not involve funds from money-laundering or terrorist financing.
https://www.calcalist.co.il/local/articles/0,7340,L-3737674,00.html
🇨🇳 China
The Chinese government announced its intention to release nationwide blockchain standards.
https://cointelegraph.com/news/china-will-issue-blockchain-standards-in-2019-says-govt-official
Police in Shenzhen arrested six individuals who allegedly conducted a fraudulent ICO that raised $47 million from Chinese investors.
https://www.coindesk.com/tea-tokenizers-arrested-china-alleged-47-million-crypto-fraud/
🇰🇷 South Korea
On May 11, prosecutors raided the largest cryptocurrency exchange in South Korea, in part for allegedly selling users cryptocurrencies that it did not actually have. This action was part of an ongoing probe into the country’s exchanges. In another recent development, the Financial Services Commission, which is the largest financial regulator, joined the probe, which was previously run by lower-level agencies. The Financial Services Commission will begin checking the bank accounts of Korean cryptocurrency exchanges and will also be involved in other fraud prevention measures.
https://www.coindesk.com/koreas-biggest-crypto-exchange-raided-over-suspected-fraud-report/
🇮🇳 🇿🇼 Banks and Bitcoin (Zimbabwe, India)
On issues similar to the Israeli Bank Hapoalim lawsuit discussed above, authorities in India and Zimbabwe have taken the opposite stance from the Israeli courts. The central bank in Zimbabwe has ordered all financial institutions to immediately stop trading or transacting cryptocurrencies, including transfer and receipt of money relating to purchases or sales of cryptocurrency. The Supreme Court of India declined to issue an interim order requiring the Reserve Bank of India to halt its ban on providing financial services to companies dealing in cryptocurrencies. While industry participants are still involved in a case to overturn the ban, the ban will remain in effect until the case concludes.
https://www.newsday.co.zw/2018/05/rbz-bans-bitcoin-trading/
🇹🇭 Thailand
On May 13, a new regulatory framework came into effect in Thailand, which among other things requires ICO issuers and cryptocurrency exchanges to register with the Thai SEC within 90 days. However, according to some reports, various aspects of the law have not yet been made clear and may be difficult to comply with.
https://cointelegraph.com/news/thailand-legal-framework-for-cryptocurrencies-comes-into-force
🇺🇦 Ukraine
The Ukrainian securities regulator announced in a facebook post that it is considering recognizing cryptocurrency as a financial instrument, and may issue new regulations.
🇷🇺 Russia
The Russian legislature will begin the first reading of an initiative to add digital currency provisions to the country’s civil code. The legislature is also considering other bills, including one that would govern the use of digital currencies as a form of payment and another that would provide regulation for ICOs.
🇵🇱 Poland
Polish regulators have announced that they will finance anti-cryptocurrency activity on social media.
https://cointelegraph.com/news/polish-financial-watchdog-to-fund-anti-crypto-social-media-campaign
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.
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