The People’s Bank of China (“PBOC”) announced this morning that it is banning crypto currencies and related services, including “trading, order matching, token issuance and derivatives for virtual currencies are strictly prohibited.” CNBC and other outlets reported that the ban also extends to overseas exchanges serving Chinese residents: “’Overseas virtual currency exchanges that use the internet to offer services to domestic residents is also considered illegal financial activity,” the PBOC said, according to a CNBC translation of the comments.” ...
Paxos Settlement Service announced February 20, 2020, that it has commenced P2P settlement of US-listed equity trades over a private, permissioned blockchain with Credit Suisse and Instinet (a Nomura Bank subsidiary). Paxos expects Societe Generale will join soon.
Paxos is registered with the New York Department of Financial Services and regulated as a limited-purpose trust company.
Late last year, Paxos obtained SEC No-Action relief from clearing-agency registration, limited to a “Feasibility Study No-Action Phase” restricted to a maximum of seven participants for 24 ...
SEC Commissioner Hester Peirce earlier this month proposed a draft SEC Rule 195 as a safe-harbor for developmental token offerings, providing a registration exemption for three years to allow the token’s network to achieve “maturity.”
Proposed Rule 195.
In proposing the Rule, Commissioner Peirce stressed that it is a developmental concept and welcomed direct input. She also said it might work better as a no-action position.
The Rule would provide a three-year non-exclusive exemption to allow Initial Development Teams (“IDT”) an “incubator” period during which a ...
On May 9, 2019, the House Financial Services Committee voted to establish two task forces dedicated to studying technological innovations that impact the financial services arena: a FinTech Task Force and an Artificial Intelligence Task Force. The FinTech Task Force is initially set to study various issues, including fintech regulation in the domestic and international spheres, alternative data for loan underwriting, and data privacy. The Task Force on Artificial Intelligence will study how artificial intelligence affects how consumers interact with and use financial ...
As the 116th Congress continues its work in the first session, several new and revived bills have been introduced concerning blockchain and cryptocurrencies. Two of these bills seek to add a formal definition to important terms in the realm of blockchain and cryptocurrencies. Both of these bills has bipartisan support and seeks to add a more formal definition to well-known terms.
The first bill, called the "Blockchain Promotion Act," was introduced in February and has bipartisan sponsors from both the Senate and the House of Representatives. It calls for the Department of Commerce ...
Late last week, the SEC issued a no-action letter widely hailed as its first on a blockchain-based digital token for private jet services. In its TurnKey Jet letter, the Commission Staff indicated it would not recommend enforcement action over the operation of a private, permissioned, centralized blockchain network and smart-contract infrastructure for clearing and payment using a utility-token effectively functioning as a pre-paid jet card (or streetcar token).
See TurnKey Jet, Inc. (Apr. 3, 2019), here.
And the request, here.
CoinDesk reports that the no-action process took ...
This week, the SEC's Division of Investment Management issued a letter seeking industry and public input on custody issues arising from digital assets.
The "Custody Rule," Rule 206(4)-2 under the Advisers Act of 1940, provides it is a fraudulent act or practice to have custody of client assets, unless an adviser complies with Custody-Rule requirements, including among others, by a qualified custodian subject to annual independent audits.
The Division’s recent Guidance Update on custody issues focused on inadvertent custody (e.g. where boilerplate in the adviser’s ...
This term, Congress is set to consider several bills—each with bipartisan sponsorship—targeting the fields of blockchain, cryptocurrency, and fintech. This spurt of legislative activity indicates an increased awareness by lawmakers of both the opportunities for innovation in these fields and the potential pitfalls and risks for illicit use posed by these new technologies. The following are several of the bills that have been introduced this term to date which aim to promote blockchain and cryptocurrency:
- The Blockchain Regulatory Certainty Act (H.R. 528), introduced in ...
The Securities and Exchange Commission issued a Sources Sought Notice on January 31, 2019, seeking a private vendor "to support the goal of acquiring data for the most widely used blockchain ledgers."[1]
In the notice, the SEC did not specify or name the ledgers it wanted to acquire data from; however, the requirement that they gather data from the "most widely used" ledgers suggests that the SEC would want the vendor to be able to gather data from cryptocurrencies such as bitcoin and ethereum.
This step towards data gathering, likely in the realm of cryptocurrencies, is an interesting ...
In a November 16, 2018 Statement on Digital Asset Securities Issuance and Trading, the Securities and Exchange Commission (SEC) announced its current position on regulation of blockchain and other distributed ledger technologies. In its Statement, the SEC emphasized that "market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain."
The Statement relied on ...
On October 22, 2018, the United States District Court for the Southern District of New York granted Chinese e-commerce company Alibaba's application for a preliminary injunction against cryptocurrency startup Alibabacoin Foundation. The preliminary injunction entered in Alibaba Grp. Holding Ltd. v. Alibabacoin Found., No. 18 Civ. 2897, 2018 WL 5118638 (S.D.N.Y. Oct. 22, 2018) bars Alibabacoin Foundation from using Alibaba's protected marks to promote its novel cryptocurrency known as AlibabaCoin or Alibaba Coin.
Alibaba alleged that the defendants, a group of Dubai- and ...
After Bitfinex, the CFTC issued its Proposed Interpretation on "Retail Commodity Transactions Involving Virtual Currency." Proposed Interpretation, 82 Fed. Reg. 60335 (CFTC Dec. 20, 2017). Although the comment period closed March 20, 2018, the CFTC has taken no further action on the Proposed Interpretation to date.
The CFTC will assert Commodities Exchange Act regulatory jurisdiction over any "entity or platform [that] offers margin trading or otherwise facilitates the use of margin, leverage or financing arrangements for their retail market participants…." Id. at 60337 ...
In a series of 2015 decisions, the CFTC determined that virtual currency is a commodity subject to its jurisdiction.
In a 2016 settled enforcement action, the CFTC took the position that an unregistered platform administering and providing margin trading contracts in crypto-currencies to non-eligible ("retail") users violated the provisions of the Commodities Exchange Act, In the Matter of BFXNA, Inc. d/b/a Bitfinex, No. 16-19 (CFTC Jun 2, 2016), where:
- Bitfinex controlled the keys to the customer and escrow wallets involved in the margin lending.
- Bitfinex used book-entry ...
On September 11, FINRA announced its filing of an enforcement action accusing a Massachusetts broker of fraud and registration violations arising from his sale of an unregistered cryptocurrency, "HempCoin." It is FINRA's first cryptocurrency enforcement action.
FINRA alleges Timothy Ayre of fraudulently attempting to bolster his worthless public shell company, Rocky Mountain Ayre, Inc. (RMTN in the OTC pink sheets). Ayre alleged repackaged HempCoin as a security backed by RMTN common stock, marketing it as "the world's first currency to represent equity ownership" in a ...
This is Part 3 of a seven-part series of posts looking at some broad legal issues affecting crypto-currencies.
A. Regulatory Catch-Up.
As is often true of emerging technologies, the crypto-rush of the last few years has left regulators of all types struggling to catch up. The resulting confusion increases entrepreneurial and transactional risks, and also increases fraud risks (about the only thing all regulators agree about).
Various United States federal regulators have expressed interest in crypto-currencies, and claimed some jurisdiction over,
- The Securities and Exchange ...
This is Part 2 of a seven-part series of posts looking at some broad legal issues affecting crypto-currencies.
State and federal regulators, especially the SEC, have moved aggressively to halt unregistered initial coin offerings ("ICOs") as unregistered securities sales, where the tokens involved have the attributes of equity in return for money, goods, or services. The SEC first asserted its jurisdiction over token ICOs in its § 21(a) Report on The DAO. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Rel. No. 34-81207 (SEC, July ...
This is Part 1 of a seven-part series of posts looking at some broad legal issues affecting crypto-currencies.
DLT vs Territorial Law.
Fiat currencies have declared value stemming from governmental regulation. And "governments" typically are territorial jurisdictions, exercising the fundamentally territorial concepts of law and regulation.
Cyber-currencies function on the blockchain, a distributed ledger technology ("DLT"). Because DLT is - and fundamentally must be - decentralized and distributed, it defies conventional notions of, and structures for, the ...
Last month, the Treasury Department issued a 222-page report to President Trump on Nonbank Financials, Fintech, and Innovation in which it recommends large-scale regulatory changes to promote innovation in the realm of fintech. The report makes clear the view of the Treasury Department that "innovation is critical to the success of the U.S. economy, particularly in the financial sector." To that end, the Treasury Department's report seeks to identify opportunities to "modernize regulation to embrace the use of data, encourage the adoption of advanced data processing and other ...
Earlier this month the United States District Court for the Northern District of California issued its opinion denying several motions to dismiss, including one filed by the Tezos Foundation, regarding class allegations stemming from Tezos' July 2017 initial coin offering ("ICO"). This lawsuit, In Re Tezos Securities Litigation (3:17-cv-06850), is a consolidated class action resulting from an ICO conducted by Tezos in July of 2017 in which the plaintiffs, investors in the ICO headed by lead plaintiff Arman Anvari, seek rescission of their contributions to the ICO as well as ...
Mick Mulvaney's tenure as acting director of the Consumer Financial Protection Bureau ("CFPB" or "the Bureau"), a position he has held since November of 2017, is coming to an end. It is anticipated that President Trump's nominee, Kathleen Kraninger, will take over as the Bureau's director once confirmed by the Senate. In a speech to the Women in Housing and Finance group on May 29, 2018, Mulvaney announced that the Bureau is working closely with the Commodity Futures Trading Commission to implement a "regulatory sandbox" that will enable financial technology ("FinTech") firms to ...
A distributed ledger often referred to as blockchain or distributed ledger technology ("DLT"), has a wide variety of potential uses and is currently being touted as a helpful tool for tracking financial transactions such as issuing and trading stock. Nonetheless, the nature of DLT raises some interesting jurisdictional questions and concerns.
At its core, a distributed ledger is a digital transaction record that is shared with multiple computers (also known as nodes) on a decentralized network. Distributed ledgers are often promoted as being almost immutable because the ...
UBS is leading a team of banks developing a blockchain-based system to enable financial markets to rapidly settle transactions and make payments. On August 31, 2017, UBS announced that six additional banks have joined the group developing the system, which is set to launch in late 2018. The banks are collaborating to use blockchain technology to increase speed and efficiency in business transactions. To do so, UBS has developed a "Utility Settlement Coin" ("USC"), a digital cash equivalent of each of the major currencies backed by central banks, rather than a decentralized new ...
Back in August 2014, the CFPB published a Consumer Advisory entitled, "Risks to consumers posed by virtual currencies." In the Advisory, the CFPB informs consumers of the risks associated with blockchain currency, including scams, cost as compared with credit cards, fewer protections when something goes awry, and the potential for hackers.
In the Advisory, the CFPB warns consumers about bitcoin and other blockchain currency. Risks include the threat of hackers and scammers that pose serious security threats. Because bitcoin and other blockchain currencies are virtual, fraud ...
In a previous post in this series, we provided an overview of blockchain technology and its benefits across industries. As a follow-up, below is an explanation of the technology in each block in a blockchain and how this technology functions to protect the integrity of the data on a blockchain.
Each block in a blockchain contains three key components. First, the block contains the stored data. For example, the blocks used in Bitcoin contain data regarding Bitcoin transactions, including the identification of the payor's electronic wallet, the payee's electronic wallet and the ...
Over the course of the past few years, blockchain technology - a platform that acts as a digital ledger for assets - has rapidly grown in prominence. A fundamental understanding of how this technology works, as well as its benefits, can be helpful in assessing opportunities to leverage the technology in any particular industry. This article provides a brief overview of blockchain technology and its advantages.
Blockchain provides a peer-to-peer tool for sharing information about assets and transactions, such as digital goods, money, medical records, company records ...