Weekly Focus

• Replies to Motions for Summary Judgments filed in SEC v. Telegram
• Cases Consolidated in Class Action Suit Against iFinex Inc
• Bittrex Introduces Insurance Coverage
• Research Report Finds the Number of Cryptocurrency Scams Rose in 2019
• Research Report Indicates Regulatory Uncertainty a Barrier for Digital Asset Companies
• Coinbase Custody Launches in Ireland
• Cambodia Announces Forthcoming Central Bank Digital Currency
• France Charges Alleged BTC-e Operator
• Deputy Governor of Japan’s Central Bank Comments on Potential Central Bank Digital Currency
• Singapore Payment Services Act Comes Into Force
• The World Economic Forum Announces a Global Consortium for Digital Currency Governance
• Iranian Ministry Grants Licenses to Cryptocurrency Miners

U.S. Developments

Replies to Motions for Summary Judgments filed in SEC v. Telegram

On January 27, 2020, the Securities and Exchange Commission (“SEC”), and Telegram Group Inc. and TON Issuer Inc. (collectively, “Telegram”) filed reply briefs in support of their respective motions for summary judgment. The case is before Judge Kevin Castel in the U.S. District Court for the Southern District of New York and alleges violations of the federal securities laws.

The SEC contends that Telegram violated Section 5 of the Securities Act of 1933 because (1) Grams, Telegram’s proposed tokens, are securities, and (2) Telegram sold Grams, through purchase agreements, without first filing a registration statement with the SEC and no exemption from Section 5’s registration requirement applied. The SEC also alleges that the requisite analysis under the relevant jurisprudential tests to determine if Grams are securities should take place at the time the purchase agreements were entered into, and not at the time of distribution. Relevant to such jurisprudential tests are the expectations of reasonable purchasers and their possible reliance on the efforts of Telegram.

As part of its briefing in support of its motion for summary judgment, the SEC submitted expert reports to support its contention that the technology was not substantively complete and that a reasonable purchaser would have expected to profit from the purchase of Grams. The experts included Patrick Doody, a third-party blockchain scientist and digital asset investor, Carmen Taveras, a SEC economist, and Maurice Herlihy, the computer science department chair of Brown University. Telegram, for its part, submitted its own expert reports in support of its motion for summary judgment. Telegram’s experts included Stephen McKeon, an associate professor of finance at the University of Oregon and venture capital firm partner, and Andrew Lewis-Pye, a mathematics professor at the London School of Economics.

Click here for a list of the filings and exhibits on Court Listener. Click here, here, and here for prior coverage of the SEC Telegram suit in the Virtual Currency in Review blog.

Cases Consolidated in Class Action Suit Against iFinex Inc

Four overlapping cases were consolidated on January 27, 2020 in the U.S. District Court for the Southern District of New York. The plaintiffs in the cases allege that iFinex Inc. (the company behind Bitfinex, Tether, and other affiliates) and associated defendants engaged in conduct that violated the Commodity Exchange Act, the Sherman Act, and the Racketeer Influenced and Corrupt Organization Act. The plaintiffs allege that the defendants engaged in a “part-fraud, part-pump-and-dump, and part-money laundering” scheme that caused hundreds of billions of dollars of losses to cryptocurrency investors. Three of the four now-consolidated plaintiffs filed motions on the same day to request that their counsel be certified as interim counsel for the consolidated class.

Click here for a Law 360 article on this development. Click here for prior coverage of the class action suit in the Virtual Currency in Review blog.

Bittrex Introduces Insurance Coverage

On January 29, 2020, the cryptocurrency exchange Bittrex Inc. (“Bittrex”) announced that it obtained digital asset insurance for its cold storage system to secure named cryptocurrency digital assets. According to Bittrex, “subject to the full terms, conditions and exclusions the policy will cover up to $300 million in assets in case of external theft and internal collusion.” Bittrex worked with Marsh, an insurance broker and risk adviser, to obtain the insurance coverage with a syndicate of insurers. Bittrex’s announcement follows the announcement by Gemini, a separate cryptocurrency exchange and custodian, of its own insurance coverage earlier in the month.

Click here for the Bittrex statement. Click here for a Block article on this development. Click here for prior coverage of the Gemini insurance in the Virtual Currency in Review blog.

Research Report Finds the Number of Cryptocurrency Scams Rose in 2019

The blockchain analysis company Chainalysis released its 2020 State of Crypto Crime report on January 29, 2020. The report analyzes illicit cryptocurrency activity during 2019. The report found that while the amount of bitcoin sent from criminal entities increased, such transactions account for just 0.08 percent of the total number of bitcoin transactions in 2019. The report addresses money laundering, scams, ransomware, hacks, darknet markets and terrorism financing. It found that “scams were by far the highest-earning category of crypto crime in 2019.” According to the report, scammers received roughly $4.3 billion in cryptocurrency, out of about $6 billion received from illicit activity last year. In the report, Chainalysis stated that they “believe the consumer protection implications make cryptocurrency scams an issue regulators must address and law enforcement must have the resources to investigate,” and that cryptocurrency exchanges may have a role to play in protecting consumers and preventing scammers.

Click here for the Chainalysis report. Click here for a Coindesk article on this development.

Research Report Indicates Regulatory Uncertainty a Barrier for Digital Asset Companies

A research report published on January 26, 2020 by The Block, a research, analysis, and news company that focuses on cryptocurrency and digital assets, concluded that regulatory uncertainty in the U.S. remains the primary issue for companies working the cryptocurrency and digital asset industry. Ninety-one percent of companies interviewed as part of The Block’s Digital Asset Human Capital Trends Report cited “regulatory uncertainty” as a barrier.

The research report was commissioned by the Blockchain Association, a U.S. industry group focused on cryptocurrency and digital asset policy. Earlier in January, the Blockchain Association announced a Market Integrity Working Group to support the development of public policy that ensures the transparency and fairness of cryptocurrency markets. The working group will be chaired by Breanne Madigan, Head of Global Institutional Markets at Ripple, and Rachel Nelson, Senior Director, Associate General Counsel — Regulatory at Coinbase.

Click here for the report. Click here for a Block article on this development. Click here for the Blockchain Association’s Market Integrity Working Group announcement.

International Developments

Coinbase Custody Launches in Ireland

Coinbase Custody announced on January 29, 2020 that it will establish a base in Dublin, Ireland. Coinbase Custody stated that the international launch “is aimed to meet the demands of institutional investors in Europe and beyond.”

The new entity, Coinbase Custody International Ltd., will offer institutional custody services and will undertake all staking activity currently performed by Coinbase. Coinbase Custody’s Irish launch follows the approval of a European e-money license for Coinbase by the Irish financial regulator, the Central Bank of Ireland, in October 2019.

Click here for the Coinbase Custody announcement and here for an Irish Times article on this development.

Cambodia Announces Forthcoming Central Bank Digital Currency

The National Bank of Cambodia is preparing to launch a central bank digital currency (“CBDC”), which is “in the final stages of deployment,” according to the director general of the National Bank of Cambodia, Chea Serey. The director general’s comments were made to the Phnom Penh Post on January 27, 2020. A deployment date has not been confirmed but is expected in the “next few months.” Users will apparently be able to set up a CBDC wallet that will be automatically linked to their bank accounts, allowing Baht exchange into the new CBDC in real time. Eleven banks already support the project, with more expected soon.

Click here for a Phnom Penh Post article on this development. Click here for a Coindesk article on this development.

France Charges Alleged BTC-e Operator

Alexander Vinnik, the alleged founder of the cryptocurrency exchange BTC-e that was allegedly used to launder billions of dollars, was extradited to France from Greece on January 23, 2020 and charged with extortion, aggravated money laundering, conspiracy, and harming automatic data-processing systems according to an official at the Paris prosecutor’s office.

Click here for a Bloomberg article on this development.

Deputy Governor of Japan’s Central Bank Comments on Potential Central Bank Digital Currency

The Deputy Governor of the Bank of Japan (“BOJ”) stated that the BOJ must be ready to issue a digital currency if circumstances warrant it. The deputy governor, Masayoshi Amamiya, spoke at a seminar in Tokyo on January 29, 2020. He stated that the BOJ had no immediate plans to issue a digital currency, but noted that the speed of technical innovation is very fast and that public demand for a central bank digital currency could rise in Japan, depending on developments in the world of settlement systems.

Click here for a Reuters article on this development.

Singapore Payment Services Act Comes Into Force

Singapore has enacted its Payment Services Act 2019 (“PS Act”), which expands current anti-money laundering (“AML”) and counterterrorist-financing (“CTF”) rules to ‘Digital Payment Token (DPT)’ services.

As of January 28, 2020 in-scope businesses will be required to register with the Monetary Authority of Singapore (“MAS”) and apply for a license to operate in Singapore. The PS Act was passed in January 2019 and appears to follow a broadly similar approach to the recent Fifth European Anti-Money Laundering Directive (“AMLD5”) in enacting applicable recommendations of the recent Financial Action Task Force (“FATF”) guidelines.

Click here for the PSA,   for the MAS announcement, and here for a Coindesk article on this development.

The World Economic Forum Announces a Global Consortium for Digital Currency Governance

On January 24, 2020, the World Economic Forum (“WEF”) announced the creation of a global consortium to design a governance framework for digital currencies, including stablecoins. The consortium is intended to bring together financial institutions, government representatives, developers, and other relevant stakeholders to determine appropriate governance that can best further the goal of financial inclusion.

Click here for the WEF press release. Click here for a Coindesk article on this development.

Iranian Ministry Grants Licenses to Cryptocurrency Miners

According to media reports citing statements by a person associated with Iran’s Information and Communications Technology (“ICT”) Guild Organization, licenses have been issued by Iran’s Ministry of Industry, Mine, and Trade to over one thousand cryptocurrency miners operating in the country.

Click here for a Financial Tribune article on this development. Click here for a Block article on this development.

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