U.S. Developments

Regulatory Updates

SEC Bars Perpetrator of Initial Coin Offering Fraud

On August 14, 2018, the SEC obtained permanent officer-and-director and penny stocks bars against David T. Laurance of Tomahawk Exploration LLC (“Tomahawk”), who perpetrated a fraudulent ICO to fund oil exploration and drilling in California. According to the SEC’s order, Mr. Laurance and Tomahawk attempted to raise money through the sale of blockchain-based digital tokens called “Tomahawkcoins.” While the ICO failed to raise money, the SEC’s order found that Tomahawk’s promotional materials used inflated projections of oil production that were contradicted by the company’s own internal analysis and misleadingly suggested that Tomahawk possessed leases for drilling sites when it did not. The SEC also found that Tomahawk claimed that token owners would be able to convert the Tomahawkcoins into equity and potentially profit from the anticipated oil production and secondary trading of the tokens.

The SEC’s Press Release regarding its Order can be found here. The SEC’s Office of Investor Education and Advocacy (“OIEA”) issued an Investor Alert on August 14th to encourage investors to check the background of anyone selling or offering an investment.

Update on the SEC’s Decision to Approve a Bitcoin or Cryptocurrency ETF

As we previously mentioned in our Blockchain Week In Review for the Week of August 6, the SEC extended its decision to approve or disapprove a proposed rule change that would allow Cboe BZX Exchange, Inc. (“BZX”) to list a bitcoin exchange-traded fund (“ETF”) until September 30, 2018. The SEC and other regulators have been hesitant to approve bitcoin ETFs, mostly for security concerns. On August 14, San Francisco-based asset manager Bitwise joined the race to launch a regulated ETF for cryptocurrency. The company filed an application with the SEC for an ETF that would track a basket of 10 cryptocurrencies, including bitcoin. While other companies, including VanEck, SolidX and Gemini, have filed for bitcoin-only ETFs, Bitwise is the first to apply for one that would track multiple digital assets. The SEC’s new deadline is September 30, 2018; however, some speculate that the market regulator could push it back into 2019.

The SEC Release dated August 7, 2018 can be found here.

Litigation

Crypto Investor Michael Terpin Sued AT&T for $224 Million

Crypto Investor Michael Terpin sued AT&T in the Central District of California claiming the company’s failure to protect his cellphone data led to hackers stealing $23.8 million in cryptocurrencies. Mr. Terpin alleges that AT&T employees have been complicit in a SIM swap fraud, wherein criminals pose as the owner of their victims’ mobile phone numbers and convince telecom providers to grant them access to the victims’ phones. Mr. Terpin seeks $23.8 million in compensatory damages and $200 million in punitive damages.

A copy of the Complaint can be found here.

International Developments

The World Bank Has Mandated the Commonwealth Bank of Australia to Arrange the World’s First Blockchain Bond
The World Bank has mandated the Commonwealth Bank of Australia (“CBA”) to arrange the first ever blockchain bond. Named Blockchain Offered New Debt Instrument (or “Bond-i”), this blockchain bond will be created and managed with distributed ledger technology. The two organizations issued a joint release stating that “[b]lockchain has the potential to streamline processes among numerous debt capital market intermediaries and agents. This can help simplify raising capital and trading securities; improve operational efficiencies; and enhance regulatory oversight.” The World Bank advised that investor interest in the bond has thus far been strong. Together with CBA, it intends to launch the transaction after consultation with more investors.

Japan’s Financial Services Agency (“FSA”) Announced the Results of On-Site Inspections of 23 Exchanges

Japan’s top financial regulator, the FSA, started inspecting cryptocurrency exchanges after the hack of Coincheck in January 2018. On Friday, August 10, the FSA announced the results of the on-site inspections of 23 cryptocurrency exchanges operating in the country. Seven out of the 23 are fully licensed crypto exchanges; the rest are “deemed dealers,” which are exchanges that have been allowed to operate while their applications are being reviewed by the agency. Notably, the Agency found that “the total assets of the exchanges rapidly expanded to more than 6 times in one year.” The FSA is also concerned that there are fewer than 20 executives and employees at most places, with assets under custody of 3.3 billion yen (~$30 million) per person on average. The FSA will make use of the findings from the inspections when reviewing new applicants. Since the hack of Coincheck, the agency has not approved any cryptocurrency exchanges.

The FSA’s Report can be found here (in Japanese).

Saudi Arabia Deems Bitcoin Trading as “Illegal in the Kingdom”

The Saudi Arabian Monetary Authority (“SAMA”) published a statement on August 12, 2018 advising that the Standing Committee for Awareness on Dealing in Unauthorized Securities Activities in the Foreign Exchange Market (“ForEx”) warns that “unauthorized virtual currencies are illegal inside the Kingdom of Saudi Arabia.” The committee assured “that virtual currency including, for example but not limited to, the Bitcoins are illegal in the kingdom and no parties or individuals are licensed for such practices.” The committee warned against trading in the digital currencies “for their negative consequences and high risks on traders as they are out of government supervision.” The committee did not specify any penalties or fines for cryptocurrency trading.

The CCN article about the statement can be read here.

African Regulators Taking a “Wait-and-See” Approach on Cryptocurrency

According to a news report from Ecobank, the leading independent regional banking group that serves nearly 40 countries in West and Central Africa, African countries want to regulate cryptocurrency, but regulators in most jurisdictions are taking a “wait-and-see” approach, hoping to learn from the mistakes of others before taking action themselves. Of the 39 regulatory regimes surveyed, more than half—21 countries—had yet to make a public stance on cryptocurrency.

The CCN article about the report can be read here.

South Africa Released a Draft Cryptocurrency Tax Law

The South African Revenue Services (“SARS”) recently released a draft cryptocurrency tax legislation. The draft defines the framework of virtual currency taxation in the country. The SARS’ stance on the tax treatment of cryptocurrencies is that it will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income.

The draft legislation can be read here.

Vienna Rolls Out Blockchain Platform to Reduce Bureaucracy
Austria’s capital announced that it has been steadily rolling out blockchain use to validate and secure the city’s Open Government Data, including public transport routes, train schedules and voting results. The city has been working on a pilot to simplify and automate administrative processing as part of its digitalization initiative DigitalCity.Wien. One of the first to be launched in Europe, the networks secure official documents by storing hashtags of the data sets on the public blockchains, allowing city employees as well as citizens to review the documents’ authenticity, when they were created, and when and if the data was modified.

Ulrike Huemer, CIO, City of Vienna, said the project makes the city a pioneer in Europe in the implementation of blockchain: “[W]e are committed to an open and participatory city with reduced bureaucracy,” she said. “We will continue teaming with experienced professionals such as EY to pool knowledge and establish Vienna as a center of competence for blockchain—as well as one of the most forward-looking technology cities in Europe and worldwide.”

The EY news release can be read here.

Jamaica Stock Exchange to Trade Crypto Assets in 2018
On August 14, 2018, the Jamaica Stock Exchange (“JSE”) announced that it had signed a memorandum of understanding with blockchain startup Blockstation for the creation of a new digital assets trading platform. While it is not clear which tokens will be initially listed, the platform is set to go live before 2019. JSE managing director Marlene Street Forrest said that “The end game at the end of the day is to trade tokens, the end game is smart contacts, the end game is to provide that area of the market that would like this product, to start to do so in a secure manner.” Blockstation co-founder and chief enterprise architect Jai Waterman told CoinDesk that the startup has been working with the JSE for roughly six months in order to develop a custom version of its platform for the exchange. He noted that specific requests from the JSE have included tools to track market manipulation and other regulatory needs.

The JSE announcement can be read here.

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