Blockchain Week in Review - February 2019 #4

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U.S. Developments

Regulatory Updates

SEC Settles Enforcement Action with Gladius Network

On February 20, 2019, the U.S. Securities and Exchange Commission (“SEC”) announced the settlement of charges against Gladius Network LLC (“Gladius”) for conducting an unregistered securities offering.  Gladius conducted a presale and public sale of digital tokens called “GLA” in late 2017, raising approximately $12.7 million to finance the development of a network where peers would rent out to other peers spare computer bandwidth and storage space on their computers and servers to defend against cyberattacks and to increase content delivery speed in exchange for GLA.  Gladius did not register its sale of GLA or sell the tokens under an exemption from registration requirements. 

According to the SEC, “Gladius principals and agents discussed technical issues, operational questions about the Gladius Network, and prospects for investment returns from the GLA Token on blogs, social media, online videos, and online forums” and offered a bounty program.  The SEC also noted that Gladius actively promoted the offering by reaching out to third-party exchanges for the listing of GLA and advertising that it had entered into a “partnership” with “one of the top cryptocurrency exchanges in the world” to list GLA.

The order requires Gladius to register its offering of GLA as a class of securities.  Of particular note, the order further provides that Gladius may file a Form 15 to terminate the registration “on the grounds that the GLA Token no longer constitutes a ‘class of securities’ . . . because the GLA Token is no longer a ‘security.’”  For the first time in an enforcement order, the SEC appears to be acknowledging that digital assets may initially constitute securities and then transform into commodities over time.

The order does not impose a civil monetary penalty because Gladius “self-reported the conduct, agreed to compensate investors, and will register the tokens as a class of securities.”  This is the first settlement order to date that acknowledges the reward of cooperation credit for self-reporting a violation of the securities laws.

FBI Seeking Potential Victims of BitConnect

The Federal Bureau of Investigations (“FBI”) posted a notice requesting that persons who invested in BitConnect Coin complete a questionnaire through the FBI’s website.  The FBI’s investigation into BitConnect Coin’s alleged fraudulent behavior follows those of state securities regulators announced last year.

Legislative Updates

Representatives Soto, Emmer, Budd, and Davidson Introduce Virtual Currency Legislation

On February 19, 2019, Representatives Darren Soto (D-FL), Tom Emmer (R-MN), Ted Budd (R-NC), and Warren Davidson (R-OH) introduced two bills relating to virtual currency.

H.R. 922, the “Virtual Currency Consumer Protection Act of 2019,” would direct the Commodity Futures Trading Commission (“CFTC”), the SEC, and “other relevant Federal agencies” to report to the House Committee on Financial Services and Senate Committee on Banking, Housing, and Urban Affairs on manipulation in virtual currency markets and make recommendations on how it can be addressed.  The legislation defines “virtual currency” as “a digital representation of value that does not have legal tender status and that functions as a medium of exchange, a unit of account, or a store of value.”

H.R. 923, the “U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2019,” would direct the CFTC, SEC, and “other relevant Federal agencies” to submit a report on the “state of virtual markets” to the Committees on Agriculture and on Financial Services of the U.S. House of Representatives and the Committees on Agriculture, Nutrition, and Forestry and on Banking, Housing, and Urban Affairs of the U.S. Senate.  According to H.R. 923, the report must include:

(1) A brief description of—

(A) the regulation of the United States virtual currency industry, as a comparative study of the regulation of such industry in foreign countries, to demonstrate competitiveness in a global marketplace; and

(B) the potential benefits of virtual currency and blockchain technology in the United States commodities market.

(2) Recommendations for any legislative changes, if determined appropriate, needed to improve the ability of the Commodity Futures Trading Commission and other relevant Federal agencies—

(A) to promote competitiveness of the United States and United States businesses in this industry;

(B) to encourage the growth of adoption of virtual currencies in segments of the commodity market that could benefit from virtual currencies and access to transparent markets in such currencies;

(C) to clarify the virtual currencies that qualify as commodities for both existing currencies and ones that may be created in the future; and

(D) to provide a new, optional regulatory structure for virtual currency spot markets (commonly referred to as exchanges) that includes Federal licensure, market supervision, consumer protections, and preemption of State money transmission licensing obligations for participating in spot markets.

(3) An analysis of the feasibility, cost, and potential benefit of the new regulatory structure described in subparagraphs (C) and (D) of paragraph (2).

The legislation includes the same definition of virtual currency as H.R. 922.

State Updates

Ohio Association Studying Use of Blockchain in Real Estate Transactions

The County Auditors’ Association of Ohio (CAAO) has formed a working group to study how blockchain technology may be used to transfer property deeds between counterparties.  SafeChain, an Ohio startup that “makes real estate transactions safe and modernizes operations for both the public and private sectors of the land title industry,” is working with the CAAO in this effort.  In a press release, the CAAO president stated that “the goal of this working group is to consider how County Auditors can be forward thinking to improve the taxpayer experience in conveying and transferring real property.”

International Developments

Thailand Legislature Amends Securities Laws to Legalize Security Tokens

Thailand’s National Legislative Assembly approved an amendment to the country’s securities laws that legalizes the issuance of security tokens and the licensing of security token depositories.  The country’s securities regulator will issue guidelines and rules for security tokens in the near future.  Digital asset exchanges, brokers, and dealers will need to obtain licenses to offer security tokens.

Luxembourg Parliament Approves Bill Establishing Regulatory Framework for Security Tokens

Luxembourg’s Chamber of Deputies approved Bill 7363, which establishes a regulatory framework to govern securities issued on a blockchain.  Such securities will be “legally bound by the same rights as classic dematerialized securities.”

Nova Scotia Judge Appointed Law Firms in QuadrigaCX Litigation

On February 19, 2019, Nova Scotia Supreme Court Judge Michael J. Wood ruled that Canadian law firms Miller Thompson and Cox & Palmer will represent up to 115,000 customers of the Canadian digital asset exchange QuadrigaCX.  The litigation relates to the death of QuadrigaCX founder and CEO Gerald Cotten and the loss of over $136 million in customers’ digital currencies due to the alleged inability to recover Cotten’s private keys.

The Court also ordered Ernst & Young to hold the remainder of QuadrigaCX’s digital assets (i.e., those not allegedly missing due to the death of Cotten).

Irish Auction House to Sell Confiscated Digital Assets

Wilsons Auctions, an Irish auction house, will sell off $431,660 worth of digital assets (including bitcoin, bitcoin cash, and bitcoin gold) seized by Belgian law enforcement from online drug dealers.  The international auction will be held on March 1, with each type of digital asset divided into separate lots (e.g., 0.5 BTC lots).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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