Blockchain Week in Review - February 2021 #2

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Weekly Focus:

  • Tesla buys $1.5 billion in Bitcoin
  • BNY Mellon launches crypto custody unit
  • OCC welcomes new crypto company
  • Iowa introduces smart contracts bill
  • Rhode Island introduces blockchain act
  • BitMEX publishes data storage framework for FATF ‘Travel Rule’
  • Bank of Korea says CBDCs are fiat currency
  • Central Bank of Nigeria issues prohibition on crypto trading

U.S. Developments

Tesla buys $1.5 billion in Bitcoin

In a 10-K filing with the Securities and Exchange Commission (SEC) on Monday, Tesla announced that it had bought $1.5 billion worth of bitcoin.  Tesla said the purchase of the bitcoin was approved by the Audit Committee of the Board of Directors, which approved Tesla investments in alternative reserve assets including digital assets, gold bullion, and gold exchange-traded funds, among other assets.  Tesla cited its need for “more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity” as justification for purchasing the bitcoin.  The SEC filing also noted that Tesla expects “to begin accepting bitcoin as a form of payment for our products in the near future.”

You can read Tesla’s Form 10-K filed with the SEC here.

BNY Mellon launches crypto custody unit

On Thursday, BNY Mellon, the world’s largest custodian bank with over $40 trillion in assets under management, announced that it has formed a new enterprise Digital Assets unit “that will accelerate the development of solutions and capabilities to help clients address growing and evolving needs related to the growth of digital assets, including cryptocurrencies.”  The unit is developing a multi-asset digital custody and administration platform that will treat digital assets like any other asset.

“Growing client demand for digital assets, maturity of advanced solutions, and improving regulatory clarity present a tremendous opportunity for us to extend our current service offerings to this emerging field. Pending further evaluations and approvals, we expect to begin offering these innovative and industry-shaping capabilities later this year,” said Roman Regelman, CEO of Asset Servicing and Head of Digital at BNY Mellon.

BNY Mellon, a New York State Chartered Bank, has indicated that it intends to start with providing digital asset custody services for its clients with future plans to also support clients who want to leverage their digital assets for lending purposes and collateral.

You can read BNY Mellon’s official press release here.

OCC welcomes new crypto company

The Office of the Comptroller of the Currency (OCC) announced last week on February 5th that it would conditionally approve an application by Protego, a Seattle-based provider of cryptocurrency custody and trading services, to become a federally chartered trust bank operating nationwide under the agency’s oversight.  This is only the second time that the OCC has granted such approval to a crypto custodian.  The first federally charted cryptocurrency custody provider was Anchorage Digital Bank, National Association, which received conditional approval from the OCC last month.

Both Protego and the OCC issued statements last Friday that the Washington state-chartered trust company will convert to Protego Trust Bank, National Association, and offer digital asset custody services.  The OCC stated, “Protego is currently in the organizational phase of development and will have up to 18 months to meet the terms of its conditional approval before it converts to a national trust bank and begins to operate.”

Last summer, the OCC issued an interpretive letter saying that national banks and federal savings associations are authorized to provide customers with cryptocurrency custody services, saying such activity is “a modern form of traditional bank activities related to custody services.”  Later in the fall, the OCC affirmed in another interpretive letter that national banks and federal savings associations can hold deposits that serve as a reserve against fiat currency-backed stablecoin cryptocurrencies.

You can read the OCC’s official statement on its conditional approval of Protego here.

Iowa introduces smart contracts bill

Iowa State Senator Mark Lofgren introduced Senate Bill 303 (the Bill) on Wednesday, which specifies that, unless explicitly stated otherwise, any parties using distributed ledger technology (DLT) to secure information have the same rights as those involving records secured by traditional means.  In other words, the Bill aims to place DLT-based contracts on par with traditional contracts and recordkeeping.  The practical implications of the Bill would ensure that no contract would be denied legal effect solely due to it being a smart contract or containing a smart contract provision.

The Bill also amended the definition of “contract” to include “any contract secured through distributed ledger technology and a smart contract.”  The Bill also amends the definitions of “electronic record” and “electronic signature” to include any records or signatures secured through DLT.

Senate Bill 303 was introduced to the 89th General Assembly.  The Bill has been assigned to the Senate State Government Committee for review. You can read the full text of Iowa Senate Bill 303 here.

Rhode Island introduces blockchain act

On Tuesday, House Minority Leader Blake Filippi and fellow representative David Place introduced House Bill 5425, also known as the Rhode Island Economic Growth Blockchain Act (the Act).  The Act declares that Rhode Island “must offer one of the best business environments in the United States for blockchain and technology innovators, and should offer a comprehensive regulatory technology sandbox for these innovators to develop the next generation of digital products and services in Rhode Island.”  One of the aspirations of the Act is to set up a “new type of Rhode Island financial payments and depository institution” that has expertise in handling digital assets while also meeting the regulatory requirements of customer identification, anti-money laundering, and beneficial ownership.

Importantly, the Act establishes a “financial technology sandbox,” which is defined as a program that allows a person to make an innovative financial product or service available to consumers during a sandbox period through a waiver of existing statutory and rule requirements.  Additionally, a “Special Depository Sandbox” will be established with the purpose of providing banking services to crypto-related businesses operating within the financial technology sandbox.

The Act also establishes a Rhode Island blockchain technology advisory council that will consist of 13 members to support Rhode Island’s “research institutions [and] promote entrepreneurial development.”

You can read the full text of the Act here.

International Developments

BitMEX publishes data storage framework for FATF ‘Travel Rule’

Seychelles-based BitMEX, a cryptocurrency exchange, published a framework of principles on Wednesday for data storage in light of the impending “Travel Rule” that the Financial Action Task Force (FATF) issued, set to go into effect in June 2021.  The “Travel Rule” requires that originators and beneficiaries of all transfers of digital funds must exchange identifying information.  The rule applies to all virtual asset service providers (VASPs), such as cryptocurrency exchanges and cryptocurrency wallet providers.

According to BitMEX, the crypto industry lacks a set of standards for storing the data mandated by the “Travel Rule,” so as a result, BitMEX released its Travel Rule Data Storage Principles (the Principles), which it hopes will be “a starting point for discussion from which all stakeholders can provide input.”  The principles were released as non-copyright open source.

The proposed Principles focus on issues, such as access management, encryption key management, logging and monitoring, and incident management.  For example, BitMEX proposes that all VASPs “should deny all access to the travel rule data store by default” and “should use AES 256 or higher for encrypting travel rule data at rest.”  The proposed Principles also suggest that all travel rule data should be kept separate from operating data that a VASP may process and store.

The full Travel Rule Data Store Principles can be read here.

Bank of Korea says CBDCs are fiat currency

The Bank of Korea (BOK), South Korea’s central bank, issued a research publication this week dedicated to the legal questions raised by the potential issuance of central bank digital currencies (CBDCs).  The publication calls for revisions to the law to allow for an environment where CBDCs can be transacted as freely as fiat currency.  The publication also concludes that it would be reasonable to treat CBDCs the same way as cash deposits held by financial institutions, and as such, the BOK should have the legal basis for applying interest rates on a future CBDC.

One wrinkle the BOK publication noted is how a CBDC would exist within South Korea’s current legal framework.  Under the existing laws, a CBDC would have a clear issuer and would be based on the exclusive power of that issuer.  As a result, a CBDC would not be considered “property” in South Korea, so certain financial crimes (e.g., theft, embezzlement, stolen property, etc.) would be unenforceable.  Thus, changes in the current legal framework would need to change before South Korea could launch a successful CBDC.

More information about the BOK’s research into CBDCs can be found here and here.

Central Bank of Nigeria issues prohibition on crypto trading

Last Friday, the Central Bank of Nigeria (CBN) issued a circular ordering banks in the country to close the accounts of anyone using cryptocurrencies, citing concerns that virtual currencies posed a threat to the nation’s security.  All deals involving cryptocurrency are now “prohibited” with “severe regulatory sanctions” awaiting those who disobey.  The circular also asked banks to identify “persons and or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately.”

The Acting Director of Corporate Communications at CBN, Osita Nwanisobi, clarified that the CBN’s actions did not place any new restrictions on parties transacting in cryptocurrencies because the CBN maintains its position that such use, holding, and transacting of cryptocurrencies has been forbidden since 2017.

This most recent circular followed a 2017 warning issued by the Nigerian bank warning financial institutions in the country against the use of cryptocurrencies.  While the new directive last week does not explicitly make cryptocurrencies illegal per se, it does make trading in them virtually impossible, as trading cryptocurrencies on any exchange is now forbidden.

The full letter from the CBN can be read here.  The CBN’s press release explaining its actions can be read here or here.

[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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