Federal Bank Regulators Issue Joint Statement on Collaborative BSA/AML Compliance
On October 3, 2018, a group of federal bank regulators and the Financial Crimes Enforcement Network (“FinCEN”) announced in a joint statement that banks and credit unions could collaborate and share resources to manage their Bank Secrecy Act (“BSA”) and anti–money laundering (“AML”) obligations. Sharing resources through a collaborative arrangement helps banks to meet their BSA/AML compliance obligations by providing access to specialized expertise, at a reduced cost, that may be difficult to obtain in some markets. The joint statement provides examples and guidance for how banks can manage their obligations more effectively and efficiently. Nothing in the joint statement alters the four pillars of a bank’s BSA/AML compliance program: (1) a system of internal controls to ensure ongoing compliance; (2) independent testing of BSA/AML compliance; (3) designation of a BSA compliance officer; and (4) training of appropriate personnel. With appropriate limits, each of these pillars can be addressed through a collaborative arrangement between banks.
Please click here for the joint statement between the regulators and FinCEN. For a more detailed discussion of the joint statement, please read this post on our sister blog, the FinTech Report.
SEC and FINRA Target Cryptocurrency Hedge Fund Manager and Broker-Dealers in New Wave of Digital Asset Enforcement Proceedings
The SEC and FINRA recently announced a series of enforcement actions against new types of actors in the digital asset space—private fund managers and broker-dealers.
In our recently published update, we detail the enforcement actions and offer our insights, including how private funds investing in digital assets are not immune from SEC scrutiny, token trading platforms need to register as broker-dealers if they trade digital assets that are “securities” and why taking prompt action may help mitigate penalties.
CFTC and the ASIC Enter into a Cooperation and Exchange of Information Agreement for FinTech
On October 4, 2018, the U.S. Commodity Futures Trading Commission (“CFTC”) and the Australian Securities and Investments Commission (“ASIC”) entered into an agreement (the “Agreement”) to cooperate and share information relating to financial technology (“FinTech”) and the use of technology in the regulation of financial markets and participants (“RegTech”). While non-binding, the Agreement is part of an effort by both agencies to enhance mutual understanding, identify market developments and trends, facilitate innovation with respect to FinTech, and foster the use of RegTech. Both agencies agreed to leverage their respective innovation initiatives (the CFTC’s LabCFTC and ASIC’s Innovation Hub) in an effort to maximize the results of the information sharing commitment in the Agreement.
The types of information the Agreement contemplates sharing include:
Information on innovator businesses;
Material developments and changes related to support offered by the CFTC or ASIC;
Emerging trends and developments pertaining to FinTech and RegTech;
Innovations in FinTech and regulatory issues pertaining to such innovations;
Experiences with and best practices by each agency in engaging with FinTech and RegTech innovation; and
Activities of domestic and international organizations or bodies that promote innovation in FinTech and RegTech.
A link to the Agreement can be found here.
Members of Congress Send Letter to Chairman of SEC to Ask for Further SEC Guidance on Regulation of Digital Tokens and Cryptocurrencies
On September 28, 2018, a bipartisan group of 14 members of the U.S. House of Representatives led by Rep. Ted Budd (R-NC) sent a letter to Chairman Jay Clayton of the U.S. Securities and Exchange Commission (“SEC”) asking for further SEC guidance on the regulation of digital tokens and cryptocurrencies. Citing a recent white paper by the Token Alliance of the Chamber of Digital Commerce, Congressman Budd and his colleagues stated that they believe that not all digital tokens are securities, and treating all digital tokens as securities would harm innovation and American leadership in the cryptocurrency and financial technology space. While expressing their thanks to SEC Commissioner Hester Peirce and Director of the Division of Corporate Finance William Hinman for their recent remarks that explained some of the SEC’s thinking regarding digital tokens and cryptocurrencies, the Congressmen’s letter stated that the SEC could do more to clarify its position. In addition, the letter expressed concern with the SEC using enforcement actions alone to clarify policy and suggested that the SEC consider creating formal guidelines. Recognizing that the creation of formal guidlines takes time, the Congressmen posed three central questions and requests to Chairman Clayton and the SEC:
The SEC should clarify the criteria used to determine when offers and sales of digital tokens should properly be considered “investment contracts” and therefore offerings of securities.
Does the SEC agree that a token originally sold in an investment contract can nonetheless be a non-security, as Mr. Hinman stated? Can the resultant token be analyzed separately from the original purchase agreement, which may clearly be an investment contract? And, if so, could the resultant token nonetheless be a non-security?
The SEC should describe the tools it has available to offer more concrete guidance to innovators on these topics.
Please click here for the letter from Congressman Budd and colleagues. For more information on Mr. Hinman’s speech and its implications, please find further discussion here.
The “Blockchain Promotion Act of 2018” Introduced in the U.S. House of Representatives
On September 26, 2018, Reps. Brett Guthrie (R-KY) and Doris Matsui (D-CA) introduced H.R. 6913, a new bill entitled the “Blockchain Promotion Act of 2018.” The legislation, if passed, would require the Secretary of Commerce to establish a working group within the U.S. Department of Commerce that would be known as the “Blockchain Working Group.” The Blockchain Working Group would be comprised of members appointed by the Secretary of Commerce, and must include representatives of federal agencies, representatives from industries such as information and communications technology manufacturers and software providers, subject matter experts from outside the technology sector, businesses ranging from small to large, individuals and institutions engaged in academic research on blockchain technology, and blockchain advocacy groups. The legislation directs the Blockchain Working Group to submit a report to Congress that recommends a definition of “distributed ledger technology.” It also requires the Blockchain Working Group to recommend additional studies on blockchain technology and electromagnetic spectrum policy, applications of blockchain technology, and opportunities within federal agencies to use blockchain technology.
As of October 5, 2018, H.R. 6913 has been referred to the House Committee on Energy and Commerce, as well as the House Committee on Oversight and Government Reform.
Please click here for a link to the status page for H.R. 6913, which includes the text of the bill.
Federal Judge Rules that a Virtual Currency—My Big Coin—Is a “Commodity” Under the CEA
On September 26, 2018, a federal judge ruled that My Big Coin, a virtual currency allegedly used in a fraudulent scheme, satisfies the definition of “commodity” under the Commodity Exchange Act (“CEA”). In CFTC v. My Big Coin Pay, Inc., the Commodity Futures Trading Commission (“CFTC”) alleged that My Big Coin Pay, Inc. and its principals engaged in a scheme in which they fraudulently offered the sale of a fully functioning virtual currency called My Big Coin. In an effort by My Big Coin Pay, Inc.’s principals to have the case dismissed, they argued that My Big Coin was not a “commodity” under the CEA, and therefore the CFTC would not have the authority to bring the suit.
Ruling for the CFTC, Senior District Judge Rya Zobel allowed the case to move forward by finding that My Big Coin was a “commodity” under the CEA. In particular, Judge Zobel found that the definition of “commodity” under the CEA includes categories of items that already or may in the future have futures contracts based on top of them. Pointing to the existence of futures contracts for other cryptocurrencies such as bitcoin, Judge Zobel held that My Big Coin was part of the same category of virtual currencies that are a “commodity” under the CEA. The case will now proceed into the next stages of litigation.
Please click here for the Memorandum of Decision.
South Korean Lawmaker Calls for Legalization of Initial Coin Offerings in South Korea
On October 2, 2018, Min Byung-Doo, Chairman of South Korea’s National Policy Committee called for the legalization of initial coin offerings (“ICOs”) according to a news report from CoinDesk. For Min, ICOs should be legal as long as a regulatory framework is in place, including strictly prohibiting fraud, speculation, and capital laundering. In addition, the ICO industry would need to self-regulate and introduce safety standards. Min cited several examples of recent ICOs as evidence that methods of investing are changing and expressed a desire for South Korea to not be left behind with respect to global trends in fundraising.
A link to the Coindesk report can be found here.