The following summary is available in our sister blog, The Fintech Report.
Roundup of CFTC Resources
Cryptocurrency and the Colorado Money Transmitter License Act
On September 20, 2018, following months of consultation with the Colorado Attorney General’s office, Colorado’s Division of Banking released interim guidance interpreting the Colorado Money Transmitters Act and determining whether it applies to transfers of cryptocurrency. If virtual currencies were to be subject to the regulation, facilitating transfers, and therefore cryptocurrency exchanges, would require a license. The Division of Banking determined that cryptocurrency transfers are not the subject of the Colorado Money Transmitters Act because cryptocurrency is not a legal tender. However, a license may be required if legal tender is involved in a cryptocurrency transfer; for example if fiat currency (i.e., legal tender) is bought or sold on an exchange, or if an exchange has the ability to transfer legal tender through a cryptocurrency. The step has been lauded by the virtual currency community for fostering the development and growth of blockchain technology and cryptocurrency exchanges.
The guidance can be found here.
Lawmakers Host a Cryptocurrency Roundtable and Begin to Look at Discrete Legislation
On September 24, 2018 U.S. Representative Warren Davidson (R-Ohio) hosted a roundtable in Washington, D.C. that brought prominent venture capitalists, financial institutions from Wall Street, cryptocurrency startups, the Nasdaq stock exchange and the U.S. Chamber of Commerce together to discuss cryptocurrency legislation. The invitation told participants, “your input is critical to helping us preempt a heavy-handed regulatory approach that could stall innovation and kill the U.S. ICO market.”
Representative Davidson hosted the discussion on the heels of an announcement by Representative Tom Emmer (R-Minnesota), who gave opening remarks at the roundtable, that he is drafting three cryptocurrency bills to introduce in the legislators’ fall session. The first, a draft of which can be found here, declares support for blockchain and cryptocurrency technologies. The second, a draft of which can be found here, provides a safe harbor for blockchain developers and providers of a blockchain service from federal and state money transmitter laws, unless such entity has control over digital currency. The third, a draft of which can be found here, provides a safe harbor from fines or taxes on convertible virtual currency to which a person becomes entitled as a result of a hard fork, i.e., a change in a shared digital ledger that is so material it results in a second, independent ledger with respect to the same virtual currency. The tax safe harbor is meant to be temporary until there is further administrative guidance, which other lawmakers have previously called for more generally in a letter to the IRS. A group of lawmakers has urged the IRS to provide guidance on the treatment of virtual currencies.
House Financial Services Hearing on SEC Oversight
On September 26, 2018, the U.S. House of Representatives’ Financial Services Subcommittee on Capital Markets, Securities and Investment held a hearing on oversight of the Securities and Exchange Commission’s (SEC) Division of Investment Management. Dalia Blass, Director of the Division of Investment Management at the SEC, testified before the Subcommittee. The hearing touched on cryptocurrency matters, but they were not the focus of the hearing. In her written testimony, Ms. Blass noted the importance of fund innovation and that some exchange-traded funds (ETFs) have expressed interest in holding cryptocurrencies or related instruments. In her verbal testimony, she commented on the confusion between ETFs and exchange-traded products (ETPs). Unlike ETPs, ETFs are subject to the Investment Company Act of 1940 and therefore an extensive set of regulations, and the regulatory landscape is therefore much more complex from the SEC’s perspective. She referenced a public letter that the Division of Investment Management sent to fund representatives in January 2018 as a gesture to collaborate with the private sector by being transparent and enumerating some of the SEC’s concerns, for example potential market manipulation, liquidity, valuation and more.
Written testimony from Ms. Blass can be found here and an archived webcast of the hearing can be found here. A copy of the January 2018 letter is available here.
SEC and CFTC Charge Bitcoin-Funded Securities Dealer and CEO
On September 27, 2018, the CFTC and the SEC filed complaints in federal district court against 1pool Ltd. a/k/a 1Broker, a corporation registered in the Republic of the Marshall Islands, and its CEO Patrick Brunner, for allegedly violating the federal commodity laws and regulations, and the federal securities laws and regulations. According to the complaints, the defendants operated an online trading platform, 1Broker, that solicited retail customers to execute contracts for differences (CFDs) and allowed the customers to pay in bitcoin. CFDs are types of derivative instruments where a counterparty that is short a particular asset (e.g., a stock or commodity) agrees to pay its counterparty any increase in value of the asset upon termination and the counterparty that is long the asset agrees to pay its counterparty for any decrease in the value of the asset upon termination. The CFDs offered on the platform were in commodities such as gold and oil (CFTC jurisdictional products) and exchange-listed stocks (SEC jurisdictional products). The CFTC alleges that the defendants offered CFDs on margin to retail customers without any actual delivery of the underlying commodity, in violation of the retail commodity transaction provisions of the federal commodity laws and regulations. While CFDs may constitute swaps under the federal commodity laws and regulations, in this case the CFTC characterized the products offered as retail commodity transactions. Accordingly, the defendants were charged with operating as an unregistered futures commission merchant.
The SEC determined that the CFDs on the exchange-listed stocks were security-based swaps, and alleged that they were illegally offered off of a national securities exchange. Accordingly, the defendants were charged with operating as an unregistered broker/dealer of securities. In 2015, the SEC settled charges against persons who operated a website called Sand Hill Exchange, that similarly offered CFDs on securities through bitcoin. On the same day as the filings by the CFTC and SEC, the Federal Bureau of Investigation (FBI) seized the 1Broker.com domain in accordance with a warrant issued pursuant to the conduct alleged by the CFTC and SEC, as well as an alleged money laundering violation.
See the SEC press release here, the CFTC press release here, and the FBI notice here.
SEC Extends Period of Time to Evaluate Proposed Rule Change
Cboe BZX Exchange, Inc. filed with the SEC a proposed rule change under Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) and Rule 19b-4 thereunder to list and trade shares of SolidX Bitcoin Shares issued by the VanEck SolidX Bitcoin Trust. On August 7, 2018, the SEC extended the amount of time to review the proposed rule change. The SEC is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act to decide whether the proposed rule should be approved or disapproved. The SEC seeks comments from interested persons and lists 18 topics on which the SEC is particularly interested in receiving comments. The SEC release, including the list of 18 topics, can be found here.
La Blockchain: French Data Protection Authority on Blockchain and GDPR
The French National Commission on Informatics and Liberty (Commission Nationale de L’Informatique et des Libertes – CNIL) released guidance for applying the General Data Protection Regulation (GDPR) to blockchain technologies. The GDPR is a set of rules regarding the protection of personal data for individuals in the European Union and went into effect in May 2018. CNIL points out that the GDPR may be fundamentally at odds with blockchain technology because it asserts a right to deletion while blockchain locks in recorded data. CNIL suggests that a solution may be to rely on encryption or anonymization of data, but there still may be an inherent contradiction to be addressed by regulators and entities using blockchain and complying with the GDPR.
CNIL also looks more specifically at how blockchain technologies may comply with the GDPR. The GDPR puts various obligations on actors that handle personal data, including those that “determine the purpose and means of processing” personal data, referred to as “controllers,” and those that process personal information on behalf of controllers, referred to as “processors.” Therefore, compliance by blockchain technologies necessitates an assessment of which actors in a blockchain serve as controllers and which as processors. Such an analysis is likely to be highly specific to and dependent on the circumstances in each instance.
In light of the issues it raises, CNIL’s report is likely to be the first of many studies, interpretations and analyses of the applicability of the GDPR to the blockchain.
The report is found here in French. An English version is not yet available.
Swiss Bankers Association Publishes Guidelines for Banks regarding Blockchain Companies
On September 21, 2018, the Swiss Bankers Association (SBA) published guidelines to help its member banks continue to serve blockchain companies, which are increasingly looking to open corporate accounts with Swiss banks. The guidelines are the work of an internal working group and the Crypto Valley Association, which have been focused on helping Swiss banks navigate the demand for accounts and the associated diligence requirements. The guidance concludes that blockchain companies that have held an initial coin offering (ICO) for fundraising purposes and companies whose business model touches on blockchain technologies should be treated differently by banks when conducting their diligence to establish an account. Companies that have raised capital through an ICO should expect to be subjected to a higher diligence process and heightened standards relating to origin of funds (KYC) and money laundering (AML) matters.
The guidelines are found here in Swiss.
China’s Central Bank Issues a Warning to Cryptocurrency Investors
The Shanghai branch of the People’s Bank of China, China’s central bank, issued a public notice cautioning investors about the risks of cryptocurrency and ICOs. In September 2017, China’s Office for Special Remediation of Internet Financial Risks issued a ban on ICOs, and the bank appears to be gently reminding the public that ICOs are not legal transactions in China. The bank and government regulators are aware that offshore exchanges can be difficult to monitor but regulators have increased their oversight, including blocking IP addresses, closing accounts, and issuing related bans and oversight measures.
The notice is found here in Chinese.