Blockchain Week in Review - September 2018 #2

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The following summary is available in our sister blog, The Fintech Report.

State Bank Regulators and NYDFS to renew litigation against OCC

U.S. Developments

Regulatory Updates

U.S. Judge Says Initial Coin Offerings May Be Covered by Securities Law

On September 11, U.S. District Judge Raymond Dearie ruled that U.S. securities laws may cover an initial coin offering and stated that a reasonable jury should be able to apply the “Howey Test” to determine whether the ICO at issue was a security. The ruling came in criminal prosecution of Maksim Zaslavskiy, a Brooklyn businessman charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two initial coin offerings.  Zaslavskiy’s attorneys had argued that securities law didn’t apply because the ICOs at issue were currencies, not securities and that federal securities laws are unconstitutionally vague as applied to cryptocurrency. In allowing the criminal charges to proceed, Judge Dearie rejected those arguments. However, acknowledging the early procedural stage of the case, the Court made no ruling on whether the virtual currencies offered by REcoin and DRC were securities under the U.S. Supreme Court’s Howey test. The Court did provide some discussion in the dicta previewing a possible Howey analysis. Additional thoughts on this case can be found in Perkins Coie’s latest client update. (https://www.perkinscoie.com/print/content/26291/federal-district-court-upholds-securities-indictment-for-icos-in.pdf) In March, another federal judge in Brooklyn ruled that cryptocurrencies could be regulated as commodities by the U.S. Commodity Futures Trading Commission. These cases underscore the importance of fact-specific and contextual analysis when addressing the regulatory treatment of any token or token sale.

FINRA Issues First Cryptocurrency-related Disciplinary Action

On September 11, the Financial industry Regulatory Authority (FINRA) issued its first cryptocurrency-related disciplinary action when it charged Timothy Ayre, owner of Rocky Mountain Ayre Inc., with securities fraud and the unlawful distribution of Hempcoin. HempCoin claimed to be “the first minable coin backed by marketable securities” and “the world’s first currency to represent equity ownership.” However, according to FINRA, the token was never registered as a security nor did it file for an exemption. Ayre could be facing a fine or suspension from the securities industry and will have an opportunity to file a response and request a hearing.   

News release can be found here.

SEC Temporarily Suspends Trading in Swedish Bitcoin and Ether Exchange Traded Notes (ETN’s)

On September 9, 2018 the Securities Exchange Commission announced that it would be temporarily suspending trading in the securities Bitcoin Tracker One (CXBTF) and Ether Tracker One (CETHF) through September 20, 2018. The two securities are structured as exchange traded notes (ETN’s) and are non-equity backed certificates that provide investors with access to the returns on the the performance of securities based on the performance of the underlying tokens (CXBTF for Bitcoin and CETHF for Ether) and are listed on the Nasdaq exchange in Stockholm. The SEC stated that it would be halting trading of both CXBTF and CETHF in the interests of “the protection of investors” because the specific structuring of the securities had caused some confusion for market participants. The Commission pointed towards contradictory descriptions of the two securities across Broker-Dealer application documents, online resources and the issuers own offering materials as the reason for the temporary suspension in trading. The suspension applied to the trackers themselves, not bitcoin or ether, and as of the time of this review had not impacted the cryptocurrency markets. 

More on the story can be found here.

International Developments

Republic of the Marshall Islands Warned Against Its Plans to Create Digital Currency

The International Monetary Fund (IMF) warned the Republic of the Marshall Islands (RMI) against its plans to create a government-issued digital currency. RMI had solidified plans earlier this year for its digital currency to act as a second legal tender for the network of islands alongside the US dollar. RMI plans to avoid the anonymity of other digital currencies so as to make it suitable for a regulated banking system and plans to be distributed via an initial coin offering. The IMF issued a press release encouraging RMI to be cautious about issuing a decentralized digital currency and to consider the all the potential risks.  The IMF also warned that RMI could be at risk of losing the last banking relationship with the US dollar.

More on the story can be found here.

 South Korean Police and FBI Bust Phishing Scammers

The Seoul Police cybercrimes division and the FBI conducted a joint operation to bust individuals responsible for the theft of over $800,000 worth of XRP from dozens of victims in South Korea and Japan. A computer programmer and his employer were the alleged masterminds behind the operation to replicate a Ripple exchange website. The scam involved spoofing or impersonating the real exchange’s email account and contacting users saying their funds had been frozen. The emails included links to a fake website where users entered their login details which were then recorded by the scammers and used to gain access to the user’s funds on the real exchange site. The scam exclusively targeted Korean and Japanese citizens, but the FBI may have gotten involved due to the fact that Ripple is an American company. The incident is South Korea’s first cryptocurrency phishing case.

More on the story can be found here.

Brazil’s Avai Becomes First Football Club to Launch its Own Cryptocurrency

Brazilian football club Avai Futebol Clube has become the first football club to launch its own cryptocurrency with in Initial Coin Offering (ICO) targeting a $20 million capital raise. The football club has teamed up with SportCo and Blackbridge Sports to leverage blockchain technology for financing and the club’s infrastructure. The token sale will begin on October 3, 2018 and conclude exactly one month later on November 3, 2018.

More on the story can be found here.

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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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