FinCEN Proposed Rule Halted, Exchanges and Banks Expand Crypto Products, SEC Brings Action Against Token Issuer, Crypto Threat Reports Published

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Exchanges and Banks Expand Cryptocurrency Services and Products

By: Jordan R. Silversmith

A major U.S. cryptocurrency exchange recently announced the launch of its asset hub. The initiative is intended to “streamline the asset listing process … and expand the number of services offered to digital asset issuers.”

A California-based bank with substantial holdings in digital currencies recently announced it had accepted over $2.9 billion in new deposits from new and existing cryptocurrency customers in Q4 2020. The majority of these new deposits came from cryptocurrency exchanges, bringing the bank’s total amount of digital currency customers to 969. Separately, according to reports, a New York-based bank announced that its deposits from cryptocurrency customers now total approximately $10 billion.

Huobi Global, a major cryptocurrency exchange, recently announced an initiative with a British crypto payment services firm to gain more access to European and U.K.-based banking systems. According to reports, the exchange’s over-the-counter platform will now be able to settle transactions instantly in euros and pounds. Meanwhile, this week an Austrian digital investment platform announced the launch of a debit card allowing users to shop with cryptocurrencies.

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FinCEN Proposed Rule Halted, Banks and Crypto Exchanges Adjust Policies

By: Veronica Reynolds

This week the Biden administration froze FinCEN’s proposed rule on “unhosted wallets,” which related to certain transactions involving convertible virtual currency or digital assets with legal tender status. If enacted, the rule would have required exchanges to file “currency transaction reports” for customers engaged in over $10,000 of cryptocurrency transactions per day and to store identifying information for customers transferring over $3,000 per day in cryptocurrency to private crypto wallets.

Meanwhile, several cryptocurrency exchanges and banks have recently taken actions that appear to be based on the evolving regulatory landscape. In the U.S., a major cryptocurrency exchange announced a halt on XRP trading, the latest cryptocurrency exchange to have done so. In the U.K., a major bank has reportedly banned customers from transferring cryptocurrency profits earned through exchanges to their bank accounts; this follows a broader trend in the U.K. banking industry precluding customers from using debit or credit cards to purchase cryptocurrency assets. And in the Netherlands, Bitstamp users are now required to prove ownership of external wallets before transferring funds to such wallets, a requirement that is reportedly a direct response to Dutch anti-money laundering regulations that became operative in late 2020.

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SEC Brings Action Against SAFT and Token Issuer, Related Statement Published

By: Robert A. Musiala Jr.

Late last week, the U.S. Securities and Exchange Commission (SEC) published a cease-and-desist and settlement order (Order) against Wireline Inc. involving an alleged unregistered securities offering related to so-called SAFT agreements. Wireline is described in the Order as “an early-stage project focused on the development of a decentralized, blockchain based platform for ‘microservices’ applications.” According to the Order,

Wireline offered and sold securities in the form of investment contracts when it offered and sold digital assets through simple agreements for future tokens (“SAFTs”). The SAFTs provided that upon the public release of Wireline’s marketplace, Wireline would distribute those digital tokens to investors, who were counterparties to the SAFTs. … The Offering was not registered pursuant to the federal securities laws, and the offer and sale did not qualify for an exemption from the registration requirements. Wireline never distributed the digital tokens to investors.

Regarding the SAFTs, the Order notes that while Wireline “collectively filed three Forms D with the Commission,” it “did not qualify for the exemption under Rule 506(b) because it offered and sold the investment contracts through a general solicitation.” The Order also alleges Wireline “violated the antifraud provisions of the federal securities laws with respect to the offering by making materially false and misleading statements about the viability of its platform and the timetable for the issuance of the tokens.” Among other things, the Order requires Wireline to notify its 28 SAFT investors that it will not distribute any digital tokens, publish notice of the Order on its public website and social media channels, and pay a civil penalty of $650,000.

In a public statement, SEC Commissioner Hester M. Peirce noted “a concern about the settlement.” According to the statement, “[B]y including a provision whereby Wireline will not distribute the tokens pursuant to the SAFTs, [the] settlement perpetuates an approach that suggests that tokens themselves are securities and thus complicates the development of crypto networks.” Among other things, Commissioner Peirce noted that “the security label applied to tokens … stifles network effects before they even have a chance to make the network vibrant.” According to Commissioner Peirce, “A better course would be for us to treat the original capital-raising event for an unlaunched network as a sale of securities, but not to stretch the securities analysis to include subsequent sales of tokens for use on a launched network.”

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Reports Provide Details on Criminal Activities Involving Cryptocurrencies

By: Jordan R. Silversmith

A recent report by Chainalysis on cryptocurrency crime in 2020 finds that while scams and darknet markets dominated the year by total revenue, ransomware continues to be a problem. The report showed a drop in the criminal share of all cryptocurrency activity in 2020, falling to just 0.34 percent, or $10.0 billion in transaction volume, from 2019’s numbers of 2.1 percent, or roughly $21.4 billion, worth of transfers. Scams continued to make up the majority of all crypto-related crime, but ransomware increased over 311 percent from 2019 as increased work-from-home opened up more vulnerabilities for hostile actors. Chainalysis also recently released a report alleging that personalities involved in the riot at the U.S. Capitol had received over $500,000 in bitcoin from a French donor one month prior to the events.

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