This week saw two items of note in the regulation of digital assets and both came out of the state of New York.

The Return of the Empire State

A New York State Supreme Court ruled that it has personal and subject matter jurisdiction over matters relating to the investigation by the New York Attorney General of the cryptocurrency exchange, Bitfinex and its related stablecoin, Tether.

In April 2019, New York’s Office of the Attorney General filed claims against Bitfinex under the Martin Act alleging that a $700 million cash loan underlying Tether to support Bitfinex was improper. The Martin Act, which was passed in 1921 is considered to be the most expansive of the state blue sky laws that grants expansive powers to the New York Attorney General with respect to the regulation of financial services. New York was initially successful in obtaining an injunction to freeze Tether’s assets, but that injunction has since been narrowed to allow Tether to invest its assets, while continuing the prohibition on loans from Tether’s reserves to Bitfinex.

While the injunctions were pending, the defendants attempted to have the case dismissed for lack of personal and subject jurisdiction. They argued, among other things, that Bitfinex did not serve customers in New York and that the Martin Act only covers securities and commodities and does not apply to a digital currency like Tether. The court rejected the defendants’ subject matter jurisdiction arguments and ruled that because of the broad investigative powers under the Martin Act, New York regulators had grounds to argue that Tether is a commodity or security. Regarding personal jurisdiction, the court held there were enough connections to New York to warrant an investigation by the state. Note that the New York Supreme Court is not the appeals court, meaning an appeal by the defendants is possible, though it is questionable that the court’s ruling will be overruled.

A copy of the court’s order can be found here.

ICE – Bakkt Gets New York Approval and Plans First Bitcoin Futures With Physical Delivery.

Bakkt, a subsidiary of Intercontinental Exchange (ICE), announced that it had received the approvals needed to launch its bitcoin futures business on September 23[1]. The contracts will be launched pursuant to the U.S. Commodities Futures Trading Commission’s self-certification program and a required New York state trust charter through the New York State Department of Financial Services (NYDFS)[2]. Bakkt’s bitcoin futures contracts will trade on ICE Futures U.S. and clear through ICE Clear U.S. Although there are other crypto currency futures products, Bakkt is likely to be the first under which Bitcoin could be physically-delivered at the end of the contract.

The question of how to properly custody digital assets is an issue that is challenging regulators. The U.S. Securities and Exchange Commission and FINRA recently published guidance on the issue for digital assets that are securities.[3] Bakkt apparently addressed the issue by creating what it calls a Warehouse where it will use physical custody along with other digital protections to ensure safekeeping. “With approval by the New York State Department of Financial Services to create Bakkt Trust Company, a qualified custodian, the Bakkt Warehouse will custody bitcoin for physically delivered futures,” the CEO said[4]. There is speculation that physical delivery may lead to institutional investors actually holding bitcoin thereby increasing bitcoin’s use and possible value.

More News From The SEC

The U.S. Securities and Exchange Commission (“SEC”) reached an agreement with ICO Rating, a Russian cryptocurrency ratings company, to settle claims alleging that ICO Rating failed to disclose payments it received from issuers for publishing their tokens. This recent SEC settlement demonstrates: (1) the SEC is casting a wide net in the firms it chooses to target and hold accountable for infractions related to token-based security sales, and (2) the SEC is trying to reach settlements when at all possible.

A copy of the SEC Order can be found here.

The SEC again delayed approval of a Bitocin ETF (exchange traded fund) which would open up simple bitcoin investing to a broad array or retail investors. The SEC appears to be mostly concerned with the lack of transparency and the possibility of market manipulation related to how bitcoin is priced. Based on the SEC obligation to approve or deny a potential fund within 90 days it appears that a final decision will be made in October.

The Taxman Cometh

Last month the IRS announced that it was in the process of sending letters to over 10,000 taxpayers with a history of cryptocurrency transactions by the end of August, noting that the letters were sent to taxpayers who, “potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.”[5] Please see our client alert explaining what these letters are and how recipients should respond.


[1] https://medium.com/bakkt-blog/cleared-to-launch-8dfc3e6f9ed0

[2] https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1908161

[3] Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities (July 8, 2019), available at: https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities.

[4] https://medium.com/bakkt-blog/custody-at-our-core-15f6b26d16d6

[5] https://www.irs.gov/newsroom/irs-has-begun-sending-letters-to-virtual-currency-owners-advising-them-to-pay-back-taxes-file-amended-returns-part-of-agencys-larger-efforts