Blockchain Legal Resource

On August 28, 2023, the SEC settled enforcement charges against a Los Angeles-based media and entertainment company for conducting an unregistered offering of non-fungible tokens (NFTs). The case represents the SEC’s first foray into the NFT space.

On July 13, 2023, the Federal District Court for the Southern District of New York issued the hotly anticipated ruling in the SEC’s case against Ripple Labs, Inc. (Ripple). On cross-motions for summary judgment, the court found that only Ripple’s sale of its XRP tokens to institutional buyers pursuant to sales contracts constituted unregistered sales of securities in violation of Section 5 of the Securities Act of 1933. But according to the court, Ripple’s programmatic sales of XRP through crypto exchanges, Ripple using XRP to pay employees and service providers and Ripple ...

On March 31, 2022, the staff of the Division of Corporation Finance and the Office of the Chief Accountant of the SEC issued Staff Accounting Bulletin (SAB) No. 121 (SAB 121), which “adds interpretive guidance for entities to consider when they have obligations to safeguard crypto-assets held for their platform users.” SAB 121 highlights the enhanced technological, legal and regulatory risks associated with safeguarding digital assets, as compared with more traditional asset classes. Specifically, SAB 121 asserts that a company is subject to “significant increased risks... including an increased risk of financial loss” when that company controls the cryptographic keys associated with a user’s digital assets. As a result, the staff believes that reporting companies should quantify and disclose that obligation, and record a liability and corresponding asset on their balance sheets at fair value.

On November 19, 2020, IMVU, Inc. (“IMVU”) received no-action relief from the Securities and Exchange Commission (the “SEC”) confirming that the Division of Corporate Finance will not recommend enforcement action against IMVU for selling its digital asset, VCOIN. IMVU intends to issue and sell VCOIN for immediate use within its online three-dimensional avatar-based social community, “IMVU.” IMVU will supply an unlimited number of VCOIN at a fixed price of $0.004 per VCOIN to replace its current system of providing in-platform “credits” for participants to use to purchase virtual goods and services within the platform.

On September 27, 2018, the Securities Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) charged an international securities dealer with illegally offering and selling to U.S. investors security-based swaps funded with bitcoins and related violations of the Commodities Exchange Act. The broker, 1pool Ltd., a.k.a. 1Broker, and its CEO, Patrick Brunner, were both named in the complaint filed by the SEC with the U.S. District Court for the District of Columbia. 

On September 9, 2018, the SEC announced the temporary trading suspension of two securities known as Bitcoin Tracker One (“CXBTF”) and Ether Tracker One (“CETHF”). According to the SEC’s order, the broker-dealer application materials submitted to enable the offer and sale of these products in the United States, as well as certain trading websites, characterize them as “Exchange Traded Funds.” According to the SEC, other public sources characterize the instruments as “Exchange Traded Notes.” By contrast, the SEC observed that the issuer of these securities characterizes them in its offering materials as “non-equity linked certificates.” CXBTF and CETHF are listed and traded on the NASDAQ/OMX in Stockholm and have recently been quoted on OTC Link (formerly known as the “pink sheets”) in the U.S. The SEC temporarily suspended trading in these securities in light of apparent confusion among market participants regarding the characteristics of these instruments.

As we previously reported, in May 2018, more than 40 state and provincial securities regulators in the United States and Canada launched a coordinated enforcement sweep of the ICO market dubbed “Operation Cryptosweep.” On August 28, 2018, the North American Securities Administrators Association (“NASAA”) published a press release with an update on the progress of this initiative. According to NASAA, more than 200 active investigations of ICOs and cryptocurrency-related investment products are currently underway, and blue sky regulators have brought 46 enforcement actions to date.

A recent settled SEC enforcement action against an ICO issuer (the “Company”) and its promoter calls into question the viability of the “airdrop” model of distributing digital tokens to investors. In the ICO context, an “airdrop” generally refers to the widespread distribution of digital tokens to community members either for free or in exchange for performing menial tasks. Whether such a distribution model runs afoul of the federal securities laws has been the subject of much debate in recent months, and the SEC’s case provides additional insight into their analysis of the issue. While a narrow path for airdrops may remain, the case will significantly curtail their current use.

On August 9, 2018, the World Bank issued a press release highlighting what it described as the “World’s First Blockchain Bond.” It will be issued in Australia and, according to news reports, will be called a BONDI—both in honor of the famous Australian beach and also a clever acronym for “Blockchain Offered New Debt Instrument.” The issue size is approximately AUD $100 million (about USD $74 million).

Current regulations in the United States limit the ability of securities to trade exclusively over a blockchain, but over time we believe they will become more commonplace ...

On August 6, 2018, the Federal Trade Commission ("FTC") published a notice seeking public comment as to whether broad-based changes in the economy, evolving business practices, new technologies or international developments might require adjustments to competition and consumer protection law, enforcement priorities and policy. The notice, published in the Federal Register, does not specifically mention blockchain or distributed ledger technology specifically, but the broad list of topics that the FTC lists as areas in which it seeks comments could easily accommodate market developments due to the emergence of blockchain technology and related applications. 

In a terse press release issued July 26, 2018, the Swiss Financial Market Supervisory Authority ("FINMA") announced that it has launched enforcement proceedings against an ICO issuer based on evidence that the company may have “breached financial market law.” According to FINMA, the proceedings focus in particular on possible breaches of Swiss banking law resulting from the potentially unauthorized acceptance of public deposits. FINMA noted that, in the context of its ICO, the subject company “accepted funds amounting to approximately one hundred million francs from more than 30,000 investors in return for issuing EVN tokens in a bond-like form.”

On July 16, 2018, the Commodity Futures Trading Commission (“CFTC”) issued a customer advisory on digital tokens. Citing various studies and reports, the advisory identified high rates of fraud in some initial coin offerings, and warned investors to be on the lookout for the following risks associated with investing in digital tokens:

• The potential for forks in open-source applications that could split away market participants, increase the number of digital coins or make coins obsolete.
• Decrease in mining or validation costs (if price is tied to those factors).
• Acceptance ...

On July 11, 2018, in an emergency cease and desist order, the Texas securities commissioner took action against several individuals and affiliated companies based in Utah to halt the offering of unregistered cryptocurrency mining investments to Texas residents. The order alleges numerous violations of the registration and antifraud provisions of the Texas Securities Act. 

In the race to develop blockchain technology, companies are increasingly devoting capital to creating proprietary blockchain solutions. A search of the U.S. Patent & Trademark Office (“USPTO”) as of today returns 343 patent applications that contain either “blockchain” or “distributed ledger” in the abstract. Patents are being filed related to a wide variety of industries and applications, including supply chain management, autonomous deliveries, energy networks, electronic health records, 3D printing, travel itinerary management, data security and securing rights to digital media.

While ICO issuers have understandably been focused recently on the latest pronouncements from the Securities and Exchange Commission (“SEC”) and other regulators, a second group of potential litigants has largely avoided notice. Seeing a potential bonanza, private plaintiffs law firms have become aggressive in soliciting disgruntled investors as clients and filing lawsuits against issuers of digital tokens.

The Securities Exchange Commission (“SEC”) and Commodities Futures Trading Commission (“CFTC”) are not the only U.S. government agencies exerting regulatory jurisdiction over initial coin offerings (“ICOs”) and cryptocurrencies. In an article written by Hunton Andrews Kurth lawyers in Crowdfund Insider, Richard Garabedian and Shaswat Das discuss the Financial Crimes Enforcement Network's (“FinCEN's”) guidance, enforcement actions and related compliance issues. In 2013, FinCEN, a bureau of the U.S. Department of Treasury, began issuing guidance on virtual currency, explicitly stating that virtual currency exchangers and administrators are money transmitters and must comply with the Bank Secrecy Act (“BSA”) and related regulations. Most recently, on February 13, 2018, FinCEN sent a letter to U.S. Senator Ron Wyden that sought to clarify its role as a regulator of virtual currencies and ICOs. In the letter, FinCEN asserted that individuals involved in certain ICOs must register as money services businesses (“MSBs”) and consequently comply with the corresponding BSA and anti-money laundering (“AML”) compliance requirements. The FinCEN letter notes that ICOs that are otherwise regulated by the SEC or CFTC should comply with the AML and related requirements imposed by those agencies. Despite this attempt at clarifying the state of regulatory play for ICOs and virtual currencies, federal and state MSB registration requirements remain fluid and should be evaluated on a case-by-case basis for ICOs and those issuing cryptocurrencies.

Last week, SEC Chairman Jay Clayton gave an interview during which he provided his thoughts on initial coin offerings (“ICOs”) and cryptocurrencies. He applauded the “incredible promise” of distributed ledger technology as a driver of efficiencies, and also attempted to clarify the SEC’s position on its role in regulating ICOs and token offerings.

Last week, the Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight and Division of Clearing and Risk issued a joint staff advisory providing guidance to exchanges and clearinghouses for listing virtual currency derivatives products.

The advisory relies on established rules and regulations as it clarifies the CFTC’s priorities and expectations in its review of new virtual currency derivatives products.  In the press release announcing the advisory, the CFTC stated its intent to exercise “appropriate oversight, while encouraging innovation and growth in these products.”

North American Securities Administrators Association (“NASAA”) members from more than 40 jurisdictions across the United States and Canada are working together in “Operation Cryptosweep,” a coordinated series of enforcement actions to crack down on fraudulent initial coin offerings (“ICOs”), cryptocurrency-related investment products and the individuals behind them.  NASAA organized a task force of its members in April 2018 to begin these coordinated investigations, which identified hundreds of ICOs in the final stages of pre-launch preparation and other cryptocurrency-related investment products.

Blockchain’s impact is often misunderstood as narrowly affecting the financial sector. We discuss with Law360 why “retail and consumer products companies can no longer afford to ignore blockchain as a passing trend.”

2018 continues to be a busy year for initial coin offerings, notwithstanding recent announcements from capital markets regulators in the US.  In this alert, we chronicled developments at the Securities and Exchange Commission, Commodity Futures Trading Commission, state securities regulators and others.