Blockchain Legal Resource

A recent bipartisan letter from Members of Congress seeks clarification from SEC Chairman Jay Clayton as to the status of digital tokens and cryptocurrencies under the federal securities laws. The signatories expressed their view that not all digital tokens should be deemed securities, and voiced their concern that the SEC should not use its enforcement mechanism alone to craft policy on this issue. Instead, the Members advocated in favor of formal SEC guidance to clear up “uncertainties which are causing the environment for the development of innovative technologies in the United States to be unnecessarily fraught.”

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. 

For many public companies, the annual meeting voting process is littered with intermediaries and inefficiencies that can result in a lack of shareholder engagement. Proposals are often voted on by proxies instead of by shareholders, oftentimes weeks in advance of the meeting. Few shareholders attend annual meetings in person. Large institutional shareholders may be granted engagement opportunities with management of the company that are not afforded to individual shareholders. These factors can result in a lack of transparency in the voting process and asymmetrical voting power amongst shareholders. Blockchain technology has several potential applications that can remedy these inefficiencies and restore shareholder trust and engagement.

Interest in the crypto economy continues to grow in Congress. On September 25, 2018, Representative Warren Davidson (R-OH) hosted a roundtable, “Legislating Certainty for Cryptocurrencies,” with more than 50 financial institutions and crypto start-ups invited to attend. Additionally, the House Financial Services Committee has scheduled a hearing on financial innovation on September 28, 2018, entitled Examining Opportunities for Financial Markets in the Digital Era.

A new report from the New York Attorney General (“NYAG”) summarizes the findings of its recent Virtual Markets Integrity Initiative (the “Initiative”). The NYAG concluded that crypto trading platforms vary significantly in their risk management strategies and in the ways they fulfill customer responsibilities. The NYAG also identified three broad areas of concern: (1) potential conflicts of interest, (2) lack of serious efforts to impede abusive trading activity, and (3) limited protections for customer funds.

Recently, in a wide-ranging speech, the SEC’s Chief Accountant, Wes Bricker, provided his thoughts on how the SEC accounting staff analyzes accounting issues surrounding digital assets and distributed ledger technology. Bricker emphasized that companies must continue to maintain appropriate books and records, irrespective of whether distributed ledger technology, smart contracts or other technology-driven applications are (or are not) used. Likewise, when accounting for digital assets, companies should act appropriately within the parameters of the existing requirements of the federal securities laws. Accordingly, they should consider traditional regulations and accounting standards such as those relating to books and records, internal accounting controls, internal control over financial reporting, and custody. Bricker emphasized that “[d]istributed ledger technology and digital assets, despite their exciting possibilities, do not alter this fundamental responsibility.”

Blockchain, or distributed ledger technology (“DLT”), is already proving to be a game-changer for businesses globally and across sectors. But is it secure? And can insurance help protect against risks and, thus, help advance the development of this technology?

Recently, Canadian investment firm First Block Capital Inc. reported that FBC Bitcoin Trust, which the firm bills as the “first and only open-ended bitcoin fund approved by Canadian regulators,” has achieved mutual fund trust status under Canada’s Federal Income Tax Act. Units of a mutual fund trust are considered qualified investments under registered plans such as Registered Retirement Savings Plans (“RRSPs”) and Tax-Free Savings Accounts (“TFSAs”).

On September 10, 2018, the New York Department of Financial Services (“DFS”) authorized Gemini Trust Company and Paxos Trust Company to each offer a price-stable cryptocurrency, also known as a stablecoin, pegged to the U.S. dollar. Both Gemini and Paxos hold limited purpose trust company charters under the New York Banking Law and are authorized to offer services for buying, selling, sending, receiving and storing virtual currency. Gemini is controlled by the Winklevoss brothers, whose application for a Bitcoin ETF was recently denied by the SEC.

On September 11, 2018, capital markets regulators announced a series of cases that are the first of their kind in the digital assets space.

The SEC announced its first case charging unregistered broker-dealers for selling digital tokens. According to the SEC’s order, the defendants operated a self-described “ICO Superstore” that solicited investors, took thousands of customer orders for digital tokens, processed investor funds, and handled more than 200 different digital tokens in connection with both ICOs and the defendants’ own secondary market activities. The defendants also promoted the sale of approximately 40 digital tokens in exchange for marketing fees paid by digital token issuers. Because the digital tokens issued in the ICOs and traded by defendants included securities under the SEC’s DAO Report, the SEC concluded that the defendants’ market activities required broker-dealer registration with the SEC.