Blockchain Legal Resource

In a reversal of a policy that has spanned two administrations, on January 10, 2024, the SEC approved applications for 11 Bitcoin spot exchange traded funds, or ETFs. The SEC approved the order by a 3-2 vote, with Chair Gensler forming a majority with the two Republican commissioners, and the two Democratic commissioners voting against the action.

A small but growing number of employees are asking for cryptocurrency as a form of compensation.  Whether a substitute for wages or as part of an incentive package, offering cryptocurrency as compensation has become a way for some companies to differentiate themselves from others.  In a competitive labor market, this desire to provide innovative forms of compensation is understandable.  But any company thinking about cryptocurrency needs to be aware of the risks involved, including regulatory uncertainties and market volatility.

In 15 recent enforcement actions, the Commodity Futures Trading Commission (CFTC) announced charges against various digital asset exchanges for failure to register appropriately as futures commission merchants (FCMs). This series of actions is the latest in an ongoing regulatory crackdown across federal agencies involving cryptocurrency and other digital asset trading platforms.

On May 11, 2021, staff in the Division of Investment Management (IM) at the Securities and Exchange Commission issued a statement (the Statement) on “Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market.” The Statement provides a series of warnings to retail investors about certain risks associated with investments in registered mutual funds whose portfolios include Bitcoin futures. But the Statement also provides further insight into the way SEC staff analyze the market for Bitcoin Futures more broadly.

A recent Bloomberg article reported that average prices for nonfungible tokens, or NFTs, are down approximately 70 percent from recent highs.  NFTs are the latest innovation in digital assets and encompass digital representations of unique works of art, music, or other goods and experiences stored on blockchain.  Unlike other digital assets such as bitcoin, in which each bitcoin is the same as every other one (and thus “fungible”), each NFT is theoretically unique and different from every other one (and thus “nonfungible”).  A wide range of NFTs have begun to enter the marketplace over the past several months.  A digital work of art represented by an NFT recently sold at auction for over $69 million, and even a professional sports league has begun to issue NFTs.  A fascinating debate about the social and economic utility of NFTs has emerged, but what are some of the legal issues associated with this new digital asset class?

In some of her first remarks on the subject of digital assets since Senate confirmation, Treasury Secretary Janet Yellen sounded an alarm on Bitcoin. Her views on the regulation of digital assets more broadly are sure to influence policy in the coming years at the various offices and bureaus within the Treasury Department that oversee the asset class, including the OCC, IRS, OFAC and FinCen.

On December 11, 2019, the New York Department of Financial Services (DFS) published proposed guidance regarding adoption or listing of virtual currency by holders of a BitLicense. Specifically, under the proposed guidance, DFS seeks comment regarding two proposed changes affecting coin listings, both of which are intended to streamline and expedite the process.

On June 18, 2019, the Commodity Futures Trading Commission (CFTC) announced the commencement of a civil enforcement action (the Complaint) against two United Kingdom-based defendants, a purported Bitcoin trading company and its principal (collectively, the Defendants). The CFTC alleges that the Defendants perpetrated a wide-ranging fraud involving at least $147 million in Bitcoin from more than 1,000 customers.

In a letter released to the public on April 10, 2019, New York’s Department of Financial Services (DFS) denied Bittrex’s two separate applications to engage in a virtual currency business and to engage in money transmission activity in New York state. The action came after an extended trial period in which DFS sought to “address continued deficiencies and assist Bittrex in developing appropriate controls and compliance programs commensurate with the evolving nature of the sector.”

To date, virtual currency exchanges in the United States have structured their operations in an effort to avoid being required to register as an exchange with either the Securities and Exchange Commission or the Commodity Futures Trading Commission. While these efforts may be entirely legal, without the regulatory protections of exchange registration, they could create enhanced risks for customers, particularly in the case of a fund’s insolvency or collapse. A recent federal case highlights these risks and provides a roadmap for asserting personal jurisdiction over a virtual currency exchange.

On January 30, 2019, a Florida appellate court reversed the trial court’s dismissal of State v. Espinoza, instead holding that a Bitcoin business was both a money transmitter and a payment instrument seller, subject to Florida’s statutes governing money services businesses. The decision contrasts with recent guidance in Texas and Pennsylvania regarding cryptocurrencies, where virtual currencies in those states were not deemed money under applicable state statutes and businesses that conduct transactions exchanging virtual and sovereign currencies do not generally require a currency exchange license.

Ohio is the first state in the United States to accept tax payments in cryptocurrency.  Starting today, December 3, 2018, companies operating in Ohio can elect to pay certain Ohio state taxes in Bitcoin.  Many Ohio state taxes are eligible for payment in cryptocurrency, including (among others) sales tax, withholding tax, pass-thru entity tax, and public utilities tax.  As long as an entity operates in the state of Ohio and pays Ohio state taxes, the entity is eligible to pay such taxes in Bitcoin.

On November 1, 2018, the New York Department of Financial Services (“DFS”) announced its approval of the first virtual currency license for an operator of Bitcoin teller machines (“BTM”). According to DFS, to date it has now approved 12 charters or licenses for companies in the virtual currency space.

On Monday, October 22, 2018, Judge J. Paul Oetken of the Southern District of New York granted Alibaba Group Holding Limited’s (“Alibaba”) motion for preliminary injunction in a trademark action against several foreign-based promoters and developers of a new cryptocurrency called “AlibabaCoin.” In doing so, the court considered several novel issues around personal jurisdiction and blockchain.

Hunton Andrews Kurth partner Scott Kimpel, chair of the Firm’s blockchain working group, recently participated in a panel discussion hosted by the Washington Legal Foundation regarding the latest legal issues associated with ICOs and security token offerings. Co-panelists included Alan Cohn, formerly of the Department of Homeland Security and Daniel Alter, former general counsel of the New York Department of Financial Services.

As reported on the Hunton Insurance Recovery Blog, in what appears to be a case of first impression, an Ohio trial court ruled in Kimmelman v. Wayne Insurance Group that the crypto-currency, Bitcoin, constitutes personal property in the context of a first-party homeowners’ insurance policy and, therefore, its theft would not be subject to the policy’s $200 sublimit for loss of “money.”

On October 11, 2018, the Senate Banking Committee held a wide-ranging hearing entitled “Exploring the Cryptocurrency and Blockchain Ecosystem.” The hearing featured testimony from Dr. Nouriel Roubini, an NYU professor who famously predicted the 2007-2008 financial crisis, as well as a counterpoint from Mr. Peter Van Valkenburgh, the Director of Research from Coin Center.

On October 2, 2018, Venezuelan President Nicolas Maduro appeared on national television and announced the official launch of the Venezuelan Petro cryptocurrency. First announced in December 2017, and purportedly backed by the country’s oil and mineral reserves, the Petro is intended to supplement Venezuela’s national currency, the bolívar, which has depreciated at an exorbitant rate in the past year. The International Monetary Fund has predicted that inflation in the country will reach 1 million percent.

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. 

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 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.

On August 28, 2018, as reported in Business Insurance, Lloyd’s of London underwriters have agreed to insure digital currency storage company, Kingdom Trust Co., against theft and destruction of cryptocurrency assets. The cover comes after almost a decade-long search by Kingdom Trust for insurance to cover its cryptoassets. According to Business Insurance, Kingdom Trust sees the availability of insurance as a key factor in bringing institutional investors into the marketplace by dispelling concerns about lack of traditional safeguards in the emerging cryptoasset space.

This post has been updated. 

On August 22, 2018, following its recent decision denying the application of the Winklevoss Bitcoin Trust, the SEC denied applications for nine more Bitcoin ETFs. The orders involving applications by Cboe BZX and NYSE Arca (here and here) are similar to each other and cite many of the same reasons for denial. As with the Winklevoss application, the SEC went out of its way to emphasize that “its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an ...

In a lengthy order issued on July 26, 2018, by a 3-1 vote the U.S. Securities and Exchange Commission (“SEC”) denied an application by the CBOE Bats BZX Exchange, Inc., (“BZX”) seeking to list and trade shares of the Winklevoss Bitcoin Trust. The denial marks the culmination of a two-year effort by the Winklevoss brothers to launch the first bitcoin-based exchange-traded fund, or ETF, in the United States. In denying the application, the SEC cited various concerns about the lack of oversight in the underlying bitcoin market, and ruled that BZX did not demonstrate that bitcoin and bitcoin markets are uniquely resistant to manipulation, or that alternative means of detecting and deterring fraud and manipulation are sufficient in the absence of a surveillance-sharing agreement with a significant, regulated market related to bitcoin.

On June 25, 2018, a magistrate judge of the U.S. District Court of the Southern District of Florida released a report finding that cryptocurrency tokens issued in an initial coin offering (“ICO”) by the startup company, Centra Tech, are securities under the federal securities laws. This report was released in connection with a class action lawsuit filed by former investors claiming that Centra Tech and its founders violated the federal securities laws through a token sale that ultimately raised $30 million in cryptocurrencies. The former investors allege that the sale of the Centra Tech tokens was an unregistered offer and the sale of securities was in violation of the Securities Act of 1933 (“Securities Act”).

On June 14, 2018, Bill Hinman, Director of the SEC’s Division of Corporation Finance, delivered a speech to an industry conference providing additional insights into how SEC staff analyze crypto assets under the Supreme Court’s Howey test. Since issuing the DAO Report nearly one year ago, the SEC has largely avoided providing additional guidance on the rapidly evolving world of ICOs. Hinman’s remarks represent a welcome departure from this position and provide critical insights into several areas of interest to the crypto community. 

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.

Enterprises around the world are actively implementing a wide variety of blockchain solutions to improve efficiencies, enhance user experiences and lower transaction costs.  But the private sector’s development of distributed ledger technology is often outpacing the legal and regulatory regimes that impact it.  In the United States, numerous regulators have asserted jurisdiction over blockchain applications, frequently in redundant or even contradictory ways.  With the Blockchain Legal Resource blog, we at Hunton Andrews Kurth plan to keep track of the most notable legal ...

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.”

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.