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.

On October 16, 2023, the SEC’s Division of Examinations released a reporting detailing its 2024 examination priorities. The document lays out the key risks, topics and priorities that the Division plans to focus on during its upcoming cycle of inspections and examinations of broker-dealers, investment advisers and other regulated securities intermediaries. Among the various areas of focus, once again risks related to crypto assets and blockchain will be an examination priority.

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.

As we previously reported in our summary of the Ripple case, a federal district court judged determined that under certain circumstances the offering of a digital asset does not create a security. The reasoning in the Ripple case has been criticized by leading to an outcome that places institutional investors ahead of retail investors and employees. In a separate, recently decided case involving digital assets, another federal district judge has declined to follow the ruling in Ripple.

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 April 14, 2023, by a 3-2 party-line vote the US Securities and Exchange Commission (SEC) reopened the public comment period and provided supplemental information on amendments proposed in January 2022 to the definition of “exchange” under Rule 3b-16. The SEC previously reopened the comment period in May 2022. The April 2023 action provides supplemental information and economic analysis regarding trading systems that trade crypto asset securities that would be newly included in the definition of “exchange” under the proposed rules.

Hunton Andrews Kurth LLP continues to assist clients and monitor developments in the financial markets arising from the liquidity challenges and market volatility currently facing the banking industry. Late Tuesday brought the first inevitable wave of lawsuits and government investigations. There will be many more in the days ahead.

On February 15, 2023, by a 4-1 vote, the SEC proposed new rules regarding an investment adviser’s obligation to custody assets. Unlike the existing rules, if adopted, the new rules would apply to all crypto assets.

On December 1, 2022, the Consumer Financial Protection Bureau (Bureau) made public an administrative order denying Nexo Financial LLC’s (Nexo) petition to modify the Bureau’s civil investigative demand.  The order represents the first publicly known Bureau investigation of a digital asset company, in this case, over Nexo’s “Earn Interest” crypto lending product.

In recent months, members of Congress have introduced a wide variety of bills seeking to create a new federal regulatory regime for digital assets. NASAA, which is an umbrella organization for state and provincial securities regulators in the US, Canada and Mexico, recently submitted a letter to Congress critical of one such bill that lays out a series of arguments more broadly against federal action.

On August 10, 2022, 3-2 majorities of the SEC and CFTC voted to propose amendments to Form PF reporting for certain investment advisers to private investment funds. Among the many proposed amendments to the form, the proposed rules would for the first time require covered investment advisers to report on certain digital asset investments.

In a series of parallel actions announced on July 21, 2022, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) initiated criminal and civil charges against three defendants in the first cryptocurrency insider trading case.

On March 9, 2022, the Biden Administration released its much-anticipated “Executive Order on Ensuring Responsible Development of Digital Assets” (Executive Order). The White House describes the Executive Order as the “first whole-of-government strategy” on digital assets and attempts to strike a balance between encouraging innovation and US leadership in the digital asset space, while signaling an appetite to protect against a variety of stated risks through additional regulation and legislation.

The President’s Working Group (PWG), a federal interagency working group of financial regulators established by Executive Order in 1988, has issued a statement outlining key regulatory and supervisory considerations related to stablecoins and digital payment systems. Beginning with a declaration that the United States encourages responsible payments innovation, the statement outlines various high-level regulatory principles that participants in stablecoin arrangements need to account for. The statement may be interpreted as a sign of what is to come in terms of federal regulation and supervision of stablecoins and other digital assets in the new year.

On October 8, 2020, the Department of Justice’s Cyber-Digital Task Force released an 83-page report entitled “Cryptocurrency: An Enforcement Framework.” In an accompanying press release, Attorney General Barr remarked, “Cryptocurrency is a technology that could fundamentally transform how human beings interact, and how we organize society.  Ensuring that use of this technology is safe, and does not imperil our public safety or our national security, is vitally important to America and its allies.” The DOJ report highlights many of the legal and enforcement risks posed in the burgeoning crypto marketplace, and includes various enforcement case studies as well as informative graphics.

In a closely-watched case, on September 30, 2020, federal judge Alvin Hellerstein ruled that Kik’s $100 million two-phase coin offering resulted in a sale of unregistered securities in violation of Section 5 of the US Securities Act of 1933.  Kik raised approximately $50 million through an initial private pre-sale effected via a Simple Agreement for Future Token, or SAFT, and the remainder through a subsequent public offering of the Kin token.  Concluding that the two-phase offering constituted a single offering, Judge Hellerstein found that Kik’s offering created a security subject to federal securities laws.  Specifically, the court found that Kik met the so-called Howey test because Kik planned to use the proceeds from the offering to fund Kik’s operations and buyers of Kin had a reasonable expectation of profit from their purchase.

On March 24, 2020, federal Judge P. Kevin Castel issued a long-anticipated opinion in the SEC’s ongoing efforts to block Telegram’s $1.7 billion initial coin offering. Judge Castel found that Telegram’s planned distribution of Gram tokens constitutes a securities offering under federal law for which no exemption from registration is available. He therefore granted the SEC a preliminary injunction blocking Telegram from distributing its Gram tokens to investors.

As has been widely reported, SEC Commissioner Hester Peirce (aka “Crypto Mom”) recently delivered a thoughtful speech entitled “Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization,” including with it a model rule on digital token sales. The model rule has made waves in the crypto community because it proposes a three-year safe harbor from SEC registration while a development team builds out a functional, decentralized network.

In 2019, Hunton Andrews Kurth LLP’s structured finance and securitization team closed a number of substantial transactions, developed novel structures for our clients and advised on important tax, regulatory and other industry developments, including emerging uses of blockchain solutions.

In an investor alert issued on January 14, 2020, staff in the Securities and Exchange Commission’s Office of Investor Education and Advocacy warned investors in initial exchange offerings (IEOs) to “use caution before investing  . . . through online trading platforms.”  According to the SEC staff, “Claims of new technologies and financial products, such as those associated with digital asset offerings, and claims that IEOs are vetted by trading platforms, can be used improperly to entice investors with the false promise of high returns in a new investment space.”

At a mutual fund industry conference held on December 3, 2019, Dalia Blass, director of the Securities and Exchange Commission’s Division of Investment Management, previewed a new structure for registered mutual funds seeking to invest substantially in digital assets and related investments.

In particular, Director Blass indicated that an unnamed registered closed-end interval fund with a bitcoin futures strategy is preparing to launch. As a result of recent industry feedback and engagement, and in response to issues the SEC staff previously identified:

• The fund expects to ...

On October 28, 2019, staff in the SEC’s Division of Trading and Markets provided a no-action letter to Paxos Trust Company, LLC permitting it to pilot a blockchain-based clearance and settlement platform for a limited number of U.S.-listed equity securities for 24 months. The staff’s action enables the further development and commercialization of a blockchain platform for clearing and settling U.S. securities trades.

On September 24, 2019, the House Financial Services Committee held an oversight hearing entitled “Oversight of the Securities and Exchange Commission: Wall Street’s Cop on the Beat.” The format of the hearing was somewhat unusual in that the sole witnesses were the five sitting SEC commissioners. Though it is common for the SEC chair to testify before Congress, the other commissioners testify very infrequently, and the assembly of all five at a single hearing is extremely rare, with the last such joint testimony coming back in 2007. While the hearing covered a wide range of issues related to securities regulation and enforcement, it also touched on a number of topics of particular interest to crypto and blockchain businesses, including the application of the securities laws to digital assets.

On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel (collectively, the Staffs) issued a Joint Statement on Broker-Dealer Custody of Digital Asset Securities. For purposes of the Joint Statement, “digital asset” refers to any asset that is issued and transferred using distributed ledger or blockchain technology, and a “digital asset security” is any digital asset that is also a security for purposes of the federal securities laws. The Joint Statement discusses several provisions of the federal securities laws applicable to registered broker-dealers that may be implicated when such entities custody digital asset securities.

As this short video explains, the “initial exchange offering,” or IEO, is the latest innovation in the offer and sale of cryptocurrencies. By partnering with a crypto exchange to aid in marketing and listing efforts, issuers engaging in an IEO hope to obtain better visibility and liquidity for their products. But like the ICOs they seek to replace, IEOs raise a host of potential issues under the US federal securities laws.

In a case being closely watched by the crypto community, a California federal judge reversed his earlier decision and, on reconsideration, issued a preliminary injunction against ICO issuer Blockvest LLC. Although the SEC has a high success rate in litigated cases, its action against Blockvest was notable because the judge initially declined to grant the SEC’s request for a preliminary injunction, then ruling that “at this stage, without full discovery and disputed issues of material facts, the Court cannot make a determination whether the BLV token offered to the 32 test investors was a ‘security.’” After reviewing new evidence, the judge subsequently reversed his position and found that Blockvest had indeed issued a security.

The year 2018 was a busy one for the SEC in the digital asset space, with the agency cementing its role as the primary de facto regulator of crypto finance in the United States.  The SEC’s enforcement division was operating at full speed, bringing a series of enforcement cases in the crypto space with an emphasis on fraud and scams involving digital assets.  Notably, the SEC brought first of its kind cases involving digital securities against an unregistered broker-dealer, an unregistered investment company and an unregistered token exchange.  The SEC also took action against an airdrop of securities, while at the same time providing general guidance on when the federal securities laws apply in the first place.

Congressmen Darren Soto (D-FL) and Ted Budd (R-NC) recently introduced two bipartisan bills to address virtual currency price manipulation and maintain the United States’ leadership in the cryptocurrency industry. In a joint statement citing the New York Attorney General’s recent report on crypto exchanges and other recent media reports, the members announced that:

“Virtual currencies and the underlying blockchain technology has a profound potential to be a driver of economic growth. That’s why we must ensure that the United States is at the forefront of protecting consumers and the financial well-being of virtual currency investors, while also promoting an environment of innovation to maximize the potential of these technological advances. This bill [sic] will provide data on how Congress can best mitigate these risks while propelling development that benefits our economy.”

At a recent securities regulation conference, Bill Hinman, Director of the SEC’s Division of Corporation Finance, indicated that the agency intends to release “plain English” guidance around the issue of whether an ICO is a security. The SEC has provided guidance on these issues in its DAO Report and Hinman’s own prior speech, and as we have frequently blogged, has been actively enforcing perceived violations of the federal securities laws. The idea behind the plain English guidance appears to be to consolidate the SEC staff’s views into a single “how to” document for use by the lay person.

As we have previously blogged, state and provincial securities regulators across the U.S. and Canada have been actively policing the marketplace for ICOs and security token offerings, supplementing efforts at the federal level in the United States undertaken by the SEC. Texas and Massachusetts have been particularly active on this front, and New York recently issued a blistering report on the status of crypto exchanges. Colorado and North Dakota are among the latest states to announce enforcement actions against crypto businesses.

On November 8, 2018, the SEC announced settled charges against an unlicensed digital token exchange (the “Platform”). It represents the SEC's first enforcement action based on findings that such a platform operated as an unregistered national securities exchange. This action follows first-of-their kind enforcement actions that the SEC brought in September against an unregistered broker-dealer and an unregistered investment company that each transacted in digital securities.

The SEC’s Division of Enforcement (Division) released its latest Annual Report (Report) on November 2, 2018. The fiscal year that ended September 30, 2018, was a busy one for the SEC in the crypto and distributed ledger technology space, and the Report includes a discussion of the SEC’s initiatives on this front.

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. 

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.”

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.

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.

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 ...

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.

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.”

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 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. 

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”).

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.

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.

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.