Blockchain and the Law

A Warning to Cryptocurrency Users from the Justice Department’s Tax Division

As you might expect during tax season, the Justice Department’s press releases seem particularly focused on tax-related issues these days.  At the start of this month, DOJ sent a stern reminder to the public that non-traditional currency users should not expect to escape federal tax law enforcement.

Read the full blog post on Proskauer’s Corporate Defense blog.

Antitrust Enforcers Preview Incoming Spotlight on Blockchain

The tide of regulation of cryptocurrency and blockchain could be turning in the United States. Following comments by newly-confirmed Treasury Secretary (and former Federal Reserve Chair) Janet Yellen describing Bitcoin as “inefficient” and “extremely volatile,” the price of the coin dropped 10% in 24 hours. During her confirmation hearings, Yellen described cryptocurrencies as a “particular concern” and signaled that the Treasury would begin examining blockchain-based financial networks. On the heels of Secretary Yellen’s comments, Congressman Patrick McHenry (R-NC), head of the House Financial Services Committee, and Congressman Stephen F. Lynch (D-MA), Chair of the Financial Technologies Task Force, introduced H.R. 1602, bipartisan legislation which directs the CFTC and the SEC to “jointly establish a digital asset working group” to “provide regulatory clarity” and to “create a critical collaboration [between the two agencies to] create fair and transparent markets.” Notably absent from this proposed collaboration is any mention of antitrust enforcement or involvement of the DOJ antitrust division or the FTC.  However, recent comments by outgoing DOJ chair Makan Delrahim provide clues as to how antitrust may play a part in the regulatory framework for blockchain and cryptocurrency.

Read the full post on Proskauer’s Minding Your Business blog.

SEC Division of Examinations Releases Risk Alert for Digital Asset Securities

On February 26, 2020, the Security and Exchange Commission’s (“SEC”) Division of Examinations (the “Division”) published a Risk Alert, “The Division of Examinations’ Continued Focus on Digital Asset Securities.” In the Risk Alert, the Division offered insight into its current examination focus with respect to the activities of market participants, including investment advisers, concerning digital assets that are securities (“Digital Asset Securities”) and distributed ledger technologies.

The Alert outlines the observations of the Division, which were the product of examinations of investment advisers, broker-dealers, and transfer agents and their use of Digital Asset Securities. At only eight pages, the Alert is not an exhaustive compliance document for market participants and does not detail explicitly how firms might remain in compliance with securities laws and regulations.  The Division’s outline of the risks it has observed from recent examinations is, however, a useful roadmap, outlining the areas of focus for the Division’s future examinations and compelling firms to take another look at their relevant compliance practices.  It also raises some questions about the scope of the applicability of federal securities to digital assets that have yet to be explored. Continue Reading

Three Critical Questions That Will (Hopefully) be Answered by the SEC’s Lawsuit against Ripple

Late last year, the SEC filed a litigated action in the U.S. District Court for the Southern District of New York against Ripple Labs Inc. and two of its executive officers (collectively, “Ripple”), alleging that Ripple raised over $1.3 billion in unregistered offerings of the digital asset known as XRP. Ripple opted not to file a motion to dismiss the complaint, and based on recent filings it appears that the parties do not believe a pre-trial settlement is likely.

The Ripple case raises three very important questions regarding digital assets, and may provide a vehicle for the SEC or the court to offer answers to those questions.

Read the full post on our The Capital Commitment blog.

SEC Brings Charges against Individuals Behind Allegedly Fraudulent Unregistered Digital Asset Securities Offering

On February 1, 2021, the U.S. Securities and Exchange Commission (SEC) announced that it had brought charges against several individuals involved in an alleged scheme to induce investors to transfer more than $11 million to buy into an unregistered initial coin offering (ICO) of B2G tokens, which the SEC claimed was merely an elaborate sham. (SEC v. Krstic, No. 21-0529 (E.D.N.Y. Filed Feb. 1, 2021)). The complaint, filed in the Eastern District of New York, alleged that Kristijan Krstic (“Krstic”), John DeMarr (“DeMarr”), and Robin Enos (“Enos”) (collectively, “Defendants”) conspired, in violation of securities laws, to defraud over 460 investors of $11.4 million with promises of large returns on investments from its offerings, including for B2G tokens that the defendants claimed were genuine digital assets for a mining and trading platform. Continue Reading

Crypto Asset Regulation: Is the US or UK Keeping Up Best With This Emerging Market?

One driver for the first widely adopted cryptocurrency Bitcoin was to create a store of value that existed outside of government control. It is therefore no surprise that attempts to regulate the rapidly developing crypto asset market have required great efforts from regulators and legislators around the world to keep apace.

In this blog, we compare key drivers and results of the regulatory approach being taken in the US and UK. While the U.S. is leading the way on the enforcement of crypto regulations, the UK has taken greater steps in relation to banking approvals. With regard to tax treatment, the position is becoming much clearer in both jurisdictions.

First though, is there even “an” approach within each country? Continue Reading

SEC Responds to Wyoming’s Opinion on Custody of Digital Assets and Qualified Custodian Status

The U.S. Securities and Exchange Commission (“SEC”) issued a statement in response to the Wyoming Division of Banking’s No-Action Letter on Custody of Digital Assets and Qualified Custodian Status.

in October, the Wyoming Division of Banking granted Two Ocean Trust, a Wyoming-chartered public trust company, “no action” relief setting forth the first opinion by a state or federal banking regulator to permit a financial institution to act as a “qualified custodian” under the Advisers Act of 1940 (“Advisers Act”) for digital assets. The no-action letter is Wyoming’s latest move to further establish the state’s position as the digital asset epicenter of the U.S.

The SEC “Custody Rule” (Rule 206(4)-2 under the Advisers Act) requires that registered “advisers that have custody of client funds or securities [maintain] those assets with broker-dealers, banks, or other qualified custodians.” In turn, only financial institutions that are deemed “qualified custodians” under federal law may provide custodial services to the public.

The Wyoming Division of Banking determined that Two Ocean Trust meets the definition of “bank” under the Advisers Act and may serve as a “qualified custodian” for both digital and traditional assets. The Wyoming Division of Banking also stated that it “will not recommend an investigation or enforcement action to the SEC on these issues.” Following the no-action letter, Two Ocean Trust announced its offering of the “first comprehensive digital asset wealth management platform”.

In response to the Wyoming Division of Banking’s opinion, the SEC’s Staff of the Division of Investment Management (the “Staff”), along with the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), issued a statement to reinforce, as stated by the Wyoming Division of Banking, that the no-action letter “should not be construed to represent the views of the SEC or any other regulatory agency.”

The Staff noted that “[d]etermining who qualifies as a qualified custodian is a complicated, and facts and circumstances based, analysis” and that the SEC “has limited the types of financial institutions that may act as qualified custodians to those institutions that possess key characteristics, including being subject to extensive regulation and oversight, that help to ensure that client assets are adequately safeguarded.”

The Staff solicited comments to inform and support “staff recommendations to amend the Custody Rule”—an opportunity that will play a critical role in the development of the cryptocurrency industry and how it will operate under state and federal law.

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