Blockchain and the Law

Further SEC action and guidance with respect to ICOs and cryptocurrencies

The SEC took two additional steps today in its regulation and oversight of the initial coin offering (“ICO”) and cryptocurrency markets.

In the SEC’s latest action targeting an ICO, the SEC Enforcement Division’s new Cyber Unit intervened in an attempted ICO by Munchee, Inc., an online food review service with plans to build out its network on blockchain.  In its cease-and-desist order, the SEC found that the tokens offered by Munchee were securities, and that Munchee violated Section 5 of the Securities Act by not registering the offer and sale of the tokens. According to the order, after being contacted by the SEC, Munchee halted the offering and refunded investor proceeds. For more information, see the Order or the SEC’s related Press Release.

Also on Monday, SEC Chairman Jay Clayton released a public statement on cryptocurrencies and ICOs, providing additional views on the cryptocurrency and ICO markets. Mr. Clayton urged Main Street investors to ask questions and demand clear answers prior to investing in ICOs or cryptocurrencies, and provided a list of sample questions for investors considering an investment in these markets. Mr. Clayton addressed again the issue of when digital tokens or coins are “securities,” and also addressed the question as to whether all digital assets labeled as “cryptocurrencies” are beyond the SEC’s jurisdiction.  The full statement can be read here.

Bitcoin Futures Trading Kicks Off; CFTC to Monitor Risk

CBOE Global Markets Inc. (CBOE) began trading CFTC-approved bitcoin futures on December 10th, and CME Group Inc. (CME) will begin trading them on December 18th. Bitcoin futures have generated significant attention as the first cryptocurrency-based derivative products to be traded on major U.S. exchanges. Bitcoin futures provide institutional and retail investors increased exposure to the asset class, allow existing market participants to hedge their exposure, enable short sales, and facilitate price discovery. Bitcoin futures mark a significant development in cryptocurrency’s movement toward mainstream acceptance and may pave the way for additional, more sophisticated financial instruments in the future.  Continue Reading

Australian Securities Exchange Announces Decision to Implement Blockchain-Based Clearing and Settlement System

Blockchain advocates have been awaiting the final decision by ASX Ltd, the Australian Securities Exchange, as to whether ASX will replace its existing and aged CHESS registry, settlement and clearing system with a blockchain-based system that ASX has been developing and testing for the last two years.  Today, ASX announced that it will go ahead with its plan to move to the new blockchain system, as it believes that adopting it will result in significant savings of back-office costs for all involved parties.  At the end of March 2018, ASX reportedly plans to release for market feedback details regarding the launch functionality of the system and the timetable for its implementation, with the final launch date to be determined.

This decision is huge. It is a milestone in the adoption of blockchain generally, and it positions ASX at the forefront of blockchain deployment in the financial services industry.

ASX’s announcement focuses the spotlight on the underlying securities laws, policies and regulations that underpin Australian securities registration, settlement and clearing.  Law is always a lagging indicator of technological development, especially in the case of blockchain, which is so dramatically different than its predecessor technologies.  Thus, the question that Australian lawyers and regulators must be considering right now is:  Will Australia’s existing legal framework support and be compatible with this new technical infrastructure, or are new laws and regulations, as well as revisions and reinterpretations of existing principles, needed?

In the US, similar blockchain infrastructure is being developed for the securities industry, and lawyers in the financial services sector also need to be focused on what changes in regulation are necessary to smooth the transition.

SEC Cyber Unit Targets PlexCoin

On December 4, the SEC’s new Cyber Unit announced it obtained an emergency asset freeze to halt the initial coin offering (“ICO”) of PlexCoin. According to the SEC, the Plexcoin ICO had raised up to $15 million to date through the fraudulent sale of unregistered securities.

This is the first-ever enforcement action by the SEC’s Cyber Unit, which was created in September with the purpose of prosecuting cyber-related misconduct, including violations involving ICOs.

Read the full SEC complaint here.

Legal Ramifications of Paying Employees with Cryptocurrency

As cryptocurrencies surge in value and enter mainstream consciousness, an increasing number of employers may consider compensating their employees with bitcoin, ether, or other cryptocurrencies.  While a cryptocurrency compensation scheme may proliferate everyday usage of these currencies and attract tech-savvy labor talent to organizations, it may also put an employer at risk of wage and hour violations, and implicate additional regulatory regimes such as the securities laws.  Although lawsuits on such “crypto-compensation” issues have yet to materialize, employers should stay ahead of the curve by protecting themselves against these potential pitfalls: Continue Reading

U.S. Court Orders Coinbase to Share Information about Account Holders with the IRS but Limits to Transactions over $20,000

A U.S. federal district court judge on Tuesday, November 29 ordered Coinbase Inc., the largest cryptocurrency exchange and storage platform in the world, to provide information about certain of its account holders to the U.S. Internal Revenue Services (IRS).  Information pertaining to as many as 14,355 account holders and 8.9 million transactions could be covered in this order, according to estimates provided by Coinbase.  The full order by Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California can be found here. Continue Reading

Third Class Action for Tezos ICO

For the third time this month, the Tezos blockchain project is the subject of a class action complaint for claims arising from their $232 million July initial coin offering (“ICO”). Consistent with both prior lawsuits, the plaintiffs allege that the Tezos ICO constituted the unregistered, non-exempt offer and sale of securities in violation of the federal securities laws.

As a general rule ICO tokens may be securities and, if so, must be registered with the SEC or qualify for an exemption in order to be offered or sold within the United States. Violations expose issuers not just to the risk of SEC enforcement, but also the possibility of liability under Section 12(a)(1) of the Securities Act, a private right of action that provides recessionary damages on a strict liability basis for those that purchase their tokens directly from the issuer of an unregistered public offering.

Recent remarks by SEC Chairman Jay Clayton have led to speculation that meaningful SEC intervention in the ICO marketplace may be soon forthcoming. If this spate of Tezos lawsuits is any indication, the plaintiff’s bar could get there well before the regulators do.

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