Blockchain and the Law

Two New Bitcoin ETF Proposals Pending as Cryptocurrency Markets Mature

Two recent proposals for bitcoin exchange-traded funds (“ETFs”) are vying to become the first to receive approval from the U.S. Securities and Exchange Commission (“SEC”) – one filed by CBOE BZX Exchange, Inc. (“CBOE”) and the other by NYSE Arca, Inc. (“NYSE Arca”). The SEC has yet to approve a cryptocurrency ETF, although several applications were filed throughout 2018.

A bitcoin ETF would allow investors to easily invest in bitcoin without needing to directly buy and manage the cryptocurrency themselves, potentially ushering in additional capital and enabling a wider range of institutional investors to tap into the market.

Once the proposals are published in the Federal Register, the SEC has an initial 45 days from the date of publication to issue a decision or request an extension, with total time not to exceed 240 days.

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Gladius Escapes Fines for Unregistered ICO after Self-Reporting to the SEC

On February 20, 2019, the SEC announced that it settled charges against Gladius Network LLC (“Gladius”) for failing to register non-exempt offers and sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act. While the SEC has previously settled charges relating to unregistered ICOs, this is one of few occasions since its 2017 DAO Report that the SEC refrained from imposing civil monetary penalties for an ICO that it determined violated the registration requirements of the federal securities laws.

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Guidance on Cryptoassets: UK Financial Conduct Authority Issues Consultation Paper

On January 23, 2019, the UK Financial Conduct Authority (“FCA”) issued its widely anticipated “Guidance on Cryptoassets” consultation paper CP19/3 (the “Consultation”). The Consultation followed the UK Cryptoassets Task Force’s publication last October, which set out the UK’s policy and regulatory approach to cryptoassets and distributed ledger technology and called for the FCA to issue guidance on its regulatory perimeter. The purpose of the Consultation is to provide guidance on the proposed rules that the FCA intends to implement in relation to cryptoassets and to provide market participants with the opportunity to provide initial feedback.

Amongst other things, the Consultation provided some helpful clarification as to where cryptoassets would fall within the FCA’s regulatory perimeter.

Which cryptoassets are within the FCA’s regulatory perimeter?

The FCA’s guidance clarifies whether different types of cryptoassets would fall within the FCA’s regulatory scope and, in particular, outlines whether cryptoassets are likely to fall within one or more of the following categories:

This is relevant because if a cryptoasset falls within one of the above categories, it could mean that the relevant firm carrying out certain activities in relation to cryptoassets is engaging in a regulated activity. Firms that carry on regulated activities in the UK are required to obtain authorisation from the FCA in order to do so.

In addition, the FCA has highlighted that, while issuers of tokens may not need to be authorised themselves, other regulatory requirements may apply (e.g., under the UK financial promotion regime and/or the Prospectus Directive (2003/71/EC)).

In this respect, the FCA has stated the following in its Consultation:

  • “security tokens” (which the FCA defines to be a token which has the specific features of a typical security such as a share, debenture or unit in a collective investment scheme) are likely to fall within the definition of a “specified investment” and therefore fall within the FCA’s regulatory scope; and
  • on the other hand, “exchange tokens” (such as Bitcoin, Ether or Litecoin) and “utility tokens” (which grant holders access to a current or prospective product or service but do not grant holders rights to profit or ownership) would be unlikely to constitute a “specified investment”.

The FCA also stated in its Consultation that, while exchange tokens and utility tokens would probably not amount to a “specified investment”, they may still be brought into the FCA’s regulatory perimeter under the PSRs or EMRs depending on the specific features of the tokens.

The FCA ultimately reminded firms that due to the complexity of many tokens, firms should consider a number of factors to determine if the relevant token is a specified investment. Ultimately, this can only be assessed on a case by case basis and legal advice should be sought.

Impact on Firms

The Consultation provides some welcome clarity as to when cryptoassets may fall within or outside the FCA’s regulatory scope.

Firms that carry on cryptoasset business which is within the regulatory scope of the FCA will need to seek authorisation to carry on the relevant regulated activities. In addition, where a cryptoasset is a transferable security and will be either offered to the public in the UK or admitted to trading on a regulated market, the issuer would need to publish a prospectus approved by the FCA, unless an exemption applies.

Next Steps

The Consultation will remain open until April 5, 2019, with the FCA aiming to provide final guidance in summer 2019. HM Treasury is also expected to publish a consultation paper in early 2019 on exploring legislative change to potentially broaden the FCA’s regulatory remit to bring further types of cryptoassets within its regulatory scope.

A Taxonomy of the Proposed Token Taxonomy Act

On December 20, 2018, a bipartisan pair of Congressmen, Warren Davidson (R-OH) and Darren Soto (D-FL), introduced bill H.R. 7356 to enact the Token Taxonomy Act (the “Act”). The Act proposes several amendments to federal securities and tax laws that are intended to clarify how cryptoassets should be treated thereunder. Below, we discuss the key provisions of the Act and their potential implications for cryptoasset market participants. Emphasis is placed on “potential” because, as we will discuss, the Act will likely require certain revisions, as well as substantial political support, before becoming effective law. Continue Reading

New York Grants BitLicenses to Robinhood Crypto and LibertyX

On January 24, 2019 the New York Department of Financial Services (the “DFS”) announced that it had granted BitLicenses to Robinhood Crypto, LLC and Moon Inc. (d/b/a LibertyX). These are the fifteenth and sixteenth BitLicenses granted by the DFS since the final BitLicense rules were released in 2015.

Robinhood Crypto is a subsidiary of popular stock trading platform Robinhood, which allows users to make commission-free trades of stocks, ETFs, options and select digital assets online and through a smartphone app. The BitLicense, along with a New York state money transmitter license also granted this month, authorizes Robinhood Crypto to offer services for buying, selling and storing Bitcoin, Ether, Bitcoin Cash, Litecoin, Dogecoin, Ethereum Classic and Bitcoin SV to New York residents. LibertyX allows customers to buy Bitcoin with their debit cards through traditional ATM transactions. In October, LibertyX partnered with Genmega, Inc., which supplies over 100,000 ATMs throughout the United States, to upgrade their ATMs to enable purchases of Bitcoin. Readers of our blog may recall that Coinsource, Inc. similarly received a BitLicense in November 2018 to operate “Bitcoin Teller Machines” that allowed customers to buy and sell Bitcoin for cash.

Robinhood Crypto and LibertyX already actively conduct their respective “virtual currency business activities” in other states and expect to roll out their services to New York in the coming months.

Wyoming Legislature Advances Blockchain-Related Bills

States have long been “laboratories of democracy” where policymakers can try out certain innovative policies on a local or regional level that could eventually, if successful, become national programs. On the tech side, some states have sought to establish themselves as laboratories of blockchain. For example, this past week Vermont announced that it will work with vendors to launch a pilot program permitting new captive insurance companies to register with the Vermont Secretary of State using blockchain.

Across the country, Wyoming has been especially active in this area and reportedly desires to be a corporate-friendly “Delaware of the West” [subscription required] as well as a haven for blockchain and fintech business activity. To that end, the Wyoming legislature has advanced several blockchain-related bills through committee since the new year (following an active 2018, which saw the state pass a number of regulatory measures related to blockchain and digital assets). Continue Reading

New York Approves Nationwide Licensing Tool for Virtual Currency Business Activity Companies

New York State has taken measures this year to modernize its approach to regulation for blockchain-based companies. Even before Assembly Bill A8783B established a government task force to study the effects of blockchain and digital assets on financial markets in the state, in October, the New York State Department of Financial Services (“NYSDFS”) announced that it would allow companies engaged in “virtual currency business activity” (as defined in the New York State “BitLicense” requirements) to utilize the Nationwide Multistate Licensing System and Registry (“NMLS”) to apply for, update, and renew their operating licenses, including BitLicenses. The NMLS was created in 2008 by the Conference of State Bank Supervisors to act as a central licensing repository and has expanded over the past decade from servicing non-bank mortgage companies to including a variety of non-bank firms. The system is intended to allow for enhanced supervision, as license applications and registrations can be managed by a number of governmental agencies through NMLS. In addition to businesses engaged in virtual currency business activity, other nonbank financial institutions currently under the oversight of the NMLS platform include licensed check cashing companies, budget planners, sales finance agencies, money transmitter licensees, and mortgage providers. Continue Reading