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Hester Peirce Proposal For Treatment Of Cryptocurrency

SEC Commissioner Hester M. Peirce, nicknamed “Crypto Mom,” has made a proposal for the temporary deregulation of digital assets to advance innovation and allow for unimpeded decentralization of blockchain networks. Ms. Peirce made the proposal in a speech on February 6, 2020.

The world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector with the SEC’s announcement that a cryptocurrency is a security in its Section 21(a) Report on the DAO investigation. Since then, there has been a multitude of enforcement proceedings, repeated disseminations of new guidance and many speeches by some of the top brass at the SEC, each evolving the regulatory landscape. Although I wasn’t focused on digital assets before that, upon reading the DAO report, I wasn’t surprised. It seemed clear to me that the capital raising efforts through cryptocurrencies were investment contracts within the meaning of SEC v.

March 3, 2020

The SEC, FinCEN And CFTC Issue A Joint Statement On Digital Assets

On October 11, 2019 the SEC, FinCEN and CFTC issued a joint statement on activities involving digital assets. Various agencies have been consistently working together, with overlapping jurisdiction, on matters involving digital assets and distributed ledger technology. Earlier, in August, the SEC and FINRA issued a joint statement on the custody of digital assets, including as it relates to broker-dealers and investment advisors (see HERE).

The purpose of the joint statement is to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN (for more information on MSBs see HERE), and broker-dealers and mutual funds obligated to register

November 5, 2019

SEC And FINRA Joint Statement On Custody Of Digital Assets

On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel issued a joint statement on broker-dealer custody of digital asset securities (“Joint Statement”). The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years. For example, issues surrounding the custody of digital assets have been continuously cited by the SEC as one of the reasons for the failure to approve a cryptocurrency ETF.

The Joint Statement begins with the admission that historical rules do not adequately cover the complex issues related to digital assets, including rules related to the loss or theft of a security. In recent months the SEC and FINRA staff have been engaging in conversations with industry participants regarding how the rules could be applied or modified to suit the needs of the emerging technology of digital assets.

Any entity that transacts business in digital asset securities must comply with the federal securities

August 6, 2019

Are Smart Contracts Enforceable

I’ve mentioned the term “smart contract” numerous times in my blogs related to blockchain and distributed ledger technology. It seems worth drilling down on what exactly a “smart contract” is and whether such a “contract” is enforceable as a legally binding contract. Smart contracts are generally computer code designed to automatically execute all or part of an agreement that is stored on a blockchain, such as the automatic transfer of assets upon the completion of specific programmed criteria. A smart contract may be the only agreement between parties, or it may be used to implement all or part of the provisions of a separate written contract.

Since a smart contract is programmed code, it will only perform each step or item of execution when the pre-programmed criteria has been completed. That is, if “x” occurs, then the code will automatically execute step “y.” Accordingly, all contractual actions must be capable of being completed within

July 30, 2019

FinCEN Guidance On Cryptocurrency

In May 2019, the Financial Crime Enforcement Network (FinCEN) issued a thirty-page comprehensive review of its regulations as pertains to convertible virtual currencies. Previously, in February 2018, FinCEN stated that it expects issuers of initial coin offerings (ICOs) to comply with the Bank Secrecy Act (BSA), including its anti-money laundering (AML) and know your customer (KYC) requirements (see HERE).

In general, entities that are subject to the BSA must: (i) register with FinCEN as a money services business (MSB); (ii) prepare a written AML compliance program that is designed to mitigate risks, including AML risks, and to ensure compliance with all BSA requirements including the filing of suspicious activity reports (SAR) and currency transaction reports; (iii) keep records for certain types of transactions at specific thresholds; and (iv) obtain customer identification information sufficient to comply with the AML program and recordkeeping requirements.

Although the new guidance does not establish any new regulatory requirements, it is the first time

July 16, 2019

SEC Establishes Analysis Matrix for Digital Assets

On April 3, 2019, the SEC’s Division of Corporation Finance published a “Framework for Investment Contract Analysis of Digital Assets,” issued a No-Action Letter to Turnkey Jet, Inc. and made a statement on both. Although all guidance is appreciated, there is really nothing new or different about the analysis, which is firmly based on SEC v. W.J. Howey Co. (the “Howey Test”). Moreover, as discussed below, even though the SEC found that Turnkey Jet did not need to comply with the federal securities laws in the issuance and sales of its tokens, the opinion and issued guidelines do not go far enough and still leave a great deal of uncertainty.

Framework for Investment Contract Analysis of Digital Assets

The SEC’s framework sets forth facts and circumstances to be considered in applying the Howey Test to determine if a digital asset is an investment contract and thus a security subject to state and federal securities laws in its

April 16, 2019

SEC Provides Enforcement Driven Guidance On Digital Asset Issuances And Trading

On November 16, 2018, the SEC settled two actions involving cryptocurrency offerings which settlement requires the registration of the digital assets. On the same day, the SEC issued a public statement stating, “[T]hese two matters demonstrate that there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities.”

The two settled actions, CarrierEQ Inc., known as Airfox and Paragon Coin Inc., both involved an unregistered issuance of a cryptocurrency. In its statement the SEC highlighted three other recent settled actions involving digital assets and, in particular, the actions involving Crypto Asset Management, TokenLot and EtherDelta. The three additional cases involved investment vehicles investing in digital assets and the providing of investment advice, and secondary market trading of digital asset securities.

The SEC has developed a consistent mantra declaring both support for technological innovation while emphasizing the requirement to “adhere to [our] well-established and well-functioning

December 26, 2018

The SEC’s Strategic Hub For Innovation And Financial Technology

Responding to the growing necessity, in mid-October the SEC launched a Strategic Hub for Innovation and Financial Technology (FinHub). The FinHub will serve as a resource for public engagement on the SEC’s FinTech-related issues and initiatives, such as distributed ledger technology (including digital assets), automated investment advice, digital marketplace financing, and artificial intelligence/machine learning. The FinHub also replaces and consolidates several SEC internal working groups that have been working on these matters.

According to the SEC press release on the matter, the FinHub will:

Provide a portal for the industry and the public to engage directly with SEC staff on innovative ideas and technological developments;
Publicize information regarding the SEC’s activities and initiatives involving FinTech on the FinHub web page;
Engage with the public through publications and events, including a FinTech Forum focusing on distributed ledger technology and digital assets planned for 2019;
Act as a platform and clearinghouse for SEC staff to acquire and disseminate information and FinTech-related knowledge

December 11, 2018

Shifting Capital Markets; Bank of America’s Merrill Lynch Exits the Penny Stock Business

There is a strange dichotomy building in the capital markets and what some are calling a clearing firm crisis. At the same time that the world of penny stocks and low-priced securities is on shaky ground with regulators and market participants, the U.S. is trying to regenerate the IPO marketplace, and a whole world of cryptocurrency investments and global trading continues to flourish. However, the IPO market cannot flourish for small companies if stockholders cannot clear their securities and sell into a secondary market. Recently, penny stocks have experienced a one-two punch that leaves me, and many of my colleagues, wondering how the marketplace will respond and evolve. Furthermore, as the inevitable birth of securities tokens and an actual licensed operational securities token exchange looms on the near-term horizon, it is clear we are at the precipice of experiencing fundamental changes in the capital markets.

Background on Penny Stocks

Penny stocks and low-priced securities have always been considered speculative and

October 23, 2018

Securities Token Or Not? A Case Study – Part III

This is the third part in my three-part series laying out fact patterns and discussing whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. In Part 1 of the series, I examined a decentralized token that had been issued without any concurrent capital raise and was able to conclude such token was not a security. Part 1 can be read HERE. In Part 2 I examined a token that was issued with the intent of being a utility token, but as a result of the clear speculative motivation for purchasers, and the lack of decentralization, concluded it was a security. Part 2 can be read HERE.

In this Part 3 of the series, I examine the issuance of the Free Token as a dividend and its cousin the Bounty Token. Unlike the prior blogs in this series, which examined the question of whether a particular token is a security, this blog

October 9, 2018

Securities Token Or Not? A Case Study – Part II

This is the second part in my three-part series laying out fact patterns and discussing whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. Although the first and easy answer is that if a digital asset is being issued today, it is most assuredly a security upon issuance that needs to comply with the federal securities laws, the answer is not always that straightforward for digital assets that have been in the marketplace for a period of time, such as Bitcoin and Ether, or for new digital assets that are carefully being constructed to fall outside the purview of a securitized token.

In the first part of this series, we examined the Oldie Token and, under the fact pattern presented, was able to determine that the Oldie Token was not a security. Part 1 can be read HERE. In this part we will examine the Functional Token, which has not

October 2, 2018

Security or Utility Token? A Case Study – Part I

Is it a security or is it a utility, currency, commodity or some other digital asset? That question has been continuously raised by those working with digital assets such as cryptocurrencies, virtual coins and tokens, including by digital asset issuers and companies that run platforms for the issuance or trading of such digital assets. Although the first and easy answer is that if a digital asset is being issued today, it is most assuredly a security upon issuance that needs to comply with the federal securities laws, the answer is not always that straightforward for digital assets that have been in the marketplace for a period of time, such as bitcoin and ether, or for new digital assets that are carefully being constructed to fall outside the purview of a securitized token.

The “STO” standing for security token offering has quickly gained favor alongside “ICO” with an industry-understood distinction. An STO is designed to

September 25, 2018

FINRA Examines Fintech Including Blockchain

On July 30, 2018, the Financial Industry Regulatory Authority (FINRA) published a Special Notice seeking public comments on how FINRA can support fintech developments including those related to data aggregation services, supervisory processes, including with the use of artificial intelligence, and the development of a taxonomy-based, machine-readable rulebook. The Special Notice, and fintech in general, necessarily includes blockchain technology, a topic FINRA has been examining for a few years now. Last July, FINRA held a Blockchain Symposium to assess the use of distributed ledger technology (DLT) in the financial industry, and earlier in January 2017 FINRA issued a report entitled “Distributed Ledger Technology: Implications of Blockchain for the Securities Industry” on the topic (see HERE).

Also, on July 6, 2018, FINRA sent Regulatory Notice 18-20 to its members asking all FINRA member firms to notify FINRA if they engage in activities related to digital assets such as cryptocurrencies, virtual coins and tokens. FINRA informs members that it is

September 11, 2018

Wyoming’s Blockchain Legislation

Wyoming continues to position itself as a business-friendly state most recently by passing groundbreaking blockchain legislation defining cryptocurrency coins or tokens as a whole new asset class separate from securities and commodities. While it is unlikely that Wyoming’s new statutes will impact the SEC’s view that most, if not all, cryptocurrencies, or at least those issued to investors or used for capital raising, are securities, or the CFTC’s view that cryptocurrencies that are used as a medium of exchange, are a commodity, Wyoming has done what federal lawmakers have not yet endeavored – created comprehensive blockchain legislation.

In March 2018, Wyoming passed five separate bills addressing securities, corporate, banking and tax matters which could entice cryptocurrency and blockchain businesses to locate within the state. The statutes are part of an initiative in Wyoming called ENDOW – Economically Needed Diversity Options for Wyoming.

HB 19

Wyoming House Bill 19 provides an exemption for virtual currency, including bitcoin and

July 31, 2018

FinCEN’S Role In Cryptocurrency Offerings

In the continuing dilemma over determining just what kind of asset a cryptocurrency is, multiple regulators have expressed opinions and differing views on regulations. Likewise, multiple regulators have conducted investigations and initiated enforcement proceedings against those in the cybersecurity space. The SEC has asserted the opinion that most, if not all, cryptocurrencies are securities; the CFTC has found them to be commodities; the IRS’s official definition is the same as the CFTC, and in particular a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, and now the Financial Crime Enforcement Network (FinCEN) has asserted that issuers of cryptocurrencies are money transmitters.

In particular, in a letter written to the US Senate Committee on Finance on February 13, 2018, FinCEN indicates that it expects issuers of initial coin offerings (ICOs) to comply with the Bank Secrecy Act (BSA), including its anti-money laundering (AML) and know your customer (KYC)

July 10, 2018

The SEC Has Provided Guidance On Ether and Bitcoin, Sort Of

On June 14, 2018, William Hinman, the Director of the SEC Division of Corporation Finance, gave a speech at Yahoo Finance’s All Markets Summit in which he made two huge revelations for the crypto marketplace. The first is that he believes a cryptocurrency issued in a securities offering could later be purchased and sold in transactions not subject to the securities laws. The second is that Ether and Bitcoin are not currently securities. Also, for the first time, Hinman gives the marketplace guidance on how to structure a token or coin such that it might not be a security.

While this gives the marketplace much-needed guidance on the topic, a speech by an executive with the SEC has no legal force. As a result, the blogs and press responding to Mr. Hinman’s speech have been mixed. Personally, I think it is a significant advancement in the regulatory uncertainty surrounding the crypto space and a signal that more constructive guidance

June 19, 2018

Online Platforms Trading Cryptocurrencies; Continued Uncertainty In Crypto Space

I have been writing often about the cryptocurrency marketplace and the SEC and other regulators’ statements and concerns about compliance with the federal securities laws. On July 25, 2017, the SEC issued a Section 21(a) Report on an investigation related to an initial coin offering (ICO) by the DAO, concluding that the ICO was a securities offering. In that Report the SEC stated that securities exchanges providing for trading must register unless an exemption applies. In its numerous statements on cryptocurrencies since then, the SEC has consistently reminded the public that exchanges that trade securities, including cryptocurrencies that are securities, must be licensed by the SEC.

The SEC has also stated that as of today, no such licensed securities cryptocurrency exchange exists. However, a few CFTC regulated exchanges have now listed bitcoin futures products and, in doing so, engaged in lengthy conversations with the CFTC, ultimately agreeing to implement risk mitigation and oversight measures, heightened margin requirements, and added

June 5, 2018

The SEC Has Issued New Guidance On Cybersecurity Disclosures

On February 20, 2018, the SEC issued new interpretative guidance on public company disclosures related to cybersecurity risks and incidents. In addition to addressing public company disclosures, the new guidance reminds companies of the importance of maintaining disclosure controls and procedures to address cyber-risks and incidents and reminds insiders that trading while having non-public information related to cyber-matters could violate federal insider-trading laws.

The prior SEC guidance on the topic was dated, having been issued on October 13, 2011. For a review of this prior guidance, see HERE. The new guidance is not dramatically different from the 2011 guidance.

Introduction

The topic of cybersecurity has been in the forefront in recent years, with the SEC issuing a series of statements and creating two new cyber-based enforcement initiatives targeting the protection of retail investors, including protection related to distributed ledger technology (DLT) and initial coin or cryptocurrency offerings (ICO’s). Moreover, the SEC has asked the House Committee on Financial

March 27, 2018

The Senate Banking Committee’s Hearing On Cryptocurrencies

On February 6, 2018, the United States Senate Committee on Banking Housing and Urban Affairs (“Banking Committee”) held a hearing on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” Both SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo testified and provided written testimony. The marketplace as a whole had a positive reaction to the testimony, with Bitcoin prices immediately jumping up by over $1600. This blog reviews the testimony and provides my usual commentary.

The SEC and CFTC Share Joint Regulatory Oversight

The Banking Committee hearing follows SEC and CFTC joint statements on January 19, 2018 and a joint op-ed piece in the Wall Street Journal published on January 25, 2018 (see HERE). As with other areas in capital markets, such as swaps, the SEC and CFTC have joint regulatory oversight over cryptocurrencies. Where the SEC regulates securities and securities markets, the CFTC

March 6, 2018

The CFTC And Cryptocurrencies

The SEC and U.S. Commodity Futures Trading Commission (CFTC) have been actively policing the crypto or virtual currency space. Both regulators have filed multiple enforcement actions against companies and individuals for improper activities including fraud. On January 25, 2018, SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo published a joint op-ed piece in the Wall Street Journal on the topic.

Backing up a little, on October 17, 2017, the LabCFTC office of the CFTC published “A CFTC Primer on Virtual Currencies” in which it defines virtual currencies and outlines the uses and risks of virtual currencies and the role of the CFTC. The CFTC first found that Bitcoin and other virtual currencies are properly defined as commodities in 2015. Accordingly, the CFTC has regulatory oversight over futures, options, and derivatives contracts on virtual currencies and has oversight to pursue claims of fraud or manipulation involving a virtual currency traded in interstate commerce. Beyond instances of fraud

February 20, 2018

The SEC And CFTC Joint Statements On Cryptocurrencies; Global Regulators Join In

On January 19, 2018 and again on January 25, 2018, the SEC and CFTC divisions of enforcement issued joint statements regarding cryptocurrencies. The January 19 statement was short and to the point, reading in total:

“When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”

The January 25, 2018 statement was issued by SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo and was published as an op-ed piece in the Wall Street Journal. In summarizing the statements, I add my usual commentary and facts and information

February 6, 2018

SEC Sanctions BITCOIN Exchange Operator-A Case Study In Basic Registration And Exemption Requirements

ABA Journal’s 10th Annual Blawg 100

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On December 8, 2014, the SEC settled charges against a creative, but ill informed, entrepreneur for acting as an unlicensed broker-dealer and for violations of Section 5 of the Securities Act of 1933, as amended. Ethan Burnside and his company, BTC Trading Corp., operated two online enterprises, BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange, that traded securities using virtual currencies, bitcoin or litecoin. Neither of these exchanges were registered as broker-dealers or stock exchanges. In addition, Burnside and his company conducted separate transactions in which he offered investors the opportunity to use virtual currencies to buy or sell shares in the LTC-Global exchange itself and a separate litecoin mining venture he owned and operated. These offerings were not registered with the SEC as required under the federal securities laws.

According to the SEC release on the matter, “the exchanges provided account holders the ability to use bitcoin or litecoin to buy,

December 16, 2014

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Hester Peirce Proposal For Treatment Of Cryptocurrency

The SEC, FinCEN And CFTC Issue A Joint Statement On Digital Assets

SEC And FINRA Joint Statement On Custody Of Digital Assets

Are Smart Contracts Enforceable

FinCEN Guidance On Cryptocurrency

SEC Establishes Analysis Matrix for Digital Assets

SEC Provides Enforcement Driven Guidance On Digital Asset Issuances And Trading

The SEC’s Strategic Hub For Innovation And Financial Technology

Shifting Capital Markets; Bank of America’s Merrill Lynch Exits the Penny Stock Business

Securities Token Or Not? A Case Study – Part III

Securities Token Or Not? A Case Study – Part II

Security or Utility Token? A Case Study – Part I

Wyoming’s Blockchain Legislation

FinCEN’S Role In Cryptocurrency Offerings

The SEC Has Provided Guidance On Ether and Bitcoin, Sort Of

Online Platforms Trading Cryptocurrencies; Continued Uncertainty In Crypto Space

The Senate Banking Committee’s Hearing On Cryptocurrencies

The CFTC And Cryptocurrencies

SEC Sanctions BITCOIN Exchange Operator-A Case Study In Basic Registration And Exemption Requirements

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